** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

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**FORM 10-Q**

 

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

**          SECURITIES EXCHANGE ACT OF 1934**

** **

**For theQuarterly Period ended December 31, 2004**

** **

**Commission File Number: 0-19972**

 

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**HF FINANCIAL CORP.**

(Exactname of registrant as specified in its charter.)

 

 
| **Delaware**                    | ** ** | **46-0418532**                          |
|---------------------------------|------------|-----------------------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer Identification Number) |
| incorporation or organization)  |       |                                    |
|                            |       |                                    |

 
| **225  South Main Avenue,**             |       |       |
|-----------------------------------------|------------|------------|
| **Sioux Falls,  SD**                    | ** ** | **57104**  |
| (Address of principal executive office) |       | (ZIP Code) |

 

 

**(605)333-7556**

(Registrant’stelephone number, including area code)

 

 

             Indicate by checkmark whether the registrant  (1) hasfiled 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 by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).  Yes  o No  ý

 

             Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 

             As of February 8, 2005 there were3,561,042 issued and outstanding shares of the Registrant’s Common Stock, with$.01 par value.

 

 

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**HF FINANCIAL CORP.**

 

**Form 10-Q**

 

**Table of Contents**

 

 
| **PART  I—FINANCIAL INFORMATION**

  |
|------------------------------------------------|
| Item 1.                                        |   | Financial Statements  (Unaudited): |
|                                           |   |   |
|                                           |   | Consolidated  Statements of Financial Condition As of December 31, 2004 and June 30, 2004 |
|                                           |   |   |
|                                           |   | Consolidated  Statements of Income for the Three and Six Months Ended December 31, 2004 and  2003 |
|                                           |   |   |
|                                           |   | Consolidated  Statements of Cash Flows for the Six Months Ended December 31, 2004 and 2003 |
|                                           |   |   |
|                                           |   | Notes to  Consolidated Financial Statements |
|                                           |   |   |
| Item  2.                                       |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                           |   |   |
| Item  3.                                       |   | Quantitative  and Qualitative Disclosures about Market Risk |
|                                           |   |   |
| Item 4.                                        |   | Controls and Procedures |
|                                           |   |   |
| **PART  II—OTHER INFORMATION**            |
|                                           |   |   |
| Item 1.                                        |   | Legal Proceedings |
|                                           |   |   |
| Item  2.                                       |   | Unregistered  Sales of Equity Securities and Use of Proceeds |
|                                           |   |   |
| Item 3.                                        |   | Defaults upon  Senior Securities |
|                                           |   |   |
| Item  4.                                       |   | Submission  of Matters to a Vote of Security Holders |
|                                           |   |   |
| Item 5.                                        |   | Other Information |
|                                           |   |   |
| Item 6.                                        |   | Exhibits |
|                                           |   |   |
| Form 10-Q                                      |   | Signature Page |

 

 

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**PARTI—FINANCIAL INFORMATION**

 

**Item 1.             Financial Statements**

 

**HF FINANCIALCORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**

**(Dollars inThousands)**

 

 
| ** **                                                                                                                                               | ** ** | **December  31, 2004** | ** ** | **June 30,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                                                                                                                                               | ** ** | **(Unaudited)**        | ** ** | **(Audited)**      | ** ** |
| **ASSETS**                                                                                                                                               | ** ** | ** **             | ** ** | ** **         | ** ** |
| Cash and cash  equivalents                                                                                                                               |       | $                      | 21,641     |               | $          | 20,474 |   |
| Securities available  for sale                                                                                                                           |       | 114,805                |       | 122,715            |       |
| Federal Home Loan Bank  stock                                                                                                                            |       | 6,282                  |       | 5,469              |       |
| Loans held for sale                                                                                                                                      |       | 12,334                 |       | 10,351             |       |
| Loans and leases  receivable                                                                                                                             |       | 649,225                |       | 644,551            |       |
| Allowance for loan and  lease losses                                                                                                                     |       | (3,514                 | )          | (3,605             | )          |
| Net loans and  leases receivable                                                                                                                         |       | 645,711                |       | 640,946            |       |
|                                                                                                                                                     |       |                   |       |               |       |
| Accrued interest  receivable                                                                                                                             |       | 4,862                  |       | 4,056              |       |
| Office properties and  equipment, net of accumulated depreciation                                                                                        |       | 12,451                 |       | 12,555             |       |
| Foreclosed real estate  and other properties                                                                                                             |       | 1,588                  |       | 1,689              |       |
| Cash value of life  insurance                                                                                                                            |       | 12,295                 |       | 12,051             |       |
| Servicing rights                                                                                                                                         |       | 5,074                  |       | 4,620              |       |
| Goodwill, net                                                                                                                                            |       | 4,951                  |       | 4,951              |       |
| Other assets                                                                                                                                             |       | 6,862                  |       | 7,193              |       |
| Total assets                                                                                                                                             |       | $                      | 848,856    |               | $          | 847,070 |   |
|                                                                                                                                                     |       |                   |       |               |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                           |       |                   |       |               |       |
| **LIABILITIES**                                                                                                                                          |       |                   |       |               |       |
| Deposits                                                                                                                                                 |       | $                      | 649,346    |               | $          | 658,719 |   |
| Advances from Federal  Home Loan Bank and other borrowings                                                                                               |       | 101,253                |       | 93,750             |       |
| Subordinated debentures  payable to trusts                                                                                                               |       | 27,837                 |       | 27,837             |       |
| Advances by borrowers  for taxes and insurance                                                                                                           |       | 6,766                  |       | 6,391              |       |
| Accrued expenses and  other liabilities                                                                                                                  |       | 9,329                  |       | 8,724              |       |
| Total  liabilities                                                                                                                                       |       | 794,531                |       | 795,421            |       |
|                                                                                                                                                     |       |                   |       |               |       |
| **STOCKHOLDERS’  EQUITY**                                                                                                                           |       |                   |       |               |       |
| Preferred stock, $.01  par value, 500,000 shares authorized, none outstanding                                                                            |       | —                 |       | —             |       |
| Series A Junior  Participating Preferred Stock, $1.00 stated value, 50,000 shares authorized,  none outstanding                                          |       | —                 |       | —             |       |
| Common stock, $.01 par  value, 10,000,000 shares authorized, 5,422,277 and 5,347,686 shares issued at  December 31, 2004 and June 30, 2004, respectively |       | 54                     |       | 53                 |       |
| Common stock subscribed  for but not issued, 40,244 shares at June 30, 2004                                                                              |       | —                 |       | 698                |       |
| Additional paid-in  capital                                                                                                                              |       | 18,691                 |       | 17,680             |       |
| Retained earnings,  substantially restricted                                                                                                             |       | 63,989                 |       | 61,653             |       |
| Deferred compensation                                                                                                                                    |       | (1,003                 | )          | (1,147             | )          |
| Accumulated other  comprehensive income (loss), net of related deferred tax effect                                                                       |       | (609                   | )          | (1,327             | )          |
| Less cost of treasury  stock, 1,866,836 and 1,815,036 shares at December 31, 2004 and June 30, 2004,  respectively                   |       | (26,797                | )          | (25,961            | )          |
| Total  stockholders’ equity                                                                                                                         |       | 54,325                 |       | 51,649             |       |
| Total  liabilities and stockholders’ equity                                                                                                         |       | $                      | 848,856    |               | $          | 847,070 |   |

 

*See accompanying notes tounaudited consolidated financial statements.*

 

 

1

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**HF FINANCIALCORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Dollars inThousands, Except Per Share Data)**

**(Unaudited)**

 

 
|                                                                | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
|                                                                | ** ** | **December  31,**       | ** ** | **December  31,**     | ** ** |
|                                                                | ** ** | **2004**                | ** ** | **2003**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest, dividend and loan fee income:                             |       |                    |       |                  |       |   |   |   |   |
| Loans and leases  receivable                                        |       | $                       | 10,204     |                  | $          | 9,112 |   | $ | 19,938 |   | $ | 18,718 |   |
| Investment  securities and interest-earning deposits                |       | 1,045                   |       | 732                   |       | 2,001 |   | 1,410 |   |
|                                                                |       | 11,249                  |       | 9,844                 |       | 21,939 |   | 20,128 |   |
| Interest expense:                                                   |       |                    |       |                  |       |   |   |   |   |
| Deposits                                                            |       | 2,941                   |       | 2,477                 |       | 5,712 |   | 5,073 |   |
| Advances from  Federal Home Loan Bank and other borrowings          |       | 1,504                   |       | 1,247                 |       | 2,883 |   | 2,566 |   |
|                                                                |       | 4,445                   |       | 3,724                 |       | 8,595 |   | 7,639 |   |
| Net interest  income                                                |       | 6,804                   |       | 6,120                 |       | 13,344 |   | 12,489 |   |
| Provision for losses on loans and leases                            |       | 196                     |       | 634                   |       | 375 |   | 1,071 |   |
| Net interest  income after provision for losses on loans and leases |       | 6,608                   |       | 5,486                 |       | 12,969 |   | 11,418 |   |
|                                                                |       |                    |       |                  |       |   |   |   |   |
| Noninterest income:                                                 |       |                    |       |                  |       |   |   |   |   |
| Fees on deposits                                                    |       | 1,127                   |       | 1,057                 |       | 2,247 |   | 2,129 |   |
| Loan servicing  income                                              |       | 409                     |       | 419                   |       | 781 |   | 838 |   |
| Gain on sale of  loans, net                                         |       | 234                     |       | 312                   |       | 336 |   | 834 |   |
| Trust Income                                                        |       | 172                     |       | 136                   |       | 331 |   | 259 |   |
| Gain on sale of  securities, net                                    |       | —                  |       | 42                    |       | 13 |   | 42 |   |
| Other                                                               |       | 397                     |       | 506                   |       | 829 |   | 1,180 |   |
|                                                                |       | 2,339                   |       | 2,472                 |       | 4,537 |   | 5,282 |   |
| Noninterest expense:                                                |       |                    |       |                  |       |   |   |   |   |
| Compensation and  employee benefits                                 |       | 4,129                   |       | 3,539                 |       | 8,127 |   | 7,851 |   |
| Occupancy and  equipment                                            |       | 766                     |       | 822                   |       | 1,549 |   | 1,636 |   |
| Other                                                               |       | 1,544                   |       | 1,555                 |       | 3,094 |   | 3,163 |   |
|                                                                |       | 6,439                   |       | 5,916                 |       | 12,770 |   | 12,650 |   |
| Income before  income taxes                                         |       | 2,508                   |       | 2,042                 |       | 4,736 |   | 4,050 |   |
| Income tax expense                                                  |       | 860                     |       | 773                   |       | 1,628 |   | 1,459 |   |
|                                                                |       |                    |       |                  |       |   |   |   |   |
| Net income                                                          |       | 1,648                   |       | 1,269                 |       | $ | 3,108 |   | $ | 2,591 |   |
| Comprehensive income                                                |       | $                       | 1,401      |                  | $          | 1,135 |   | $ | 3,826 |   | $ | 2,378 |   |
| Cash dividends paid per share                                       |       | $                       | 0.1100     |                  | $          | 0.1068 |   | $ | 0.2175 |   | $ | 0.2136 |   |
|                                                                |       |                    |       |                  |       |   |   |   |   |   |   |   |   |
| Earnings per share:                                                 |       |                    |       |                  |       |   |   |   |   |
| Basic                                                               |       | $                       | 0.46       |                  | $          | 0.35 |   | $ | 0.88 |   | $ | 0.73 |   |
| Diluted                                                             |       | $                       | 0.45       |                  | $          | 0.34 |   | $ | 0.86 |   | $ | 0.70 |   |

 

*See accompanying notes to unauditedconsolidated financial statements.*

 

 

2

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**HF FINANCIALCORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars inThousands)**

**(Unaudited)**

 

 
| ** **                                                                                     | ** ** | **Six Months Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                     | ** ** | **2004**                          | ** ** | **2003** | ** ** |
| Cash flows from operating activities                                                           |       |                              |       |   |   |
| Net income                                                                                     |       | $                                 | 3,108      |   | $ | 2,591 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:             |       |                              |       |   |   |
| Provision for  losses on loans and leases                                                      |       | 375                               |       | 1,071 |   |
| Depreciation                                                                                   |       | 708                               |       | 803 |   |
| Amortization of  discounts and premiums on securities and other                                |       | 757                               |       | 821 |   |
| Stock based  compensation                                                                      |       | 216                               |       | 170 |   |
| Deferred income  taxes (credits)                                                               |       | 523                               |       | — |   |
| Loans originated  for resale                                                                   |       | (42,923                           | )          | (85,199 | ) |
| Proceeds from  the sale of loans                                                               |       | 41,276                            |       | 91,405 |   |
| (Gain) on sale  of loans, net                                                                  |       | (336                              | )          | (834 | ) |
| Realized (gain)  on sale of securities, net                                                    |       | (13                               | )          | (42 | ) |
| Losses and  provision for losses on sales of foreclosed real estate and other properties,  net |       | 21                                |       | 92 |   |
| Loss on disposal  of office properties and equipment, net                                      |       | 7                                 |       | 1 |   |
| Change in other  assets and liabilities                                                        |       | (1,333                            | )          | (1,821 | ) |
| Net cash provided  by operating activities                                                     |       | 2,386                             |       | 9,058 |   |
| Cash flows from investing activities                                                           |       |                              |       |   |   |
| Loans and leases  purchased                                                                    |       | (5,763                            | )          | (2,186 | ) |
| Loans and leases  originated and held                                                          |       | (123,471                          | )          | (101,701 | ) |
| Principal  collected on loans and leases                                                       |       | 123,939                           |       | 100,346 |   |
| Securities  available for sale:                                                                |       |                              |       |   |   |
| Sales and  maturities and repayments                                                           |       | 30,376                            |       | 21,050 |   |
| Purchases                                                                                      |       | (21,791                           | )          | (32,659 | ) |
| Purchase of  Federal Home Loan Bank stock                                                      |       | (2,539                            | )          | (850 | ) |
| Redemption of  Federal Home Loan Bank stock                                                    |       | 1,726                             |       | 3,181 |   |
| Proceeds from  sale of office properties and equipment                                         |       | 1                                 |       | — |   |
| Purchase of  office properties and equipment                                                   |       | (612                              | )          | (417 | ) |
| Purchase of  servicing rights                                                                  |       | (585                              | )          | (542 | ) |
| Proceeds from  sale of foreclosed real estate and other properties, net                        |       | 361                               |       | 426 |   |
| Net cash provided  by (used in) investing activities                                           |       | 1,642                             |       | (13,352 | ) |
|                                                                                                |            |                                   |            |  |  |  |  |

 

*See accompanying notes to unauditedconsolidated financial statements.*

 

 

 

3

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| ** **                                                           | ** ** | **Six Months Ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                           | ** ** | **2004**                          | ** ** | **2003** | ** ** |
|                                                                 |       |                              |       |   |   |
| Cash flows from  financing activities                                |       |                              |       |   |   |
| Net increase  (decrease) in deposit accounts                         |       | $                                 | (9,373     | ) | $ | 3,627 |   |
| Proceeds of  advances from Federal Home Loan                         |       |                              |       |   |   |
| Bank and other  borrowings                                           |       | 327,713                           |       | 53,000 |   |
| Payments on  advances from Federal Home Loan                         |       |                              |       |   |   |
| Bank and other  borrowings                                           |       | (320,210                          | )          | (74,731 | ) |
| Payment of debt  issue costs                                         |       | —                            |       | (158 | ) |
| Proceeds from  issuance of preferred securities                      |       | —                            |       | 7,000 |   |
| Increase in  advances by borrowers                                   |       | 375                               |       | (258 | ) |
| Purchase of  treasury stock                                          |       | (836                              | )          | (431 | ) |
| Proceeds from issuance  of common stock                              |       | 242                               |       | 367 |   |
| Cash dividends  paid                                                 |       | (772                              | )          | (765 | ) |
| Net cash (used  in) financing activities                             |       | (2,861                            | )          | (12,349 | ) |
|                                                                 |       |                              |       |   |   |
| Increase  (decrease) in cash and cash equivalents                    |       | 1,167                             |       | (16,643 | ) |
|                                                                 |       |                              |       |   |   |
| Cash and cash  equivalents                                           |       |                              |       |   |   |
| Beginning                                                            |       | 20,474                            |       | 44,214 |   |
| Ending                                                               |       | $                                 | 21,641     |   | $ | 27,571 |   |
|                                                                 |       |                              |       |   |   |
| Supplemental  Disclosures of Cash Flows Information                  |       |                              |       |   |   |
| Cash payments  for interest                                          |       | $                                 | 8,591      |   | $ | 8,056 |   |
| Cash payments  for income and franchise taxes, net                   |       | 1,218                             |       | 259 |   |
|                                                                 |       |                              |       |   |   |
| Supplemental  Schedule of Noncash Investing and Financing Activities |       |                              |       |   |   |
| Other  investments reclassified as cash and cash equivalents         |       | $                                 | —     |   | $ | 98 |   |
| Other  investments reclassified as other assets                      |       | —                            |       | 95 |   |

 

 

*See accompanying notes to unauditedconsolidated financial statements.*

 

 

 

4

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**HF FINANCIAL CORP. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

For The Three and Six Months EndedDecember 31, 2004 and 2003

(Unaudited)

 

**NOTE 1.          SELECTED ACCOUNTING POLICIES**

 

*Basis of presentation:*

 

             The consolidatedfinancial information of HF Financial Corp. (the “Company”) and itswholly-owned subsidiaries included in this Quarterly Report on Form 10-Q isunaudited.  However, in the opinion ofmanagement, adjustments (consisting of normal recurring adjustments) necessaryfor a fair presentation for the interim periods have been included.  Results for any interim period are notnecessarily indicative of results to be expected for the fiscal year.  Interim consolidated financial statements andthe notes thereto should be read in conjunction with the consolidated financialstatements and notes thereto included in the Company’s Annual Report on Form10-K for the fiscal year ended June 30, 2004 (“Fiscal 2004”), filed with theSecurities and Exchange Commission.  Theaccounting and reporting policies of the Company and its subsidiaries conformto accounting principles generally accepted in the United States of America(“GAAP”) and to general practice within the industry.

 

             During the secondquarter of Fiscal 2004, the Company completed a reclassification of itsdeferred loan origination fees and other loan fees and costs.  This process was done upon a fullerinterpretation of Statement No. 91 as issued by the Financial AccountingStandards Board (“FASB”) and Regulation S-X (“Reg S-X”) as issued by theSecurities and Exchange Commission.   Allperiods 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.

 

The interim consolidated financial statements includethe accounts of the Company, its wholly-owned subsidiaries, Home Federal Bank(the “Bank”), HF Financial Group, Inc. (“HF Group”) and HomeFirst MortgageCorp. (the “Mortgage Corp.”), and the Bank’s wholly-owned subsidiaries, MidAmerica Capital Services, Inc. (“Mid America Capital”), Hometown Insurors, Inc.(“Hometown”), Home Federal Securitization Corp. (“HFSC”), Mid-America ServiceCorporation and PMD, Inc.  The interimconsolidated financial statements reflect the deconsolidation of the subsidiarytrusts of the Company, HF Financial Capital Trust I (“Trust I”), HF FinancialCapital Trust II (“Trust II”), HF Financial Capital Trust III (“Trust III”) andHF Financial Capital Trust IV (“Trust IV”). All intercompany balances and transaction have been eliminated inconsolidation.

 

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

 

Stock-basedcompensation:  The Company accounts for stock-basedcompensation in accordance with Accounting Principles Board (“APB”) Opinion No.25, “*Accounting for Stock Issued toEmployees”,*and related Interpretations.  Accordingly, no stock-based employeecompensation cost has been recognized for grants under the fixed stock optionplans, as all options granted under those plans had an exercise price equal tothe market value of the underlying common stock on the date of grant.  These stock-based compensation plans aredescribed more fully in the Company’s Annual Report on Form 10-K for Fiscal2004, under Note 17 of “Notes to Consolidated Financial Statements.”

 

 

 

5

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Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of FASB StatementNo. 123, “*Accounting for Stock-BasedCompensation”,*to stock-based employee compensation.

 
| ** **                                                                                                                                        | ** ** | **Three Months Ended December 31,**                   | ** ** | **Six Months Ended December 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                        | ** ** | **2004**                                              | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                        | ** ** | **(Dollars in Thousands, Except for Per Share Data)** | ** ** |
|                                                                                                                                              |       |                                                  |       |                              |       |   |   |   |   |
| Net income, as  reported                                                                                                                          |       | $                                                     | 1,648      |                              | $          | 1,269 |   | $ | 3,108 |   | $ | 2,591 |   |
| Add: Total  stock-based employee compensation expense included in reported net income,  net of related tax effects                                |       | 66                                                    |       | 38                                |       | 97 |   | 73 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects (1) |       | (129                                                  | )          | (73                               | )          | (201 | ) | (143 | ) |
| Pro forma net  income                                                                                                                             |       | $                                                     | 1,585      |                              | $          | 1,234 |   | $ | 3,004 |   | $ | 2,521 |   |
| Basic earnings  per share:                                                                                                                        |       |                                                  |       |                              |       |   |   |   |   |
| As reported                                                                                                                                       |       | $                                                     | 0.46       |                              | $          | 0.35 |   | $ | 0.88 |   | $ | 0.73 |   |
| Pro forma                                                                                                                                         |       | 0.45                                                  |       | 0.34                              |       | 0.85 |   | 0.71 |   |
| Diluted earnings  per share:                                                                                                                      |       |                                                  |       |                              |       |   |   |   |   |
| As reported                                                                                                                                       |       | 0.45                                                  |       | 0.34                              |       | 0.86 |   | 0.70 |   |
| Pro forma                                                                                                                                         |       | 0.43                                                  |       | 0.33                              |       | 0.83 |   | 0.69 |   |

----

(1) Includes expense related torestricted stock reported in net income.

 

 

**NOTE 2.          REGULATORY CAPITAL**

 

Thefollowing table sets forth the Bank’s compliance with its minimum capitalrequirements for a well capitalized institution at December 31, 2004:

 

| ** **                                         | ** ** | **Amount**                 | ** ** | **Percent** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|-------------|------------|
| ** **                                         | ** ** | **(Dollars in Thousands)** | ** ** |
| Tier I (core)  capital (to adjusted total assets): |       |                       |       |        |       |
| Required                                           |       | $                          | 42,091     |        | 5.00       | % |
| Actual                                             |       | 72,822                     |       | 8.65        |       |
| Excess over  required                              |       | 30,731                     |       | 3.65        |       |
|                                               |       |                       |       |        |       |
| Risk-based  capital (to risk-weighted assets):     |       |                       |       |        |       |
| Required                                           |       | $                          | 68,462     |        | 10.00      | % |
| Actual                                             |       | 74,672                     |       | 10.91       |       |
| Excess over  required                              |       | 6,210                      |       | 0.91        |       |

 

 

**NOTE 3.          EARNINGS PER SHARE**

 

             Basic earnings per share iscomputed by dividing income available to common stockholders (the numerator) bythe weighted-average number of common shares outstanding  (the denominator) during the period.  Shares issued during the period and sharesreacquired during the period are weighted for the portion

 

 

 

6

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ofthe period that they were outstanding. The weighted average number of basiccommon shares outstanding for the three month periods ended December 31, 2004and 2003 was 3,553,354 and 3,582,667, respectively.  The weighted average number of basic commonshares outstanding for the six month periods ended December 31, 2004 and 2003was 3,543,600 and 3,569,780, respectively.

 

             Dilutive earnings pershare is similar to the computation of basic earnings per share except that thedenominator is increased to include the number of additional common shares thatwould have been outstanding if the dilutive options outstanding had beenexercised. The weighted average number of common and dilutive potential commonshares outstanding for the three month periods ended December 31, 2004 and 2003was 3,649,299 and 3,687,746, respectively. The weighted average number of common and dilutive potential commonshares outstanding for the six month periods ended December 31, 2004 and 2003was 3,624,589 and 3,677,444, respectively.

 

 

 **NOTE 4.         CONSUMER AUTOMOBILELOAN SECURITIZATION**

 

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

 

Thegain recognized on the sale of these loans was determined by allocating thecarrying amount of the loans between the loans sold and the interestsretained.  The Bank determined that 50basis points of the 100 basis points servicing contract represented was excessservicing and was capitalized as part of the transaction utilizing a marketdiscount rate of 10.0%.  This asset isamortized in proportion to, and over the period of, estimated net servicingincome.

 

Key economic assumptionsused and the sensitivity of fair value of the retained interest as of December31, 2004 are as follows:

 
| ** **                                  | ** ** | **Retained**               | ** ** | **Servicing** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|---------------|------------|
| ** **                                  | ** ** | **Interest**               | ** ** | **Rights**    | ** ** |
| ** **                                  | ** ** | **(Dollars in Thousands)** | ** ** |
|                                        |       |                       |       |          |       |
| Fair Value                                  |       | $                          | 1,684      |          | $          | 34 |   |
| Weighted average  life (in years)           |       | 2.43                       |       | 2.25          |       |
| Prepayment speed  (ABS annual rate):        |       | 21.60                      | %          | 21.60         | %          |
| Impact on fair  value of 10% adverse change |       | $                          | (12        | )             | $          | (3 | ) |
| Impact on fair  value of 20% adverse change |       | (27                        | )          | (7            | )          |
| Credit losses  (annual rate):               |       | 0.63                       | %          | 0.63          | %          |
| Impact on fair  value of 10% adverse change |       | $                          | (5         | )             | $          | — |   |
| Impact on fair  value of 20% adverse change |       | (10                        | )          | —        |       |
| Discount rate:                              |       | 8.21                       | %          | 10.00         | %          |
| Impact on fair  value of 10% adverse change |       | $                          | (10        | )             | $          | — |   |
| Impact on fair  value of 20% adverse change |       | (21                        | )          | —        |       |

 

 

 

7

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

 

 

**NOTE 5.****                             ****INVESTMENTS IN SECURITIES**

 

            The amortized cost and fair values of investments insecurities, all of which are classified as available for sale according tomanagement’s intent, are as follows:

 
| ** **                  | ** ** | **December 31, 2004**      | ** ** |
|-----------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | ** **                 | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Amortized**              | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                  | ** ** | **Cost**                   | ** ** | **Gains** | ** ** | **(Losses)** | ** ** | **Value** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)** | ** ** |
|                        |       |                       |       |   |   |   |   |   |   |
| Debt securities:            |       |                       |       |   |   |   |   |   |   |
| U.S. government  agencies   |       | $                          | 3,000      |   | $ | 8 |   | $ | — |   | $ | 3,008 |   |
| Federal Home  Loan Bank     |       | 2,500                      |       | 4 |   | — |   | 2,504 |   |
| Municipal bonds             |       | 3,541                      |       | 3 |   | (10 | ) | 3,534 |   |
| Preferred Term  Securities  |       | 9,000                      |       | 34 |   | — |   | 9,034 |   |
| Mortgage-backed  securities |       | 97,759                     |       | 57 |   | (1,153 | ) | 96,663 |   |
|                        |       | 115,800                    |       | 106 |   | (1,163 | ) | 114,743 |   |
| Equity  securities:         |       |                       |       |   |   |   |   |   |   |
| FNMA                        |       | 8                          |       | 20 |   | — |   | 28 |   |
| Federal Ag  Mortgage        |       | 7                          |       | 2 |   | — |   | 9 |   |
| Other  Investments          |       | 25                         |       | — |   | — |   | 25 |   |
|                        |       | 40                         |       | 22 |   | — |   | 62 |   |
|                        |       | $                          | 115,840    |   | $ | 128 |   | $ | (1,163 | ) | $ | 114,805 |   |

 

 
| ** **                  | ** ** | **December 31, 2003**      | ** ** |
|-----------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | ** **                 | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Amortized**              | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                  | ** ** | **Cost**                   | ** ** | **Gains** | ** ** | **(Losses)** | ** ** | **Value** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)** | ** ** |
|                        |       |                       |       |   |   |   |   |   |   |
| Debt securities:            |       |                       |       |   |   |   |   |   |   |
| U.S. government  agencies   |       | $                          | 998        |   | $ | — |   | $ | — |   | $ | 998 |   |
| Federal Home  Loan Bank     |       | 3,199                      |       | 69 |   | — |   | 3,268 |   |
| Municipal bonds             |       | 4,502                      |       | 39 |   | (12 | ) | 4,529 |   |
| Preferred Term  Securities  |       | 9,000                      |       | — |   | — |   | 9,000 |   |
| Mortgage-backed  securities |       | 81,808                     |       | 90 |   | (637 | ) | 81,261 |   |
|                        |       | 99,507                     |       | 198 |   | (649 | ) | 99,056 |   |
| Equity  securities:         |       |                       |       |   |   |   |   |   |   |
| FNMA                        |       | 8                          |       | — |   | (1 | ) | 7 |   |
| Federal Ag  Mortgage        |       | 7                          |       | 3 |   | — |   | 10 |   |
|                        |       | 15                         |       | 3 |   | (1 | ) | 17 |   |
|                        |       | $                          | 99,522     |   | $ | 201 |   | $ | (650 | ) | $ | 99,073 |   |

 

 

 

8

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Thefollowing table presents the fair value and age of gross unrealized losses byinvestment category at December 31, 2004 in accordance with Emerging IssuesTask Force Issue No. 03-1, “*The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments.”*

 

 
| ** **                  | ** ** | **Less than 12 Months**    | ** ** | **12 Months or More** | ** ** | **Total**  | ** ** |
|-----------------------------|------------|----------------------------|------------|-----------------------|------------|------------|------------|
| ** **                  | ** ** | ** **                 | ** ** | **Gross**             | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                  | ** ** | **Fair**                   | ** ** | **Unrealized**        | ** ** | **Fair**   | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                  | ** ** | **Value**                  | ** ** | **(Losses)**          | ** ** | **Value**  | ** ** | **(Losses)** | ** ** | **Value** | ** ** | **(Losses)** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)** | ** ** |
| Debt securities:            |       |                       |       |                  |       |       |       |   |   |   |   |   |   |
| Municipal bonds             |       | $                          | 1,792      |                  | $          | (10        | )          | $ | — |   | $ | — |   | $ | 1,792 |   | $ | (10 | ) |
| Mortgage-backed  securities |       | 66,750                     |       | (900                  | )          | 19,846     |       | (253 | ) | 86,596 |   | (1,153 | ) |
|                        |       | $                          | 68,542     |                  | $          | (910       | )          | $ | 19,846 |   | $ | (253 | ) | $ | 88,388 |   | $ | (1,163 | ) |

 

 

Managementdoes not believe any individual unrealized losses as of December 31, 2004represent an other-than-temporary impairment. The unrealized losses reported for mortgage-backed securities relate tosecurities issued by the Federal National Mortgage Association (“FNMA”), theGovernment National Mortgage Association and the Federal Home Loan MortgageCorporation (“FHLMC”).  These unrealizedlosses are primarily attributable to changes in interest rates and as a groupwere less than 1.3% of its respective amortized cost basis.  The Company has the ability to hold thesecurities to maturity or for a time necessary to recover the amortized cost.

 

TheCompany invests in investment securities issued by FNMA and FHLMC.  FNMA and FHLMC are government-sponsoredenterprises (“GSEs”).  GSE, as defined inthe Omnibus Budget Reconciliation Act of 1990, refers to a private corporationthat operates under a charter granted by Congress.  The majority of its board of directors must beelected by the private shareholders, though some portion may be appointed byCongress or the President.  Its centralfunction is to serve as a financial intermediary, making loans or issuing loanguarantees to borrowers or sectors identified in the enabling legislation.  The funds may be raised in a variety of ways,but in no case are the liabilities of the GSE to be backed by the full faithand credit of the federal government. The legislation specifically states that a GSE does not have the powerto tax or regulate and cannot make financial commitments in the name of thefederal government and that members of its staff are not employees of thefederal government.  However, managementbelieves that GSEs are generally perceived by the credit markets to have animplicit federal government guarantee backing its obligations.

 

Managementcannot predict the role of GSEs in the future or how Congress would respond toaccounting or credit issues that may affect GSEs.  Management presently expects to continue toinvest in investment securities issued by FNMA and FHLMC in the normal courseof business.  If Congress would evereliminate the implicit guarantee associated with securities issued by GSEs, theoutcome would most likely not be beneficial to the Company.

 

 

 

9

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**NOTE 6.          SEGMENT REPORTING**

 

**            **Operating segments are defined ascomponents of an enterprise for which separate financial information isavailable that is evaluated regularly by the chief operating decision makers indeciding how to allocate resources and in assessing performance.  The Company’s reportable segments are“banking” (including leasing activities) and “other”.  The “banking” segment is conducted throughthe Bank and Mid America Capital and the “other” segment is composed of smallernonreportable segments, the Company and inter-segment eliminations.

 

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

 

 
| **Three Months Ended December 31, 2004**                      | ** ** | **Banking**                | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|-----------|------------|-----------|------------|
| ** **                                                    | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                          |       |                       |       |      |       |      |       |
| Net interest  income                                          |       | $                          | 7,487      |      | $          | (683      | )          | $ | 6,804 |   |
| Intersegment  interest income                                 |       | (288                       | )          | 288       |       | —    |       |
| Provision for  losses on loans and leases                     |       | (196                       | )          | —    |       | (196      | )          |
| Noninterest  income                                           |       | 2,375                      |       | (36       | )          | 2,339     |       |
| Intersegment  noninterest income                              |       | (80                        | )          | 80        |       | —    |       |
| Noninterest  expense                                          |       | (6,167                     | )          | (272      | )          | (6,439    | )          |
| Intersegment  noninterest expense                             |       | 1                          |       | (1        | )          | —    |       |
| Income (loss)  from continuing operations before income taxes |       | $                          | 3,132      |      | $          | (624      | )          | $ | 2,508 |   |
|                                                          |       |                       |       |      |       |      |       |
| Total assets at  December 31, 2004                            |       | $                          | 845,102    |      | $          | 3,754     |       | $ | 848,856 |   |
|                                                               |            |                            |            |           |            |           |            |  |  |  |  |

 

 
| **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 |   |
|                                                               |            |                            |            |           |            |           |            |  |  |  |  |  |

 

 

 

10

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** **
| **Six Months Ended December 31, 2004**                        | ** ** | **Banking**                | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|-----------|------------|-----------|------------|
| ** **                                                    | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                          |       |                       |       |      |       |      |       |
| Net interest  income                                          |       | $                          | 14,642     |      | $          | (1,298    | )          | $ | 13,344 |   |
| Intersegment  interest income                                 |       | (534                       | )          | 534       |       | —    |       |
| Provision for  losses on loans and leases                     |       | (375                       | )          | —    |       | (375      | )          |
| Noninterest  income                                           |       | 4,599                      |       | (62       | )          | 4,537     |       |
| Intersegment  noninterest income                              |       | (172                       | )          | 172       |       | —    |       |
| Noninterest  expense                                          |       | (12,220                    | )          | (550      | )          | (12,770   | )          |
| Intersegment  noninterest expense                             |       | 2                          |       | (2        | )          | —    |       |
| Income (loss)  from continuing operations before income taxes |       | $                          | 5,942      |      | $          | (1,206    | )          | $ | 4,736 |   |
|                                                          |       |                       |       |      |       |      |       |
| Total assets at  December 31, 2004                            |       | $                          | 845,102    |      | $          | 3,754     |       | $ | 848,856 |   |
|                                                               |            |                            |            |           |            |           |            |  |  |  |  |  |

 

** **
| **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 |   |

 

 

 

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**NOTE 7.          DEFINED BENEFIT PLAN**

 

The Company has a noncontributory (cash balance)defined benefit pension plan covering all employees of the Company and itswholly-owned subsidiaries who have attained the age of 21 and have completed1,000 hours in a plan year.  The benefitsare based on 6% of each eligible participant’s annual compensation, plus incomeearned in the accounts at a rate determined annually based on 30-year treasurynote rates.  The Company’s funding policyis to make the minimum annual required contribution plus such amounts as theCompany may determine to be appropriate from time to time.  One hundred percent vesting occurs after fiveyears with a normal retirement age of 65, with provisions for early retirementat age 62.  Information relative to thecomponents of net periodic benefit cost for the Company’s defined benefit planis presented below:

 

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **December 31,**       | ** ** | **December 31,**     | ** ** |
| ** **                         | ** ** | **2004**               | ** ** | **2003**             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                               |       |                   |       |                 |       |   |   |   |   |
| Service cost                       |       | $                      | 113,536    |                 | $          | 107,695 |   | $ | 227,071 |   | $ | 215,389 |   |
| Interest cost                      |       | 91,584                 |       | 81,077               |       | 183,169 |   | 162,154 |   |
| Expected return  on plan assets    |       | (92,629                | )          | (60,988              | )          | (185,258 | ) | (121,976 | ) |
| Amortization of  prior losses      |       | 8,297                  |       | 13,681               |       | 16,594 |   | 27,362 |   |
| Accretion of  prior service cost   |       | —                 |       | (10,882              | )          | — |   | (21,765 | ) |
| Amortization of  transition asset  |       | 2,907                  |       | 2,907                |       | 5,815 |   | 5,815 |   |
| Total costs  recognized in expense |       | $                      | 123,695    |                 | $          | 133,490 |   | $ | 247,391 |   | $ | 266,979 |   |
|                                    |            |                        |            |                      |            |  |  |  |  |  |  |  |  |  |  |

 

 

The Company previously disclosed in its consolidatedfinancial statements for Fiscal 2004, which are included in Part II, Item 8 ofthe Company’s Annual Report on Form 10-K for Fiscal 2004, that it contributed $670,000to fund its qualified pension plan. During the quarter ended December 31, 2004, the Company madecontributions of $662,000 to fund its qualified pension plan.  The Company anticipates no additionalcontributions for this fiscal year ending June 30, 2005 (“Fiscal 2005”).

 

 

 

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

 

**Forward-LookingStatements**

 

This Quarterly Report on 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-lookingstatements orally 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, transactions and use of subordinated debentures payable to trusts.

•    Forecastsof future economic performance.

•    Use and descriptions of assumptions andestimates 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 often include words such as “optimism,”“look-forward,” “bright,” “believe,” “expect,” “anticipate,” “intend,” “plan,”“estimate” or words of similar meaning, or future or conditional verbs such as“will,” “would,” “should,” “could” or “may.”

 

Forward-lookingstatements about the Company’s expected financial results and other plans aresubject to certain risks, uncertainties and assumptions.  These include, but are not limited to thefollowing: possible legislative changes and adverse economic, business andcompetitive conditions and developments (such as shrinking interest margins andcontinued short-term rate environments); deposit outflows; reduced demand forfinancial services and loan products; changes in accounting policies orguidelines, or in monetary and fiscal policies of the federal government;changes in credit and other risks posed by the Company’s loan portfolios; theability or inability of the Company to manage interest rate and other risks;unexpected or continuing claims against the Company’s self-insured health plan;the Company’s use of trust preferred securities; the ability or inability ofthe Company to successfully enter into a definitive agreement for and closeanticipated transactions; technological, computer-related or operationaldifficulties; adverse changes in securities markets; results of litigation; orother significant uncertainties.

 

                Forward-looking statements speakonly as of the date they are made.  TheCompany does not undertake to update forward-looking statements to reflectcircumstances or events that occur after the date the forward-lookingstatements are made.

 

 

 

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**Executive Summary**

 

**            **The Company’s net income for the secondquarter of Fiscal 2005 was $1.6 million, or $0.45 per diluted share, comparedto $1.3 million, or $0.34 per diluted share, for the second quarter of Fiscal2004.  For the first six months of Fiscal2005, net income was $3.1 million, or $0.86 per diluted share, compared to $2.6million, or $0.70 per diluted share, for the first six months of Fiscal2004.  Return on average equity was11.72% at December 31, 2004 compared to 10.31% at December 31, 2003.

 

The national low rate environment over the last fiscaltwo years affected our net interest margin for the first six months of Fiscal2005, as net interest margin was 3.36% compared to 3.45% for the same period ayear ago.  Net interest margin was 3.41%for the quarter ended December 31, 2004 as compared to 3.41% at December 31,2003.  Net interest margin in dollars forthe first six months of Fiscal 2005 was $13.3 million which has increased by$855,000, or 6.8%, over the same period a year ago.  Net interest margin increased $684,000, or11.2%, to $6.6 million for the three months ended December 31, 2004 from $6.1million for same period in the prior fiscal year.  The change in net interest margin for thethree and six months ended December 31, 2004 as compared to the same period ayear ago was due in large part to the recent increases in the national primerate from 4.00% at June 30, 2004 to 5.25% at December 31, 2004.  In addition, the Company’s interest-earningassets on average through the first six months of Fiscal 2005 have increased9.9% from the same period a year ago. The variability of the net interest margin ratio is affected by manyaspects including Federal Reserve policies for short-term interest rates,competitive and economic factors, and customer preferences for various productsand services.

 

In April 2004, the Company announced the renewal ofits annual stock buyback program effective May 2004.  During the second quarter ended December 31,2004, the Company acquired 9,100 shares. Through the first six months of Fiscal 2005, the Company acquired 51,800shares.

 

The total risk-based capital ratio of 10.91% atDecember 31, 2004 is above the 10.60% at December 31, 2003, an increase of 31basis points.  This places the Bank inthe “well capitalized” category within Office of Thrift Supervision (“OTS”)regulation at December 31, 2004 and is consistent with the “well capitalized”OTS category in which the Company plans to operate.  The Company has been able to manage the sizeof its assets through secondary market loan sales of single-family mortgagesand student loans and a loan securitization. During the second quarter of Fiscal 2005, the Company experienced loanpayoffs in multi-family and commercial real estate due to competitive factors.

 

Credit quality of the Company has improved over thelast fiscal year as a result of a combination of disciplined underwritingstandards, good economic health of the region and resolution of a fewsignificant impaired loans. Nonperforming assets at December 31, 2004 were $3.5 million incomparison to $4.9 million a year ago, a decrease of $1.4 million or29.9%.  The ratio of nonperforming assetsto total assets declined to 0.41% at December 31, 2004, compared to 0.63% atDecember 31, 2003.  The allowance forloan and lease losses is calculated based on loan and lease levels, loan andlease loss history, credit quality of the loan and lease portfolio, andenvironmental factors such as economic health of the region and managementexperience.  This analysis gives theCompany a consistent and systematic methodology to determine proper levels forthe allowance at a given time.  These effortssupported a decrease in the allowance for loan and lease losses to $3.5 millionat December 31, 2004 compared to $4.0 million at December 31, 2003.

 

The Company’s liquidity structure is primarily basedon providing reasonably priced deposits and obtaining Federal Home Loan Bank ofDes Moines (“FHLB”) advances to fund lending operations. This process issupplemented by access to contingent funding sources including FHLB and FederalReserve Bank (“FRB”) advances along with other wholesale funding sources andloan securitizations.  Through theprocess, the Company is able to manage the liquidity needs of the Company.

 

 

14

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The efficiency ratio for the six months ended December31, 2004 was 71.42% compared to 71.18% for the six months ended December 31,2003.  Noninterest expense was $6.4million for the quarter ended December 31, 2004 compared to $5.9 million forthe second quarter ended December 31, 2003, an increase of 8.8%.  For the first six months of Fiscal 2005,noninterest expense is $12.8 million, compared to $12.7 million a year ago foran increase of 0.9%.  Compensation andemployee benefits expense for the first six months of Fiscal 2005 accounted foran increase of $276,000 from the same period a year ago.  Net healthcare costs, inclusive ofself-funded health claims, administration fees and fully-insured dentalpremiums offset by stop loss insurance receivable and employee reimbursementsfor the first six months of Fiscal 2005 were $594,000, compared to $867,000 forthe same period a year ago, a decrease of 31.5%.

 

Noninterest income was $2.3 million for the quarterended December 31, 2004 compared to $2.5 million at December 31, 2003, adecrease of 5.4%.  For the first sixmonths of Fiscal 2005, noninterest income is $4.5 million, compared to $5.3million for the same time period a year ago, for a decrease of 14.1%.  This shortfall was driven primarily by thevolume shortfall on gains on sale of single-family mortgage and studentloans.  Gain on sale of loans was$336,000 for the first six months of Fiscal 2005, compared to $834,000 for thesame a period a year ago, a decline of 59.7%.

 

 

**General**

 

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

 

 

15

----

 

**FinancialCondition Data**

 

            At December 31, 2004, the Companyhad total assets of $848.9 million, an increase of $1.8 million from the levelat June 30, 2004.  The increase in assetswas due primarily to increases in net loans and leases receivable of $4.8million, loans held for sale of $2.0 million, cash and cash equivalents of $1.2million and FHLB stock of $813,000 offset by a decrease in securities availablefor sale of $7.9 million.  The decreasein liabilities of $890,000 from June 30, 2004 to December 31, 2004 wasprimarily due to a decrease in deposits of $9.4 million offset by an increasein advances from the FHLB and other borrowings of $7.5 million.  In addition, stockholders’ equity increased$2.7 million to $54.3 million at December 31, 2004 from $51.6 million at June30, 2004 primarily due to net income of $3.1 million.

 

The increase in net loans and leases receivable of$4.8 million was due primarily to an increase in purchases and originationsover sales, amortization and repayments of principal.

 

The increase in loans held for sale of $2.0 millionwas primarily due to student loans held for sale increasing $2.8 million from$324,000 at June 30, 2004 to $3.1 million at December 31, 2004.  During the second quarter of Fiscal 2004, theCompany began classifying its student loan portfolio as held for sale.  Mortgage loans held for sale decreased$811,000 from $10.0 million at June 30, 2004 to $9.2 million at December 31,2004.

 

The increase in cash and cash equivalents of $1.2million was primarily due to the timing of items in clearing.

 

The net increase in FHLBstock of $813,000 was primarily the result of the Company’s redemption of $1.7million of stock offset by purchases of FHLB stock of $2.5 million.

 

The decrease in securities available for sale of $7.9million was primarily the result of sales, maturities and repayments of $30.4million exceeding purchases of $21.8 million. Included in the $30.4 million of sales, maturities and repayments wasapproximately $12.6 million of sales of variable-rate, mortgage backedsecurities and $16.6 million of mortgage-backed securities principalrepayments.  The purchases of $21.8 millionincluded variable-rate, mortgage-backed securities of $20.2 million.

 

The$9.4 million decrease in deposits was due to decreases in in-marketcertificates of deposit of $14.6 million, savings accounts of $12.7 million andmoney market accounts of $3.7 million offset by increases in interest bearingchecking accounts of $11.2 million, noninterest bearing checking accounts of$5.4 million and out-of-market certificates of deposit of $4.9 million.  Public fund deposits decreased $26.4 millionat December 31, 2004 from the levels at June 30, 2004 primarily due todecreases in out-of-market demand accounts of $16.0 million, in-market savingsaccounts of $12.4 million and in-market certificates of deposit of $9.0 millionoffset by increases in in-market demand accounts of $10.4 million and out-of-marketcertificates of deposit of $600,000.

 

Advancesfrom the FHLB and other borrowings increased $7.5 million, which was primarilydue to an increase in FHLB borrowings of $19.3 million.  The increase in FHLB borrowings was primarilythe result of a $9.4 million decrease in deposits and a $4.8 million increasein net loans and leases receivable.

 

 

 

16

----

 

 

Thefollowing tables show the composition of the Company’s loan and lease portfolioand deposit accounts at the dates indicated.

 

** **
| ** **                             | ** ** | **At December 31, 2004**   | ** ** | **At June 30, 2004** | ** ** |
|----------------------------------------|------------|----------------------------|------------|----------------------|------------|
| ** **                             | ** ** | ** **                 | ** ** | **Percent of**       | ** ** | ** ** | ** ** | **Percent of** | ** ** |
| ** **                             | ** ** | ** **                 | ** ** | **Loans in**         | ** ** | ** ** | ** ** | **Loans in** | ** ** |
| ** **                             | ** ** | **Amount**                 | ** ** | **Each Category**    | ** ** | **Amount** | ** ** | **Each Category** | ** ** |
| ** **                             | ** ** | **(Dollars in Thousands)** | ** ** |
|                                   |       |                       |       |                 |       |   |   |   |   |
| One-to  four-family (1)                |       | $                          | 95,219     |                 | 14.67      | % | $ | 93,721 |   | 14.54 | % |
| Commercial real  estate                |       | 98,745                     |       | 15.21                | %          | 89,356 |   | 13.86 | % |
| Multi-family  real estate              |       | 35,364                     |       | 5.45                 | %          | 42,572 |   | 6.61 | % |
| Commercial  business                   |       | 109,926                    |       | 16.93                | %          | 124,033 |   | 19.24 | % |
| Equipment  finance leases              |       | 28,783                     |       | 4.43                 | %          | 27,019 |   | 4.19 | % |
| Consumer Direct  (2) (3)               |       | 112,223                    |       | 17.29                | %          | 108,755 |   | 16.87 | % |
| Consumer  Indirect                     |       | 92,009                     |       | 14.17                | %          | 87,839 |   | 13.63 | % |
| Agricultural                           |       | 65,976                     |       | 10.16                | %          | 63,370 |   | 9.83 | % |
| Construction and  development          |       | 10,980                     |       | 1.69                 | %          | 7,886 |   | 1.23 | % |
| Total Loans and  Leases Receivable (4) |       | $                          | 649,225    |                 | 100.00     | % | $ | 644,551 |   | 100.00 | % |

 

----

(1)     Excludes $9,216 and $10,027 loans held forsale at December 31, 2004 and June 30, 2004, respectively.

(2)     Includes mobile home loans.

(3)     Excludes $3,118 and $324 student loans heldfor sale at December 31, 2004 and June 30, 2004, respectively.

          During the second quarter of Fiscal 2004, the Company beganclassifying its student loan portfolio as held for sale.

(4)     Includes deferred loan fees and discountsand undisbursed portion of loans in process.

** **

** **
| ** **                             | ** ** | **At December 31, 2004**   | ** ** | **At June 30, 2004** | ** ** |
|----------------------------------------|------------|----------------------------|------------|----------------------|------------|
| ** **                             | ** ** | ** **                 | ** ** | **Percent of**       | ** ** | ** ** | ** ** | **Percent of** | ** ** |
| ** **                             | ** ** | ** **                 | ** ** | **Deposits in**      | ** ** | ** ** | ** ** | **Deposits in** | ** ** |
| ** **                             | ** ** | **Amount**                 | ** ** | **Each Category**    | ** ** | **Amount** | ** ** | **Each Category** | ** ** |
| ** **                             | ** ** | **(Dollars in Thousands)** | ** ** |
|                                   |       |                       |       |                 |       |   |   |   |   |
| Noninterest  bearing checking accounts |       | $                          | 80,654     |                 | 12.42      | % | $ | 75,251 |   | 11.42 | % |
| Interest bearing  accounts             |       | 56,987                     |       | 8.78                 | %          | 45,738 |   | 6.94 | % |
| Money market  accounts                 |       | 208,277                    |       | 32.07                | %          | 211,928 |   | 32.17 | % |
| Savings accounts                       |       | 51,013                     |       | 7.86                 | %          | 63,670 |   | 9.67 | % |
| Certificates of  deposit               |       | 252,415                    |       | 38.87                | %          | 262,132 |   | 39.80 | % |
| Total Deposits                         |       | $                          | 649,346    |                 | 100.00     | % | $ | 658,719 |   | 100.00 | % |

 

 

 

**Analysis of Net Interest Income**

 

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

 

*             AverageBalances, Interest Rates and Yields.*  The followingtable presents for the periods indicated, the total dollar amount of interestincome from average interest-earning assets and the resulting yields, as wellas the interest expense on average interest-bearing liabilities, expressed bothin dollars and rates, and the net

 

 

 

17

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interest margin.  The table doesnot reflect any effect of income taxes. Average balances consist of daily average balance for the Bank withsimple average balances for all other companies.  The average balances include nonaccruingloans and leases.  The yields on loansand leases include origination fees, net of costs, which are consideredadjustments to yield.

 

 

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

** **
| ** **                                     | ** ** | **THREE MONTHS ENDED DECEMBER 31,** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                     | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| ** **                                     | ** ** | **Average**                         | ** ** | **Interest** | ** ** | ** ** | ** ** | **Average** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Outstanding**                     | ** ** | **Earned/** | ** ** | **Yield/** | ** ** | **Outstanding** | ** ** | **Earned/** | ** ** | **Yield/** | ** ** |
| ** **                                     | ** ** | **Balance**                         | ** ** | **Paid** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Paid** | ** ** | **Rate** | ** ** |
| ** **                                     | ** ** | **(Dollars in Thousands)**          | ** ** |
| Interest-earning  assets:                      |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Loans and leases  receivable (1) (3)           |       | $                                   | 671,387    |   | $ | 10,204 |   | 6.03 | % | $ | 611,711 |   | $ | 9,112 |   | 5.91 | % |
| Investment  securities (2) (3)                 |       | 113,906                             |       | 996 |   | 3.47 | % | 96,322 |   | 702 |   | 2.89 | % |
| FHLB stock                                     |       | 6,576                               |       | 49 |   | 2.96 | % | 4,540 |   | 30 |   | 2.62 | % |
|                                           |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                 |       | 791,869                             |       | $ | 11,249 |   | 5.64 | % | 712,573 |   | $ | 9,844 |   | 5.48 | % |
| Noninterest-earning  assets                    |       | 66,704                              |       |   |   |   |   | 61,490 |   |   |   |   |   |
| Total assets                                   |       | $                                   | 858,573    |   |   |   |   |   | $ | 774,063 |   |   |   |   |   |
|                                           |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                      |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Checking and  money market                     |       | $                                   | 264,507    |   | $ | 1,077 |   | 1.62 | % | $ | 227,132 |   | $ | 631 |   | 1.10 | % |
| Savings                                        |       | 45,053                              |       | 111 |   | 0.98 | % | 47,098 |   | 67 |   | 0.56 | % |
| Certificates of  deposit                       |       | 259,927                             |       | 1,753 |   | 2.68 | % | 257,301 |   | 1,779 |   | 2.74 | % |
| Total  interest-bearing deposits               |       | 569,487                             |       | 2,941 |   | 2.05 | % | 531,531 |   | 2,477 |   | 1.85 | % |
| FHLB advances  and other borrowings            |       | 115,391                             |       | 1,102 |   | 3.79 | % | 77,051 |   | 921 |   | 4.74 | % |
| Subordinated  debentures payable to trusts     |       | 27,837                              |       | 402 |   | 5.73 | % | 27,000 |   | 326 |   | 4.79 | % |
|                                           |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities            |       | 712,715                             |       | 4,445 |   | 2.47 | % | 635,582 |   | 3,724 |   | 2.32 | % |
| Noninterest-bearing  deposits                  |       | 75,948                              |       |   |   |   |   | 66,685 |   |   |   |   |   |
| Other  liabilities                             |       | 16,156                              |       |   |   |   |   | 21,020 |   |   |   |   |   |
| Total  liabilities                             |       | 804,819                             |       |   |   |   |   | 723,287 |   |   |   |   |   |
| Equity                                         |       | 53,754                              |       |   |   |   |   | 50,776 |   |   |   |   |   |
| Total  liabilities and equity                  |       | $                                   | 858,573    |   |   |   |   |   | $ | 774,063 |   |   |   |   |   |
|                                           |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  income; interest rate spread (4) |       |                                |       | $ | 6,804 |   | 3.17 | % |   |   | $ | 6,120 |   | 3.16 | % |
|                                           |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  margin (4) (5)                   |       |                                |       |   |   | 3.41 | % |   |   |   |   | 3.41 | % |
|                                                |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

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

(2)     Includes federal funds sold.

(3)     Yields do not reflect the tax exempt natureof loans and municipal securities.

(4)     Percentages for the six months endedDecember 31, 2004 and December 31, 2003 have been annualized.

(5)     Net interest margin is net interest incomedivided by average interest-earning assets.

 

 

 

18

----

 
| ** **                                     | ** ** | **SIX MONTHS ENDED DECEMBER 31,** | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                     | ** ** | **2004**                          | ** ** | **2003** | ** ** |
| ** **                                     | ** ** | **Average**                       | ** ** | **Interest** | ** ** | ** ** | ** ** | **Average** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Outstanding**                   | ** ** | **Earned/** | ** ** | **Yield/** | ** ** | **Outstanding** | ** ** | **Earned/** | ** ** | **Yield/** | ** ** |
| ** **                                     | ** ** | **Balance**                       | ** ** | **Paid** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Paid** | ** ** | **Rate** | ** ** |
| ** **                                     | ** ** | **(Dollars in Thousands)**        | ** ** |
| Interest-earning  assets:                      |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Loans and leases  receivable (1) (3)           |       | $                                 | 667,444    |   | $ | 19,938 |   | 5.93 | % | $ | 617,622 |   | $ | 18,718 |   | 6.01 | % |
| Investment  securities (2) (3)                 |       | 115,068                           |       | 1,917 |   | 3.30 | % | 95,403 |   | 1,345 |   | 2.80 | % |
| FHLB stock                                     |       | 6,228                             |       | 84 |   | 2.68 | % | 4,610 |   | 65 |   | 2.80 | % |
|                                           |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                 |       | 788,740                           |       | $ | 21,939 |   | 5.52 | % | 717,635 |   | $ | 20,128 |   | 5.56 | % |
| Noninterest-earning  assets                    |       | 66,326                            |       |   |   |   |   | 60,892 |   |   |   |   |   |
| Total assets                                   |       | $                                 | 855,066    |   |   |   |   |   | $ | 778,527 |   |   |   |   |   |
|                                           |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                 |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                      |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Checking and  money market                     |       | $                                 | 262,359    |   | $ | 1,972 |   | 1.49 | % | $ | 226,195 |   | $ | 1,262 |   | 1.11 | % |
| Savings                                        |       | 47,982                            |       | 217 |   | 0.90 | % | 47,141 |   | 137 |   | 0.58 | % |
| Certificates of  deposit                       |       | 261,680                           |       | 3,523 |   | 2.67 | % | 260,874 |   | 3,674 |   | 2.79 | % |
| Total  interest-bearing deposits               |       | 572,021                           |       | 5,712 |   | 1.98 | % | 534,210 |   | 5,073 |   | 1.88 | % |
| FHLB advances  and other borrowings            |       | 110,879                           |       | 2,108 |   | 3.77 | % | 81,653 |   | 1,989 |   | 4.83 | % |
| Subordinated  debentures payable to trusts     |       | 27,837                            |       | 775 |   | 5.52 | % | 24,000 |   | 577 |   | 4.77 | % |
| Total  interest-bearing liabilities            |       | 710,737                           |       | 8,595 |   | 2.40 | % | 639,863 |   | 7,639 |   | 2.37 | % |
| Noninterest-bearing  deposits                  |       | 73,288                            |       |   |   |   |   | 68,107 |   |   |   |   |   |
| Other  liabilities                             |       | 18,020                            |       |   |   |   |   | 20,316 |   |   |   |   |   |
| Total  liabilities                             |       | 802,045                           |       |   |   |   |   | 728,286 |   |   |   |   |   |
| Equity                                         |       | 53,021                            |       |   |   |   |   | 50,241 |   |   |   |   |   |
| Total  liabilities and equity                  |       | $                                 | 855,066    |   |   |   |   |   | $ | 778,527 |   |   |   |   |   |
|                                           |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  income; interest rate spread (4) |       |                              |       | $ | 13,344 |   | 3.12 | % |   |   | $ | 12,489 |   | 3.19 | % |
|                                           |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  margin (4) (5)                   |       |                              |       |   |   | 3.36 | % |   |   |   |   | 3.45 | % |
|                                                |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

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

(2)     Includes federal funds sold.

(3)     Yields do not reflect the tax exempt natureof loans and municipal securities.

(4)     Percentages for the six months endedDecember 31, 2004 and December 31, 2003 have been annualized.

(5)     Net interest margin is net interest incomedivided by average interest-earning assets.

 

 

 

19

----

 

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

 

 
| ** **                                 | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                 | ** ** | **2004 vs 2003**                    | ** ** | **2004 vs 2003**                  | ** ** |
| ** **                                 | ** ** | **Increase**                        | ** ** | **Increase**                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **(Decrease)**                      | ** ** | **(Decrease)**                    | ** ** | **Total** | ** ** | **Increase** | ** ** | **(Decrease)** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **Due to**                          | ** ** | **Due to**                        | ** ** | **Increase** | ** ** | **Due to** | ** ** | **Due to** | ** ** | **Increase** | ** ** |
| ** **                                 | ** ** | **Volume**                          | ** ** | **Rate**                          | ** ** | **(Decrease)** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| ** **                                 | ** ** | **(Dollars in Thousands)**          | ** ** |
| Interest-earning  assets:                  |       |                                |       |                              |       |   |   |   |   |   |   |   |   |
| Loans and leases  receivable (1)           |       | $                                   | 889        |                              | $          | 203 |   | $ | 1,092 |   | $ | 1,510 |   | $ | (290 | ) | $ | 1,220 |   |
| Investment  securities (2)                 |       | 128                                 |       | 166                               |       | 294 |   | 277 |   | 295 |   | 572 |   |
| FHLB stock                                 |       | 14                                  |       | 5                                 |       | 19 |   | 23 |   | (4 | ) | 19 |   |
|                                       |       |                                |       |                              |       |   |   |   |   |   |   |   |   |
| Total  interest-earning assets             |       | $                                   | 1,031      |                              | $          | 374 |   | $ | 1,405 |   | $ | 1,810 |   | $ | 1 |   | $ | 1,811 |   |
|                                       |       |                                |       |                              |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:             |       |                                |       |                              |       |   |   |   |   |   |   |   |   |
| Deposits:                                  |       |                                |       |                              |       |   |   |   |   |   |   |   |   |
| Checking and  money market                 |       | $                                   | 104        |                              | $          | 342 |   | $ | 446 |   | $ | 202 |   | $ | 508 |   | $ | 710 |   |
| Savings                                    |       | (3                                  | )          | 47                                |       | 44 |   | 2 |   | 78 |   | 80 |   |
| Certificates of  deposit                   |       | 18                                  |       | (44                               | )          | (26 | ) | 11 |   | (162 | ) | (151 | ) |
| Total  interest-bearing deposits           |       | 119                                 |       | 345                               |       | 464 |   | 215 |   | 424 |   | 639 |   |
| FHLB advances  and other borrowings        |       | 458                                 |       | (277                              | )          | 181 |   | 712 |   | (593 | ) | 119 |   |
| Subordinated  debentures payable to trusts |       | 10                                  |       | 66                                |       | 76 |   | 92 |   | 106 |   | 198 |   |
|                                       |       |                                |       |                              |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities        |       | $                                   | 587        |                              | $          | 134 |   | $ | 721 |   | $ | 1,019 |   | $ | (63 | ) | $ | 956 |   |
|                                       |       |                                |       |                              |       |   |   |   |   |   |   |   |   |
| Net interest  income increase              |       |                                |       |                              |       | $ | 684 |   |   |   |   |   | $ | 855 |   |

 

----

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

(2)     Includes federal funds sold.

 

 

 

20

----

 

**Application of CriticalAccounting Policies**

 

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

 

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

 

The allowance is compiled by utilizing the Company’sloan and lease risk rating system, which is structured to identify weaknessesin the loan and lease portfolio.  Therisk rating system has evolved to a process whereby management believes thesystem will properly identify the credit risk associated with the loan andlease portfolio.  Due to thestratification of loans and leases for the allowance calculation, the estimateof the allowance for loan and lease losses could change materially if the loanand lease risk rating system would not properly identify the strength of alarge or a few large loan and lease 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.

 

*MortgageServicing Rights (“MSR”)* – The Company records a servicing asset forcontractually separated servicing from the underlying mortgage loans.  The asset is initially recorded at fair valueand represents an intangible asset backed by an income stream from the servicedassets.  The asset is amortized inproportion to and over the period of estimated net servicing income.

 

At each balance sheet date, the MSRs are analyzed forimpairment, which occurs when the fair value of the MSRs is lower than theamortized book value. The Company’s MSRs are primarily servicing rightsacquired on South Dakota Housing Development Authority first time home buyersprogram.  Due to the lack of quotedmarkets for the Company’s servicing portfolio, the Company estimates the fairvalue of the MSRs using present value of future cash flow analysis.  If the analysis produces a fair value that isgreater than or equal to the amortized book value of the MSRs, no impairment isrecognized.  If the fair value is lessthan the book value, an expense for the difference is charged to earnings byinitiating a MSR valuation account.  Ifthe Company determines this impairment is temporary, any future changes in fairvalue are recorded as a change in earnings and the valuation.  If the Company determines the impairment tobe permanent, the valuation is written off against the MSRs, which results in anew amortized balance.

 

Due to the substantial decline in interest rates overthe last several fiscal years, the Company has included MSRs as a criticalaccounting policy because the use of estimates for determining fair value usingpresent value concepts may produce results which may significantly differ fromother fair value analysis perhaps even to the point of recordingimpairment.  The risk to earnings is whenthe underlying mortgages payoff significantly faster than the assumptions usedin the previously recorded amortization. Estimating future cash flows on the underlying mortgages is a difficultanalysis and requires judgment based on the best information available.  The Company looks at alternative assumptionsand projections when preparing a reasonable and supportable analysis.  Based on the Company’s quarterly analysis ofMSRs, there was no impairment to the MSRs at December 31, 2004.

 

 

21

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*Retained Interest from Securitization*– The Company recorded an asset as a result of the automobilesecuritization.  See Note 4 of the “Notesto Consolidated Financial Statements.” This asset is recorded based on present value concepts of future expectedcash flows.  The assumptions used tocalculate the initial retained interest value and subsequent assumptions arebased on the best information available. The value of the retained interest may change significantly if actualcash flows differ from expected cash flows.

 

**Asset Quality and PotentialProblem Loans and Leases**

 

Nonperforming assets (nonaccrual loans and leases,accruing loans and leases delinquent more than 90 days and foreclosed assets)increased to $3.5 million at December 31, 2004 from $2.3 million at June 30,2004, an increase of $1.2 million, or 52.3%. Accruing loans and leases delinquent more than 90 days increased $1.5million from the levels at June 30, 2004 primarily due to one agricultural loanrelationship, which was paid down by $1.2 million subsequent to December 31,2004.  In addition, the ratio ofnonperforming assets to total assets, which is one indicator of credit riskexposure, increased to 0.41% at December 31, 2004 from 0.27% at June 30, 2004.

 

Nonaccruing loans and leases decreased 27.9% or$435,000 to $1.1 million at December 31, 2004 compared to $1.6 million at June30, 2004.  Included in nonaccruing loansand leases at December 31, 2004 was three loans totaling $130,000 secured byone- to four-family real estate, one loan totaling $71,000 secured bycommercial real estate, six commercial business loans totaling $426,000 and 32consumer loans totaling $499,000.

 

The Company’s nonperforming loans and leases, whichrepresent nonaccrual and past due 90 days and still accruing, have increased$1.5 million to $2.0 million at December 31, 2004 compared to $502,000 at June30, 2004.  The risk rating system inplace is designed to identify and manage the nonperforming loans and leases.  Commercial and agricultural loans and equipmentfinance leases will have specific reserve allocations based on collateralvalues or based on the present value of expected cash flows if the loans andleases are deemed impaired.  Loans andleases that are not performing do not necessarily result in a loss.

 

As of December 31, 2004, the Company had $290,000 offoreclosed assets.  The balance offoreclosed assets at December 31, 2004 consisted of $150,000 of consumercollateral owned and $140,000 of single family collateral owned.

 

At December 31, 2004, the Company had designated $13.8 million of its assets asspecial mention and classified $2.2 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, 2004 theCompany had $29.2 million in multi-family, commercial business, commercial realestate and agricultural participation loans purchased, none of which wereclassified as of December 31, 2004. These loans and leases were considered in determining the adequacy ofthe allowance for loan and lease losses. The allowance for loan and lease losses is established based onmanagement’s evaluation of the risks probable in the loan and lease portfolioand changes in the nature and volume of loan and lease activity.  Such evaluation, which includes a review ofall loans and leases for which full collectibility may not be reasonablyassured, considers the estimated fair market value of the underlyingcollateral, present value of expected principal and interest payments, economicconditions, historical loss experience and other factors that warrantrecognition in providing for an adequate loan and lease loss allowance.

 

Althoughthe Company’s management believes that the December 31, 2004 recorded allowancefor loan and lease losses was adequate to provide for probable losses on therelated loans and leases, there can be no assurance that the allowance existingat December 31, 2004 will be adequate in the future.

 

 

22

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

 
| ** **                                                                 | ** ** | **Nonperforming Assets As Of** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                 | ** ** | **December 31,**               | ** ** | **June 30,** | ** ** |
| ** **                                                                 | ** ** | **2004**                       | ** ** | **2004** | ** ** |
| ** **                                                                 | ** ** | **(Dollars in Thousands)**     | ** ** |
| Nonaccruing  loans and leases:                                             |       |                           |       |   |   |
| One- to  four-family                                                       |       | $                              | 130        |   | $ | 86 |   |
| Commercial real  estate                                                    |       | 71                             |       | 75 |   |
| Commercial  business                                                       |       | 426                            |       | 795 |   |
| Equipment  finance leases                                                  |       | —                         |       | 21 |   |
| Consumer (1)                                                               |       | 499                            |       | 564 |   |
| Agricultural                                                               |       | —                         |       | 20 |   |
| Total                                                                      |       | 1,126                          |       | 1,561 |   |
|                                                                       |       |                           |       |   |   |
| Accruing loans  and leases delinquent more than 90 days:                   |       |                           |       |   |   |
| One- to  four-family                                                       |       | 146                            |       | — |   |
| Commercial real  estate                                                    |       | 55                             |       | — |   |
| Commercial  business                                                       |       | 381                            |       | 221 |   |
| Equipment  finance leases                                                  |       | 117                            |       | 281 |   |
| Consumer (1)                                                               |       | 8                              |       | — |   |
| Agricultural                                                               |       | 1,342                          |       | — |   |
| Total                                                                      |       | 2,049                          |       | 502 |   |
|                                                                       |       |                           |       |   |   |
| Foreclosed  assets: (2)                                                    |       |                           |       |   |   |
| One- to  four-family                                                       |       | 140                            |       | 100 |   |
| Consumer (1)                                                               |       | 150                            |       | 112 |   |
| Total                                                                      |       | 290                            |       | 212 |   |
|                                                                       |       |                           |       |   |   |
| Total  nonperforming assets                                                |       | $                              | 3,465      |   | $ | 2,275 |   |
|                                                                       |       |                           |       |   |   |
| Ratio of  nonperforming assets to total assets                             |       | 0.41                           | %          | 0.27 | % |
|                                                                       |       |                           |       |   |   |
| Ratio of  nonperforming loans and leases to total loans and leases (3) (4) |       | 0.48                           | %          | 0.32 | % |

 

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(1)     Includes mobile home loans.

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

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

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

 

 

23

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Thefollowing table sets forth information with respect to activity in theCompany’s allowance for loan and lease losses during the periods indicated.

 
| ** **                                                                                                   | ** ** | **Six Months Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                   | ** ** | **2004**                          | ** ** | **2003** | ** ** |
| ** **                                                                                                   | ** ** | **(Dollars in Thousands)**        | ** ** |
| Balance at  beginning of period                                                                              |       | $                                 | 3,605      |   | $ | 3,842 |   |
| Charge-offs:                                                                                                 |       |                              |       |   |   |
| One- to  four-family                                                                                         |       | —                            |       | (6 | ) |
| Commercial real  estate                                                                                      |       | —                            |       | (16 | ) |
| Commercial  business                                                                                         |       | (126                              | )          | (339 | ) |
| Equipment  finance leases                                                                                    |       | (11                               | )          | (23 | ) |
| Consumer (1)                                                                                                 |       | (540                              | )          | (677 | ) |
| Agriculture                                                                                                  |       | (14                               | )          | — |   |
| Total  charge-offs                                                                                           |       | (691                              | )          | (1,061 | ) |
| Recoveries:                                                                                                  |       |                              |       |   |   |
| One- to  four-family                                                                                         |       | 8                                 |       | 4 |   |
| Commercial  business                                                                                         |       | 25                                |       | 2 |   |
| Equipment  finance leases                                                                                    |       | 1                                 |       | 54 |   |
| Consumer (1)                                                                                                 |       | 119                               |       | 101 |   |
| Agriculture                                                                                                  |       | 72                                |       | — |   |
| Total recoveries                                                                                             |       | 225                               |       | 161 |   |
|                                                                                                         |       |                              |       |   |   |
| Net  (charge-offs)                                                                                           |       | (466                              | )          | (900 | ) |
|                                                                                                         |       |                              |       |   |   |
| Additions  charged to operations                                                                             |       | 375                               |       | 1,071 |   |
|                                                                                                         |       |                              |       |   |   |
| Balance at end  of period                                                                                    |       | $                                 | 3,514      |   | $ | 4,013 |   |
|                                                                                                         |       |                              |       |   |   |   |   |
| Ratio of net  (charge-offs) during the period to average loans and leases outstanding  during the period (2) |       | (0.07                             | )%         | (0.15 | )% |
|                                                                                                         |       |                              |       |   |   |
| Ratio of  allowance for loan and lease losses to total loans and leases at end of  period (2)                |       | 0.53                              | %          | 0.66 | % |
|                                                                                                         |       |                              |       |   |   |
| Ratio of  allowance for loan and lease losses to nonperforming loans and leases at end  of period (3)        |       | 110.68                            | %          | 83.21 | % |

 

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(1)     Includes mobile home loans.

(2)     Total and average loans and leases includeloans held for sale.

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

 

 

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

 
| ** **               | ** ** | **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, 2004**                         |       | **At June  30, 2004**                             |       |
|                     |       | **(Dollars  in Thousands)**                       |       |
|                     |       |                                              |       |                                              |       |                                              |       |                                              |       |
| One- to four-family      |       | $                                                 | 184        |                                              | $          | —                                            |       | $                                                 | 15         |   | $ | — |   |
| Commercial real estate   |       | 217                                               |       | —                                            |       | 135                                               |       | —                                            |       |
| Multi-family real estate |       | 87                                                |       | —                                            |       | 85                                                |       | —                                            |       |
| Commercial business      |       | 765                                               |       | —                                            |       | 970                                               |       | —                                            |       |
| Equipment finance leases |       | 318                                               |       | —                                            |       | 296                                               |       | 4                                                 |       |
| Consumer (1)             |       | 1,607                                             |       | —                                            |       | 1,736                                             |       | —                                            |       |
| Agricultural             |       | 336                                               |       | —                                            |       | 364                                               |       | —                                            |       |
| Total                    |       | $                                                 | 3,514      |                                              | $          | —                                            |       | $                                                 | 3,601      |   | $ | 4 |   |

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(1) Includes mobile home loans.

 

**FASB 114 Impaired Loan Summary**

** **
| ** **               | ** ** | **Number**

**of Loan**

**Customers** | ** ** | **Loan  Balance** | ** ** | **Impaired Loan  Valuation**

**Allowance** | ** ** |
|--------------------------|------------|----------------------------------------|------------|-------------------|------------|---------------------------------------------|------------|
| **Loan  Type**           | ** ** | **At  December 31, 2004**              |       |
|                     |       | **(Dollars  in Thousands)**            |       |
| Equipment finance leases |       | —                                 |       | $                 | —     |                                        | $          | — |   |
| Commercial real estate   |       | 1                                      |       | 65                |       | —                                      |       |
| Commercial business      |       | 4                                      |       | 120               |       | —                                      |       |
| Total                    |       | 5                                      |       | $                 | 185        |                                        | $          | — |   |

 

 

25

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**FASB 114 Impaired Loan Summary**

** **
| ** **               | ** ** | **Number**

**of Loan**

**Customers** | ** ** | **Loan**

**Balance** | ** ** | **Impaired Loan  Valuation**

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

 

 

The allowance for loan andlease losses was $3.5 million at December 31, 2004 as compared to $4.0 millionat December 31, 2003. The ratio of the allowance for loan and lease losses tototal loans and leases was 0.53% at December 31, 2004 compared to 0.66% atDecember 31, 2003, a decrease of 19.7%. 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 tomonitor its allowance for probable loan and lease losses and make futureadditions or reductions in light of the level of loans and leases in itsportfolio and as economic conditions dictate. The currentlevel of the allowance for loan and lease losses is a result of management’sassessment of the risks within the portfolio based on the information revealedin credit reporting processes. The Company utilizes a risk-rating system on allcommercial business, agricultural, construction and multi-family and commercialreal estate loans, including purchased loans. A periodic credit review isperformed on all types of loans and leases to establish the necessary reservebased on the estimated risk within the portfolio. This assessment of risk takesinto account the composition of the loan and lease portfolio, historical lossexperience for each loan and lease category, previous loan and lease experience,concentrations of credit, current economic conditions and other factors that inmanagement’s judgment deserve recognition.

 

**               **Realestate properties acquired throughforeclosure are recorded at the lower of cost or fair value (less a deductionfor disposition costs). Valuations are periodically updated by management and aspecific provision for losses on such properties is established by a charge tooperations if the carrying values of the properties exceed their estimated netrealizable values.

 

                Although management believesthat it uses the best information available to determine the allowances,unforeseen market conditions could result in adjustments and net earnings beingsignificantly affected if circumstances differ substantially from the assumptionsused in making the final determinations. Future additions to the Company’sallowances result from periodic loan, property and collateral reviews and thuscannot be predicted in advance.

 

26

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**Comparison of the Three Months Ended December 31,2004 and December 31, 2003**

 

*General*. The Company’s net incomewas $1.6 million, or $0.46 and $0.45 for basic and diluted earnings per share,respectively, for the three months ended December 31, 2004, a $379,000 increasein earnings compared to $1.3 million, or $0.35 and $0.34 for basic and dilutedearnings per share, respectively, for the same period in the prior fiscal year.For the three months ended December 31, 2004, the return on average equity was12.26%, a 22.6% increase compared to 10.00% for the same period in the priorfiscal year. For the three months ended December 31, 2004, the return onaverage assets was 0.77%, a 16.7% increase compared to 0.66% for the sameperiod in the prior fiscal year. As discussed in more detail below, theincreases were due to a variety of key factors, including an increase in netinterest income of $684,000 and a decrease in provision for losses on loans andleases of $438,000 offset by a decrease in noninterest income of $133,000 andincreases in noninterest expense of $523,000 and income tax expense of $87,000.

 

*Interest, Dividend andLoan Fee Income.* Interest, dividend and loan fee income was $11.2million for the three months ended December 31, 2004 as compared to $9.8 millionfor the same period in the prior fiscal year, an increase of $1.4 million or14.3%. A $889,000 increase in interest, dividend and loan fee income was theresult of a 9.8% increase in the average volume of loans and leases receivableand a $203,000 increase in interest, dividend and loan fee income due to anincrease in the average yield on loans and leases receivable from 5.91% for thethree months ended December 31, 2003 to 6.03% for the three months endedDecember 30, 2004. The average yield on total interest-earning assets was 5.64%for the three months ended December 31, 2004 as compared to 5.48% for the sameperiod in the prior fiscal year.

 

*Interest Expense.* Interestexpense was $4.4 million for the three months ended December 31, 2004 ascompared to $3.7 million for the same period in the prior fiscal year, anincrease of $721,000 or 19.4%. A $345,000 increase in interest expense was theresult of an increase in average yield on interest-bearing deposits from 1.85%for the three months ended December 31, 2003 to 2.05% for the three monthsended December 31, 2004. A $458,000 increase in interest expense was the resultof a 49.8% increase in the average balance of FHLB advances and otherborrowings offset by a decrease of $277,000 as a result of the average yield onFHLB advances and other borrowings decreasing from 4.74% for the three monthsended December 31, 2003 to 3.79% for the three months ended December 31, 2004. Averageinterest-bearing deposits increased $38.0 million while FHLB advances and otherborrowings increased $38.3 million. An increase of $587,000 in interest expensewas the result of a 12.1% increase in the average balance of interest bearingliabilities from $635.6 million for the three months ended December 31, 2003 to$712.7 million for the three months ended December 31, 2004.

 

*Net Interest Income.* The Company’snet interest income for the three months ended December 31, 2004 increased$684,000, or 11.2%, to $6.8 million compared to $6.1 million for the sameperiod in the prior fiscal year. The increase in net interest income was dueprimarily to an increase in the average balance of interest earning assets forthe three months ended December 31, 2004 compared to the same period in theprior fiscal year. In addition, gradually increasing rates over the priorquarter and the prime rate increasing from 4.00% at June 30, 2004 to 5.25% atDecember 31, 2004 contributed to an increase in net interest income. TheCompany’s net interest margin was 3.41% for the second quarter of Fiscal 2005 ascompared to 3.41% for the same period in the prior fiscal year.

 

*Provision for Losses onLoans and Leases.*The allowancefor loan and lease losses is maintained at a level which is considered bymanagement to be adequate to absorb probable losses on existing loans andleases that may become uncollectible, based on an evaluation of thecollectibility of loans and leases and prior loan and lease loss experience. Theevaluation takes into consideration such factors as changes in the nature andvolume of the loan and lease portfolio, overall portfolio quality, review ofspecific problem loans and leases, and current economic conditions that mayaffect the borrower’s ability to pay. The allowance for loan and lease lossesis established through a provision for losses on loans and leases charged toexpense.

 

27

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During the three monthsended December 31, 2004, the Company recorded a provision for losses on loansand leases of $196,000 compared to $634,000 for the three months ended December31, 2003, a decrease of $438,000. See “Asset Quality” for further discussion.

 

*Noninterest Income.* Noninterestincome was $2.3 million for the three months ended December 31, 2004 ascompared to $2.5 million for the same period in the prior fiscal year, adecrease of $133,000 or 5.4%. The decrease in noninterest income was dueprimarily to decreases in net gain on sale of loans of $78,000 and othernoninterest income of $109,000 offset by an increase in fees on deposits of$70,000.

 

Net gain on sale of loanswas $234,000 for the three months ended December 31, 2004 as compared to$312,000 for the same period in the prior fiscal year, a decrease of $78,000 or25.0%. The decrease was primarily due to a decrease in the amount of residentialmortgage loans sold into the secondary market during the second quarter ofFiscal 2005 as compared to the same period in the prior fiscal year. Residentialmortgage loan production decreased 1.3% in dollar volume for the three monthsended December 31, 2004 as compared to the same period in the prior fiscalyear.

 

Other noninterest incomedecreased 21.5% to $397,000 for the three months ended December 31, 2004 ascompared to $506,000 for the same period in the prior fiscal year primarily dueto a decrease in securitization income of $58,000 as a result of a decrease inthe principal balance of securitized loans. The remaining $51,000 decrease inother noninterest income is comprised of miscellaneous and various othernoninterest income.

 

Fees on deposits increased$70,000 primarily due to an increase in fees collected on automatic tellermachine (“ATM”) transactions from outside customers of $52,000. The remainingincrease in fees on deposits is comprised of various other deposit fee income.

 

*Noninterest Expense.* Noninterestexpense was $6.4 million for the three months ended December 31, 2004 ascompared to $5.9 million for the three months ended December 31, 2003, anincrease of $523,000 or 8.8%. The increase in noninterest expense was dueprimarily to an increase in compensation and employee benefits of $590,000offset by a decrease in occupancy and equipment of $56,000.

 

Compensation and employeebenefits increased $590,000, or 16.7%, to $4.1 million for the three monthsended December 31, 2004 as compared to $3.5 million for the three months endedDecember 31, 2003. The increase was primarily due to an increase of $504,000for a year-to-date reclassification of deferred loan origination costs as aresult of FASB Statement No. 91 in the three months ended December 31, 2003,which had the effect of decreasing noninterest income but reducing compensationand employee benefits expenses. There was also an increase of $298,000 invariable incentive pay for mortgage originations and a short-term compensation program.In addition, there was a decrease of $60,000 or 22.0% in net healthcare costs,inclusive of self-funded health claims, administration fees and fully-insureddental premiums offset by stop loss insurance receivable and employeereimbursements.

 

Occupancy and equipmentdecreased $56,000 for the three months ended December 31, 2004 compared to thesame period in the prior fiscal year primarily due to a decrease indepreciation expense on fixed assets of $40,000.

 

*Income tax expense.* The Company’sincome tax expense for the three months ended December 31, 2004 increased$87,000 or 11.3% to $860,000 compared to $773,000 for the same period in theprior fiscal year. The effective tax rate was 34.3% and 37.9% for the threemonths ended December 31, 2004 and December 31, 2003, respectively. Thedecrease in the effective tax rate for the quarter was the result of a decreasein the expected effective tax rate for Fiscal 2005 due to permanent taxdifferences.

 

28

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**Comparison of the Six Months Ended December 31,2004 and December 31, 2003**

 

*General*. The Company’snet income was $3.1 million, or $0.88 and $0.86 for basic and diluted earningsper share, respectively, for the six months ended December 31, 2004, a $517,000increase in earnings compared to $2.6 million, or $0.73 and $0.70 for basic anddiluted earnings per share, respectively, for the same period in the priorfiscal year. For the six months ended December 31, 2004, the return on averageequity was 11.72%, a 13.7% increase compared to 10.31% for the same period inthe prior fiscal year. For the six months ended December 31, 2004, the returnon average assets was 0.73%, a 9.0% increase compared to 0.67% for the sameperiod in the prior fiscal year. As discussed in more detail below, theincreases were due to a variety of key factors, including an increase in netinterest income of $855,000 and a decrease in provision for losses on loans andleases of $696,000 offset by a decrease in noninterest income of $745,000 andincreases in noninterest expense of $120,000 and income tax expense of$169,000.

 

*Interest, Dividend andLoan Fee Income.* Interest, dividend and loan fee income was $21.9million for the six months ended December 31, 2004 as compared to $20.1 millionfor the same period in the prior fiscal year, an increase of $1.8 million or9.0%. A $1.5 million increase in interest, dividend and loan fee income was theresult of a 8.1% increase in the average volume of loans and leases receivableoffset by a decrease of $290,000 in interest, dividend and loan fee income dueto a decrease in the average yield on loans and leases receivable from 6.01%for the six months ended December 31, 2003 to 5.93% for the six months endedDecember 31, 2004. The average yield on total interest-earning assets was 5.52%for the six months ended December 31, 2004 as compared to 5.56% for the sameperiod in the prior fiscal year.

 

*Interest Expense.* Interestexpense was $8.6 million for the six months ended December 31, 2004 as comparedto $7.6 million for the same period in the prior fiscal year, an increase of$956,000 or 12.5%. A $424,000 increase in interest expense was the result of anincrease in average yield on interest-bearing deposits from 1.88% for the sixmonths ended December 31, 2003 to 1.98% for the six months ended December 31,2004. A $712,000 increase in interest expense was the result of a 35.8%increase in the average balance of FHLB advances and other borrowings offset bya decrease of $593,000 as a result of the average yield on FHLB advances andother borrowings decreasing from 4.83% for the six months ended December 31,2003 to 3.77% for the six months ended December 31, 2004. Averageinterest-bearing deposits increased $37.8 million while FHLB advances and otherborrowings increased $29.2 million. An increase of $1.0 million in interestexpense was the result of a 11.1% increase in the average balance of interestbearing liabilities from $639.9 million for the six months ended December 31,2003 to $710.7 million for the six months ended December 31, 2004.

 

*Net Interest Income.* The Company’snet interest income for the six months ended December 31, 2004 increased$855,000, or 6.8%, to $13.3 million compared to $12.5 million for the sameperiod in the prior fiscal year. The increase in net interest income was dueprimarily due to an increase in the average balance of interest earning assetsfor the six months ended December 31, 2004 compared to the same period in theprior fiscal year.

 

*Provision for Losses onLoans and Leases.*The allowancefor loan and lease losses is maintained at a level which is considered bymanagement to be adequate to absorb probable losses on existing loans andleases that may become uncollectible, based on an evaluation of thecollectibility of loans and leases and prior loan and lease loss experience. Theevaluation takes into consideration such factors as changes in the nature andvolume of the loan and lease portfolio, overall portfolio quality, review ofspecific problem loans and leases, and current economic conditions that mayaffect the borrower’s ability to pay. The allowance for loan and lease lossesis established through a provision for losses on loans and leases charged toexpense.

 

29

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During the six months endedDecember 31, 2004, the Company recorded a provision for losses on loans andleases of $375,000 compared to $1.1 million for the six months ended December31, 2003, a decrease of $696,000. See “Asset Quality” for further discussion.

 

*Noninterest Income.* Noninterestincome was $4.5 million for the six months ended December 31, 2004 as comparedto $5.3 million for the same period in the prior fiscal year, a decrease of$745,000 or 14.1%. The decrease in noninterest income was due primarily todecreases in net gain on sale of loans of $498,000 and other noninterest incomeof $351,000 offset by an increase in fees on deposits of $118,000.

 

Net gain on sale of loanswas $336,000 for the six months ended December 31, 2004 as compared to $834,000for the same period in the prior fiscal year, a decrease of $498,000 or 59.7%. Thedecrease was primarily due to a decrease in the amount of residential mortgageloans sold into the secondary market during the six months ended December 31,2004 as compared to the same period in the prior fiscal year. Residentialmortgage loan production decreased 44.6% in dollar volume for the six monthsended December 31, 2004 as compared to the same period in the prior fiscalyear.

 

Other noninterest incomedecreased 29.8% to $829,000 for the six months ended December 31, 2004 ascompared to $1.2 million for the same period in the prior fiscal year primarilydue to the sale of the property and casualty book of business during the firstquarter of the prior fiscal year of $116,000, a decrease in securitizationincome of $123,000 primarily due to a decrease in the principal balance ofsecuritized loans and a decrease in commission and insurance income in theamount of $46,000 primarily due to the sale of the Company’s property andcasualty book of business. The remaining $66,000 decrease in other noninterestincome is comprised of miscellaneous and various other noninterest income.

 

Fees on deposits increased$118,000 primarily due to an increase in fees collected on ATM transactionsfrom outside customers of $87,000.  Theremaining increase in fees on deposits is comprised of various other depositfee income.

 

*Noninterest Expense.* Noninterestexpense was $12.8 million for the six months ended December 31, 2004 as comparedto $12.7 million for the six months ended December 31, 2003, an increase of$120,000 or 1.0%. The increase in noninterest expense was due primarily to anincrease in compensation and employee benefits of $276,000 offset by decreasesin occupancy and equipment of $87,000 and other noninterest expenses of$69,000.

 

Compensation and employeebenefits increased $276,000, or 3.5%, to $8.1 million for the six months endedDecember 31, 2004 as compared to $7.9 million for the six months ended December31, 2003. An increase of $374,000 was due to deferred loan origination costsreflecting primarily lower mortgage originations. There was also an increase of$217,000 in variable incentive pay for mortgage originations and a short-termcompensation program. In addition, there was a decrease of $273,000 or 31.5% innet healthcare costs, inclusive of self-funded health claims, administrationfees and fully-insured dental premiums offset by stop loss insurance receivableand employee reimbursements.

 

Occupancy and equipmentdecreased $87,000 for the six months ended December 31, 2004 compared to thesame period in the prior fiscal year primarily due to a decrease indepreciation expense on fixed assets of $94,000.

 

Other noninterest expensedecreased 2.2%, or $69,000, for the six months ended December 31, 2004 ascompared to the same period in the prior fiscal year primarily due to decreasesin ATM servicer expense of $70,000, loan servicing costs of $62,000 andconsultant services of $40,000 offset by increases in advertising of $110,000and data communications of $51,000. The remaining $58,000 decrease in othernoninterest expense is comprised of miscellaneous and various other general andadministrative expenses.

 

30

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*Income tax expense.* The Company’sincome tax expense for the six months ended December 31, 2004 increased$169,000 or 11.6% to $1.6 million compared to $1.5 million for the same periodin the prior fiscal year. The effective tax rate was 34.4% and 36.0% for thesix months ended December 31, 2004 and December 31, 2003, respectively. Thedecrease in effective tax rate was the result of a decrease in the expectedeffective tax rate for the year ending June 30, 2005 due to permanent taxdifferences.

 

**Liquidity and Capital Resources**

 

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

 

Liquidity management is both a dailyand long-term responsibility of management. The Bank adjusts its investments inliquid assets based upon management’s assessment of (i) expected loan demand,(ii) projected loan sales, (iii) expected deposit flows, (iv) yields availableon interest-bearing deposits, and (v) the objectives of its asset/liabilitymanagement program. Excess liquidity is invested generally in interest-bearingovernight deposits and other short-term government and agency obligations.

 

The Bank anticipates that itwill have sufficient funds available to meet current loan commitments. AtDecember 31, 2004, the Bank had outstanding commitments to originateresidential mortgage loans of $13.8 million, commercial and agricultural realestate loans of $10.1 million and commercial business loans of $6.2 million. Inaddition, the Bank had outstanding commitments to sell residential mortgageloans of $11.7 million and consumer student loans of $3.1 million. Commitmentsby the Bank to originate loans are not necessarily executed by the customer. TheBank monitors the ratio of commitments to fundings for use in liquiditymanagement. At December 31, 2004, the Bank had no commitments to purchase orsell securities available for sale.

 

Although in-market deposits are the Bank’s primarysource of funds, the Bank’s policy has been to utilize borrowings where thefunds can be invested in either loans or securities at a positive rate ofreturn or to use the funds for short-term liquidity purposes. The Bankcurrently has two $10.0 million unsecured lines of federal funds withcorrespondent banks. There were no funds drawn on either line of credit atDecember 31, 2004. Additionally, as of December 31, 2004, the Bank had $17.1million in out-of-market certificates of deposit and $2.4 million inout-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 uses its capital resourcesto pay dividends to its stockholders, to repurchase Company stock in the marketpursuant to Board of Directors’ approved plans, to support organic growth, tomake acquisitions, to service its debt obligations and to provide funding for investmentinto the Bank of Tier 1 (core) capital.

 

The Company currently has in effect astock buy back program in which up to 10% of the common stock of the Companyoutstanding on May 1, 2004 may be acquired through April 30, 2005. A total of51,800 shares of common stock have been purchased pursuant to the currentprogram, of which 9,100 shares were

 

31

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purchasedduring the three months ended December 31, 2004. See Part II, Item 2 “UnregisteredSales of Equity Securities and Use of Proceeds.”

 

Savings institutions insured by theFederal Deposit Insurance Corporation are required by the FinancialInstitutions Reform, Recovery and Enforcement Act of 1989 to meet threeregulatory capital requirements. If a requirement is not met, regulatoryauthorities may take legal or administrative actions, including restrictions ongrowth or operations or, in extreme cases, seizure. Institutions not incompliance may apply for an exemption from the requirements and submit arecapitalization plan. Under these capital requirements, at December 31, 2004,the Bank met all current capital requirements.

 

The minimum OTS Tier 1 (core) capitalrequirement for well-capitalized institutions is 5.00% of total adjusted assetsfor thrifts. The Bank had Tier 1 (core) capital of 8.65% at December 31, 2004. Theminimum OTS total risk-based capital requirement for well-capitalizedinstitutions is 10.00% of risk-weighted assets. The Bank had total risk-basedcapital of 10.91% at December 31, 2004.

 

**Off-Balance Sheet FinancingArrangements**

 

During the fiscal year ended June 30,2003, the Bank securitized and sold consumer automobile loans in the amount of$50.0 million through HFSC and Automobile Securitization Trust. The outstandingbalance of the securitized automobile loans was $13.8 million at September 30,2004. As part of the sales transaction, the Bank retains servicingresponsibilities and a retained interest in the receivables, which issubordinated to third party investors’ interests. The receivables were soldwithout legal recourse. The sale provided the Bank with an additional source ofliquidity at interest rates more favorable than it could receive through otherforms of financing. It also assisted in reducing capital requirements andcredit risk to the Bank, in addition to giving the Bank access to the nationalcapital markets. See Note 4 of the “Notes to Consolidated Financial Statements”for further detail.

 

**Impact of Inflation and ChangingPrices**

 

The consolidated financial statements andnotes thereto presented in this Quarterly Report on Form 10-Q have beenprepared in accordance with GAAP, which require the measurement of financialposition and operating results in terms of historical dollars withoutconsidering the change in the relative purchasing power of money over time dueto inflation. The impact of inflation is reflected in the increased cost of theBank’s operations. Unlike most industrial companies, nearly all the assets andliabilities of the Bank are monetary in nature. As a result, interest rateshave a greater impact on the Bank’s performance than do the effects of generallevels of inflation. Interest rates do not necessarily move in the samedirection or to the same extent as the prices of goods and services.

 

**Recent Accounting Pronouncements**

 

In December 2004, FASB issued Statementof Financial Accounting Standards (“SFAS”) No. 123R, *“Share-Based Payment”,*which requires all companies tomeasure compensation cost for all share-based payments (including stock options)at fair value. This would be effective for the Company for the interimreporting period ending September 30, 2005.

 

The Company accounts for stock-basedcompensation in accordance with Accounting Principles Board (“APB”) Opinion No.25, “*Accounting for Stock Issued toEmployees”*, and related interpretations. No stock-based employeecompensation cost has been recognized for grants under the Company’s fixedstock option plans, as all options granted under those plans had an exerciseprice equal to the market value of the underlying common stock on the date ofgrant.

 

32

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**Item 3.Quantitative and Qualitative Disclosures About Market Risk**

 

Interest rate risk is themost significant market risk affecting the Company. 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, likeother financial institutions, is subject to interest rate risk to the extentthat its interest-bearing liabilities with short- and medium-term maturitiesmature or reprice more rapidly than its interest-earning assets. The Companydoes not currently engage in trading activities or use derivative instrumentsto control interest rate risk although it may in the future, if necessary, tomanage interest rate risk.

 

The composition of the Bank’sbalance sheet results in maturity mismatches between interest-earning assetsand interest-bearing liabilities. The scheduled maturities of the Bank’s fixedrate interest-earning assets are longer than the scheduled maturities of itsfixed rate interest-bearing liabilities. This mismatch exposes the Bank tointerest rate risk. In a rising rate scenario, as measured by the OTS interestrate risk exposure simulation model, the estimated market or portfolio value (“PV”)of the Bank’s assets would decline in value to a greater degree than the changein the PV of the Bank’s liabilities, thereby reducing net portfolio value (“NPV”),the estimated market value of its shareholders’ equity.

 

Asset forth below, depending upon the volatility of the rate change, the changein asset or liability mix of the Company or other factors may produce adecrease in net interest margin in an upward moving rate environment even asthe NPV estimate indicates an increase in net value. The converse situation canalso be expected. One approach used to quantify interest rate risk isthe NPV analysis. In essence, this analysis calculates the difference betweenthe present value of the liabilities and the present value of expected cashflows from assets and off-balance sheet contracts. The following tables setforth, at September 30, 2004 (the most recent report available) and December31, 2003, an analysis of the Company’s interest rate risk as measured by theestimated changes in NPV resulting from instantaneous and sustained parallelshifts in the yield curve (+ 300 or-100 basis points, measured in 100 basispoint increments). Due to the abnormally low prevailing interest rateenvironment, -200 and-300 NPV were not estimated by the OTS. Management doesnot believe that the Company has experienced any material changes in its marketrisk position from that disclosed in the Company’s Annual Report on Form 10-Kfor the fiscal year ended June 30, 2004 or that the Company’s primary marketrisk exposures and how those exposures were managed during the six months endedDecember 31, 2004 changed significantly when compared to June 30, 2004.

 

The data in the followingtables is based on assumptions utilized by the OTS in assessing interest raterisk of thrift institutions and published in “Selected Asset and LiabilityPrice Tables as of September 30, 2004” and “Selected Asset and Liability PriceTables as of December 31, 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.

**September30, 2004**
| ** **                        | ** ** | **Estimated**

**NPV**

**Amount** | ** ** | **Estimated Increase**

**(Decrease) in NPV** | ** **  |
|-----------------------------------|------------|------------------------------------|------------|-----------------------------------------------|-------------|
| **Change in**

**Interest Rates** | ** ** | ** **                         | **Amount** | ** **                                    | **Percent** | ** ** |
| **Basis Points**                  |       |                               |       |                                          |        |   |   |
|                              |       | **(Dollars  in thousands)**        |       |                                          |        |
|                              |       |                               |       |                                          |        |   |   |
| +300                              |       | $                                  | 100,094    |                                          | $           | (7,375 | ) | (7 | )% |
| +200                              |       | 104,319                            |       | (3,150                                        | )           | (3 | ) |
| +100                              |       | 106,993                            |       | (476                                          | )           | — |   |
| —                            |       | 107,469                            |       | —                                        |        | — |   |
| -100                              |       | 103,782                            |       | (3,687                                        | )           | (3 | ) |
|                                   |            |                                    |            |                                               |             |  |  |  |  |

 

 

33

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** **

**December31, 2003**
| ** **                        | ** ** | **Estimated**

**NPV**

**Amount** | ** ** | **Estimated Increase**

**(Decrease) in NPV** | ** **  |
|-----------------------------------|------------|------------------------------------|------------|-----------------------------------------------|-------------|
| **Change in**

**Interest Rates** | ** ** | ** **                         | **Amount** | ** **                                    | **Percent** | ** ** |
| **Basis Points**                  |       |                               |       |                                          |        |   |   |
|                              |       | **(Dollars  in thousands)**        |       |
|                              |       |                               |       |                                          |        |   |   |
| +300                              |       | $                                  | 88,563     |                                          | $           | (2,124 | ) | (2 | )% |
| +200                              |       | 91,073                             |       | 386                                           |        | — |   |
| +100                              |       | 92,198                             |       | 1,511                                         |        | 2 |   |
| —                            |       | 90,687                             |       | —                                        |        | — |   |
| -100                              |       | 87,645                             |       | (3,042                                        | )           | (3 | ) |
|                                   |            |                                    |            |                                               |             |  |  |  |  |

 

 

In managing market risk andthe asset/liability mix, the Bank has placed its emphasis on developing aportfolio in which, to the extent practicable, assets and liabilities repricewithin similar periods. The effect of this policy will generally be to reducethe Bank’s sensitivity to interest rate changes. The goal of this policy is toprovide a relatively consistent level of net interest income in varyinginterest rate cycles and to minimize the potential for significant fluctuationsfrom period to period.

 

**Item 4. Controls andProcedures**

 

The Company’smanagement has evaluated, under the supervision and with the participation ofthe Company’s Chairman, President and Chief Executive Officer and the Company’sExecutive Vice President, Chief Financial Officer and Treasurer, theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures, as defined in Rule 13a-15(e) (“Disclosure Controls andProcedures”), and have concluded that, as of the end of the period covered bythis Quarterly Report, the Company’s disclosure controls and procedures areeffective for gathering, analyzing and disclosing information the Company isrequired to disclose in its periodic reports filed under the Exchange Act. Therewere no significant changes in the Company’s internal control over financialreporting or identified in the above referenced evaluation that materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

**Item 1.    Legal Proceedings**

 

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

 

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

 

The following table setsforth the purchases by the Company of its common stock during the quarterlyperiod ended December 31, 2004.

 
| **Period**                 | ** ** | **Total**

**Number**

**of  Shares**

**Purchased** | ** ** | **Average**

**Price Paid**

**per Share** | ** ** | **Total Number of Shares Purchased**

**as Part of Publicly Announced Programs** | ** ** | **Maximum Number of Shares that May Yet Be Purchased Under the Current  Program** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | ** **                                           | ** ** | ** **                                 | ** ** | ** **                                                                       | ** ** | ** **                                                                        | ** ** |
| October 1 – 31, 2004  |       | 500                                                  |       | $                                          | 16.16      |                                                                             | 500        |                                                                              | 309,781    |   |
| November 1 – 30, 2004 |       | 5,800                                                |       | $                                          | 15.45      |                                                                             | 5,800      |                                                                              | 303,981    |   |
| December 1 – 31, 2004 |       | 2,800                                                |       | $                                          | 16.55      |                                                                             | 2,800      |                                                                              | 301,181    |   |
|                       |       |                                                 |       |                                       |       |                                                                             |       |                                                                              |       |
| 2nd Quarter Total          |       | 9,100                                                |       | $                                          | 15.76      |                                                                             | 9,100      |                                                                              |       |   |

 

 

All of the purchases weremade under the Company’s stock buy back program, which was publicly announcedon April 26, 2004 and pursuant to which up to 10% of the common stock of theCompany that was outstanding on May 1, 2004, which equals 352,981 shares, maybe acquired through April 30, 2005. A total of 51,800 shares of common stockhave been purchased pursuant to the current program, 9,100 of which werepurchased in the open-market during the three months ended December 31, 2004.

 

**Item 3.    Defaultsupon Senior Securities**

 

None

 

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

 

At the Company’s Annual Meeting of Stockholders heldon November 17, 2004 (the “Annual Meeting”), the stockholders elected the twoindividuals nominated to serve as Class II directors until 2007 or until theirrespective successors are elected and qualified, as set forth in Proposal 1 inthe Company’s Proxy Statement relating to the Annual Meeting. The twoindividuals elected, and the number of votes cast for, or withheld, withrespect to each of them, is as follows:

 
| Robert Hanson     |   | For: |   | 3,200,792 |   | Vote Withheld: | 55,249 |
|-------------------|--------|------|--------|-----------|--------|----------------|--------|
| Steven R. Sershen |   | For: |   | 3,200,902 |   | Vote Withheld: | 55,139 |

 

 

Additionally, the following directorscontinue to serve on the Board of Directors following the Annual Meeting: CurtisJ. Bernard, Curtis L. Hage, Jeffrey G. Parker, Wm. G. Pederson and Thomas L.Van Wyhe.

 

**Item 5.    Other Information**

 

None

 

**Item 6.    Exhibits**

 
| **Regulation S-K Exhibit Number** | ** ** | **Document**                                                                                                                                 | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 10.1                              |       | Real Estate Purchase  Agreement, dated December 21, 2004, by and between the Company and MVB  Properties, Inc.                               |       |
| 31.1                              |       | Certification of Chairman,  President and Chief Executive Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                 |       |
| 31.2                              |       | Certification of Executive  Vice President, Chief Financial Officer and Treasurer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 |       |
| 32.1                              |       | Certification of Chairman,  President and Chief Executive Officer Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                 |       |
| 32.2                              |       | Certification of Executive  Vice President, Chief Financial Officer and Treasurer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 |       |

 

36

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**HF FINANCIAL CORP.**

 

**FORM 10-Q**

**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|   |              |   |                                           | HF  Financial Corp.    |   |
|--------|-------------------|--------|------------------------------------------------|------------------------|--------|
|   |              |   |                                           |                   |   |
|   |              |   |                                           | (Registrant)           |   |
|   |              |   |                                           |                   |   |
| Date:  | February 11, 2005 |   | By:                                       | /s/ Curtis L. Hage     |   |
|   |              |   | Curtis L. Hage, Chairman,  President           |                   |
|   |              |   | And Chief Executive  Officer                   |                   |
|   |              |   | (Principal Executive  Officer)                 |                   |
|   |              |   |                                           |                   |   |
| Date:  | February 11, 2005 |   | By:                                            | /s/ Darrel L. Posegate |   |
|   |              |   | Darrel L. Posegate,  Executive Vice President, |                   |
|   |              |   | Chief Financial Officer  and Treasurer         |                   |
|   |              |   | (Principal Financial and  Accounting Officer)  |                   |

 

37

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**Index to Exhibits**

 
| **Exhibit  Number** | ** ** |                                                                                                                                         | ** ** |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 10**.**1            | ** ** | Real Estate Purchase  Agreement, dated December 21, 2004, by and between the Company and MVB  Properties, Inc.                               | ** ** |
| 31.1                |       | Certification of Chairman,  President and Chief Executive Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                 |       |
| 31.2                |       | Certification of Executive  Vice President, Chief Financial Officer and Treasurer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 |       |
| 32.1                |       | Certification of Chairman,  President and Chief Executive Officer Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                 |       |
| 32.2                |       | Certification of Executive  Vice President, Chief Financial Officer and Treasurer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 |       |

 

 

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