UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended June 30, 2008ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the transition period
from                                   to     
                              .


Commission file number 0-19972

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

Delaware(State or other jurisdiction of
incorporation or organization)

46-0418532(I.R.S. Employer
Identification No.)225 South Main Avenue,
Sioux Falls, SD(Address of principal executive offices)

57104(ZIP Code)


Registrant's
telephone number, including area code:(605) 333-7556

Securities
registered pursuant to Section 12(b) of the Act:None

Securities
registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes
o    No ý

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes
o    No ý

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

Yes
ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller
reporting company)

Smaller reporting company ý


Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes
o    No ý

The aggregate market value of the common stock held by non-affiliates of the Registrant, computed by reference to the closing price as of the last
business day of the Registrant's most recently completed second fiscal quarter, December 31, 2007, was approximately $60.1 million.

As
of September 16, 2008, there were 3,982,068 shares of the Registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Registrant's definitive proxy statement to be delivered to stockholders in connection with the 2008 annual meeting of stockholders to be held on November 19, 2008,
are incorporated by reference in response to Part III of this report.



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Annual Report on Form 10-K

Table of Contents

Page
NumberPART IItem 1.

Business


1Item 1A.

Risk Factors


32Item 1B.

Unresolved Staff Comments


38Item 2.

Properties


38Item 3.

Legal Proceedings


38Item 4.

Submission of Matters to a Vote of Security Holders


38PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


39Item 6.

Selected Financial Data


42Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations


45Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


67Item 8.

Financial Statements and Supplementary Data


68Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


114Item 9A.

Controls and Procedures


114Item 9B.

Other Information


114PART IIIItem 10.

Directors, Executive Officers and Corporate Governance


114Item 11.

Executive Compensation


115Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


115Item 13.

Certain Relationships and Related Transactions, and Director Independence


115Item 14.

Principal Accounting Fees and Services


116PART IVItem 15.

Exhibits and Financial Statement Schedules


116


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Forward-Looking Statements

This Annual Report on Form 10-K ("Form 10-K") and other reports issued by HF Financial Corp. (the
"Company"), including reports filed with the Securities and Exchange Commission (the "SEC"), contain "forward-looking statements" that deal with future results, expectations, plans and performance. In
addition, the Company's management may make forward-looking statements orally to the media, securities analysts, investors or others. These forward-looking statements might include one or more of the
following:



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

Forward-looking
statements about the Company's expected financial results and other plans are subject to certain risks, uncertainties and assumptions. These include, but are not limited
to, the risks discussed in Part I, Item 1A "Risk Factors" in this Form 10-K and the following: possible legislative changes and adverse economic, business and
competitive conditions and developments (such as shrinking interest margins and continued short-term rate environments); deposit outflows; reduced demand for financial services and loan
products; changes in accounting policies or guidelines, or in monetary and fiscal policies of the federal government; changes in credit and other risks posed by the Company's loan and lease
portfolios; the ability 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 of the Company to successfully enter into a definitive agreement for and close anticipated transactions; technological, computer-related or
operational difficulties; adverse changes in securities markets; results of litigation; or other significant uncertainties.

Forward-looking
statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur
after the date the forward-looking statements are made. Although the Company believes that its expectations are reasonable, it can give no assurance that such expectations will prove to be correct.
Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those
described in any forward-looking statements.

References
in this Form 10-K to "we," "our," "us" and other similar references are to the Company, unless otherwise expressly stated or the context requires otherwise.

PART I

Item 1.Business

This section should be read in conjunction with the following parts of this Form 10-K: Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" and
Part II, Item 8, "Financial Statements and Supplementary Data."

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The Company

HF Financial Corp., a unitary thrift holding company, was formed in November 1991 for the purpose of owning all of the outstanding
stock of Home Federal Bank (the "Bank") issued in the mutual to stock conversion of the Bank. The Company acquired all of the outstanding stock of the Bank on April 8, 1992. The Company is
incorporated under the laws of the State of Delaware and generally is authorized to engage in any activity that is permitted by the Delaware General Corporation Law. Unless otherwise indicated, all
matters discussed in this Form 10-K relate to the Company, and its direct and indirect subsidiaries, including without limitation, the Bank. See "Subsidiary Activities" below for
further information regarding the subsidiary operations of the Company and the Bank.

The
executive offices of the Company and its direct and indirect subsidiaries are located at 225 South Main Avenue, Sioux Falls, South Dakota, 57104. The Company's
telephone number is (605) 333-7556.

Website and Available Information

The website for the Company and the Bank is located atwww.homefederal.com. Information
on this website does not constitute part of this Form 10-K.

The
Company makes available, free of charge, its Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K
and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as reasonably practicable
after such forms are filed with or furnished to the SEC. Copies of these documents are available to stockholders upon request addressed to the Secretary of the Company at 225 South Main Avenue,
Sioux Falls, South Dakota, 57104.

The Bank

The Bank was founded in 1929 and is a federally chartered stock savings bank headquartered in Sioux Falls, South Dakota. The Bank
provides full-service consumer and commercial business banking, including an array of financial products, to meet the needs of its market place. The Bank attracts deposits from the general
public and uses such deposits, together with borrowings and other funds, to originate one- to four-family residential, commercial business, consumer, multi-family, commercial
real estate, construction and agricultural loans. The Bank's consumer loan portfolio includes, among other things, automobile loans, home equity loans, loans secured by deposit accounts and student
loans. The Bank also purchases mortgage-backed securities and invests in U.S. Government and agency obligations and other permissible investments. The Bank does not hold any non-investment
grade bonds (i.e., "junk bonds"). The Bank receives loan servicing income on loans serviced for others and commission income from credit life insurance on consumer loans. The Bank, through its
wholly-owned subsidiaries, offers annuities, mutual funds, life insurance and other financial products and equipment leasing services.

The
Bank's deposits are insured up to applicable limits by the Deposit Insurance Fund ("DIF"), which is administered by the Federal Deposit Insurance Corporation ("FDIC"), and the Bank
is subject to primary regulation and examination by the Office of Thrift Supervision ("OTS").

Segments

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated
regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company's reportable segments are "banking" (including leasing activities) and
"other." The "banking" segment is conducted through the Bank and Mid America Capital Services, Inc. ("Mid America Capital") and the "other" segment is composed of smaller
non-reportable segments, the Company and inter-segment eliminations. For

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financial
information by segment see Note 1 of "Notes to Consolidated Financial Statements," which is included in Part II, Item 8, "Financial Statements and Supplementary Data" of
this Form 10-K.

Subsidiary Activities

In addition to the Bank, the Company had six other wholly-owned subsidiaries as of June 30, 2008: HF Financial
Group, Inc. ("HF Group"), HF Financial Capital Trust III ("Trust III"), HF Financial Capital Trust IV ("Trust IV"), HF Financial Capital
Trust V ("Trust V"), HF Financial Capital Trust VI ("Trust VI") and HomeFirst Mortgage Corp. (the "Mortgage Corp.").

In
August 2002, the Company formed HF Group, a South Dakota corporation, to market software to facilitate employee benefits administration, payroll processing and management and
governmental reporting. HF Group has an approved line of credit with the Company of $100,000, with no funds advanced as of June 30, 2008. Intercompany interest income and interest expense are
eliminated in the preparation of consolidated financial statements.

In
December 2002, the Company formed Trust III, a Delaware corporation, for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures
of the Company. These subordinated debentures constitute the sole asset of Trust III.

In
September 2003, the Company formed Trust IV, a Delaware corporation, for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures
of the Company. These subordinated debentures constitute the sole asset of Trust IV.

In
December 2006, the Company formed Trust V, a Delaware corporation, for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of
the Company. These subordinated debentures constitute the sole asset of Trust V.

In
July 2007, the Company formed Trust VI, a Delaware corporation, for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the
Company. These subordinated debentures constitute the sole asset of Trust VI.

The
Mortgage Corp., a South Dakota corporation, was previously engaged in the business of originating one- to four-family residential mortgage loans, which were
sold into the secondary market. The Mortgage Corp. had no activity during fiscal 2008.

As
a federally chartered thrift institution, the Bank is permitted by OTS regulations to invest up to 2.00% of its assets in the stock of, or loans to, service corporation subsidiaries.
The Bank may invest an additional 1.00% of its assets in service corporations where such additional funds are used for inner-city or community development purposes. The Bank currently has
less than 1.00% of its assets in investments in its subsidiary service corporations as defined by the OTS. In addition to investments in service corporations, the Bank is permitted to invest an
unlimited amount in operating subsidiaries engaged solely in activities in which the Bank may engage directly.

The
Bank has five wholly-owned subsidiaries, Hometown Insurors, Inc. ("Hometown"), Mid America Capital, Home Federal Securitization Corp. ("HFSC"), Mid-America Service
Corporation ("Mid-America") and PMD, Inc. ("PMD").

Hometown,
a South Dakota corporation, provides financial and insurance products to customers of the Bank and members of the general public in the Bank's market area. Insurance products
offered by Hometown primarily include annuities and life insurance products. Hometown obtains its funding via a line of credit from the Bank. Banking regulations do not limit the amount of funding
provided to an operating subsidiary. As of June 30, 2008, the Bank had advanced no funds on an approved line of credit of $100,000. Intercompany interest income and interest expense are
eliminated in the preparation of consolidated financial statements.

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Mid America
Capital, a South Dakota corporation, specializes in equipment finance leasing. Mid America Capital obtains its funding through a line of credit from the Bank.
Banking regulations do not limit the amount of funding provided to an operating subsidiary. As of June 30, 2008, Mid America Capital had advanced $16.2 million on an approved line
of credit of $35.0 million with the Bank. Intercompany interest income and interest expense are eliminated in the preparation of consolidated financial statements.

HFSC,
a Delaware corporation, existed for the sole purpose of buying motor vehicle installment loans from the Bank to be securitized. HFSC had no activity during fiscal 2008. See
"Off-Balance Sheet Financing Arrangements" of this Form 10-K for more information on the automobile securitization.

Mid-America,
a South Dakota corporation, in the past provided residential appraisal services to the Bank and other lenders in the Bank's market. Mid-America had
no activity during fiscal 2008.

PMD,
a South Dakota corporation, in the past was engaged in the business of buying, selling and managing repossessed real estate properties. PMD had no activity during fiscal 2008.

Market Area

Based on total assets at June 30, 2008, the Bank is the largest savings association headquartered in South Dakota. The Bank has
a total of 33 banking centers in its market area and one internet branch located atwww.homefederal.com.The Bank's primary market area includes
communities located in eastern and central South Dakota, including the Sioux Falls metropolitan statistical area (MSA), Pierre, Mitchell, Aberdeen, Brookings, Dakota Dunes, Watertown, and Yankton. The
Bank also has a branch in Marshall, Minnesota, which serves customers located in southwestern Minnesota, and its banking center located in Dakota Dunes, South Dakota serves customers located in
northwestern Iowa. The Bank's primary market area features a variety of agri-business, banking, financial services, health care and light manufacturing firms. The internet branch allows
access to customers beyond traditional geographical areas.

Mid
America Capital provides services to customers primarily in a five-state area in the upper Midwest, but originations can and have expanded nationwide based on
relationships developed with existing Bank customers and other vendor relationships.

HF
Group provided services to customers in the three-state region of South Dakota, Minnesota and Iowa.

Lending Activities

The Bank originates a variety of loans including business banking loans, commercial and agricultural loans; mortgage lending, including
one- to four-family residential mortgages; and consumer loans, including loans for automobile purchases, home equity and home improvement loans and student loans.

Business Banking

Commercial Business Lending.In order to serve the needs of the local business community and improve the interest rate sensitivity and yield of its assets, the
Bank originates adjustable- and fixed-rate commercial loans. Interest rates on commercial business loans generally adjust or float with a designated national index plus a specified margin.
The Bank's commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance accounts receivable, inventory and equipment and business
expansion within the Bank's market area. The Bank originates commercial business loans directly and through programs sponsored by the Small Business Administration ("SBA") of which a portion of such
loans are also guaranteed in part by the SBA. The Bank generally originates commercial business loans for its portfolio and retains the servicing with

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respect
to such loans. The Bank anticipates continued expansion and emphasis of its commercial business lending, subject to market conditions and the Home Owners' Loan Act ("HOLA") restrictions. See
"RegulationBusiness Activities" below for HOLA restrictions.

Commercial
business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of
funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, may be dependent upon the general economic environment). The
Bank's commercial business loans are occasionally secured by the assets of the business, such as accounts receivable, equipment and inventory. However, the collateral securing the loans may depreciate
over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Whenever possible, the
Bank's commercial business loans include personal guarantees of the borrowers. In addition, the loan officer may perform on-site visits, obtain financial statements and perform a financial
review of the loan.

Multi-Family and Commercial Real Estate Lending.The Bank engages in multi-family and commercial real estate lending primarily in South Dakota and the adjoining
Midwestern states. These lending activities may include existing property or new construction development or purchased loans.

Loans
secured by multi-family and commercial real estate properties are generally larger and involve a greater degree of credit risk than one- to four-family
residential mortgage loans. Because payments on loans secured by multi-family and commercial real estate properties are often dependent on the successful operation or management of the properties,
repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired. In addition, loans secured by property outside of the Bank's primary market area may contain a higher degree of risk due to the fact
that the Bank may not be as familiar with market conditions where such property is located. The Bank does not have a material concentration of multi-family or commercial real estate loans outside of
South Dakota and the adjoining Midwestern states.

The
Bank presently originates adjustable-rate, short-term balloon payment, fixed-rate multi-family and commercial real estate loans. The Bank's multi-
family and commercial real estate loan portfolio is secured primarily by apartment buildings and owner occupied and non-owner occupied commercial real estate. The terms of such loans are
negotiated on a case-by-case basis. Commercial real estate loans generally have terms that do not exceed 25 years. The Bank has a variety of rate adjustment features,
call provisions and other terms in its multi-family and commercial real estate loan portfolio. Generally, the loans are made in amounts up to 80.00% of the appraised value of the collateral property
and with debt service coverage ratios of 115.00% or higher. The debt service coverage is the ratio of net cash from operations before payment of debt service. However, these percentages may vary
depending on the type of security and the guarantor. Such loans provide for a negotiated margin over a designated national index. The Bank analyzes the financial condition of the borrower, the
borrower's credit history, the borrower's prior record for producing sufficient income from similar loans, references and the reliability and predictability of the net income generated by the property
securing the loan. The Bank generally requires personal guarantees of borrowers.

Depending
on the circumstances of the security of the loan or the relationship with the borrower, the Bank may decide to sell participations in the loan. The sale of participation
interests in a loan are necessitated by the amount of the loan or the limitation of loans-to-one borrower. See
"RegulationLoans-to-One Borrower" for a discussion of the loans-to-one borrower
regulations. In return for servicing these loans for the participants, the Bank generally receives a fee of 0.25% to 0.38%. Also, income is received at loan closing from loan fees and discount points.
Appraisals on properties securing
multi-family and commercial real estate loans originated by the Bank are performed by appraisers approved pursuant to the Bank's appraisal policy.

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The
HOLA includes a provision that limits the Bank's non-residential real estate lending to no more than four times its total capital. This maximum limitation, which at
June 30, 2008 was $350.6 million, has not materially limited the Bank's lending practices.

Under
HOLA, the maximum amount which the Bank may lend to any one borrower is 15.00% of the Bank's unimpaired capital and surplus, or $13.3 million at June 30, 2008. Loans
in an amount equal to an additional 10.00% of unimpaired capital and surplus may be made to the same borrower if such loans are fully secured by readily marketable collateral. The Bank may request a
waiver from the OTS to exceed the 15.00% loans-to-one borrower limitation on a case-by-case basis. See
"RegulationLoans-to-One Borrower" for more information and a discussion of the loans-to-one
borrower regulations.

Construction and Development Lending.The Bank makes construction loans to individuals for the construction of their residences as well as to builders and, to a
lesser extent, developers, for the construction of one- to four-family residences and condominiums and the development of one- to four-family lots in
the Bank's primary market area.

Construction
loans to individuals for their residences are structured to be converted to mortgage loans at the end of the construction phase, which typically runs six to
12 months. These construction loans have rates and terms which match the one- to four-family residential mortgage loans offered by the Bank. Residential construction
loans are generally underwritten pursuant to the same guidelines used for originating residential mortgage loans.

The
Bank also makes loans to developers for the purpose of developing one- to four-family lots. These loans typically have terms of one year and carry floating
interest rates based on a national designated index. Loan commitment and partial release fees are charged. These loans generally provide for the payment of interest and loan fees from loan proceeds.
The principal balance of these loans is typically paid down as lots are sold. Builder construction and development loans are obtained principally through continued business from developers and
builders who have previously borrowed from the Bank, as well as broker referrals and direct solicitations of
developers and builders. The application process includes a submission to the Bank of plans, specifications and costs of the project to be constructed or developed. These items are used as a basis to
determine the appraised value of the subject property. Loans are based on the lesser of current appraised value and/or the cost of construction (land plus building).

The
Bank makes loans for the construction of multi-family residential properties. Such loans are generally made at adjustable rates, which adjust periodically based on the appropriate
Treasury Note maturity.

Construction
loans are generally originated with a maximum loan-to-value ratio of 80.00% and land development loans are generally originated with a maximum
loan-to-value ratio of 60.00%, based upon an independent appraisal. Because of the uncertainties inherent in estimating development and construction costs and the market for
the project upon completion, it is relatively difficult to evaluate accurately the total loan funds required to complete a project, the related loan-to-value ratios and the
likelihood of ultimate success of the project. Construction and development loans to borrowers other than owner occupants also involve many of the same risks discussed above regarding multi-family and
commercial real estate loans and tend to be more sensitive to general economic conditions than many other types of loans.

Prior
to making a commitment to fund a construction loan, the Bank requires an appraisal of the property, or, for larger projects, both an appraisal and a study of the feasibility of the
proposed project. The Bank's construction loan policy provides for the inspection of properties by independent in-house and outside inspectors at the commencement of construction and prior
to disbursement of funds during the term of the construction loan.

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Agricultural Loans.In order to serve the needs of the local agricultural community and improve the interest rate sensitivity and yield of its assets, the Bank
originates agricultural loans through its agricultural division. The agricultural division offers loans to its customers such as: (1) operating loans which are used to fund operating expenses,
which typically have a one year term and are indexed to the national prime rate; (2) term loans on machinery, equipment and breeding stock that may have a term up to seven years and require
annual payments; (3) agricultural farmland term loans which are used to fund land purchases or refinances; (4) specialized livestock loans to fund facilities and equipment for
confinement enterprises; and (5) loans to fund ethanol plant development. Agriculture real estate loans typically will have personal guarantees of the borrowers, a first lien on the real
estate, interest rates adjustable to the national prime rate or Treasury Note rates, and annual, quarterly or monthly payments. Operating and term loans are secured by farm chattels (crops, livestock,
machinery, etc.),
which are the operating assets of the borrower. The Bank also originates agricultural loans directly and through programs sponsored by the Farmers Service Agency ("FSA") of which a portion of such
loans are also guaranteed in part by the FSA.

Loan
customers are required to supply current financial statements, tax returns and cash flow projections which are updated on an annual basis. In addition, on major loans, the loan
officer will perform an annual farm visit, obtain financial statements and perform a financial review of the loan.

Mortgage Lending

One- to Four-Family Residential Mortgage Lending.One- to four-family residential mortgage loan originations are
primarily generated by the Bank's marketing efforts, its present customers, walk-in customers and referrals from real estate agents and builders. The Bank has focused its lending efforts
primarily on the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences.

The
Bank currently makes 10-, 15-, 20- and 30-year fixed- and adjustable-rate ("ARM") one- to
four-family residential mortgage loans in amounts up to 95.00% of the appraised value of the collateral property provided that private mortgage insurance is obtained in an amount
sufficient to reduce the Bank's exposure at or below the 80.00% level. The Bank generally offers an ARM loan having a fixed rate for the initial three to five years, which then converts to a
one-year ARM loan for the remainder of the life of the loan. These loans provide for an annual cap and a lifetime cap at a set percent over the fully-indexed rate.

The
Bank also offers balloon loans, which are sold on the secondary market and have a fixed-rate for the first five or seven years of the loan. At the end of the
five- or seven-year period, the loan converts to a 23- or 25-year fixed-rate loan at the then current market rate provided that the borrower
qualifies at the new rate. If the borrower fails to qualify at the new rate, the loan becomes payable in full. The Bank also offers a portfolio loan product that is a five- or
seven-year balloon loan that is underwritten to secondary market standards but if fully payable at the end of the balloon term.

To
meet the needs of the Bank's borrowers and financial needs of the communities it serves, the Bank has developed two distinct types of loan programs. The Integrity Mortgage Program is
a limited documentation program that is generally available to the upper credit profile customer. The Olympic Plus Program is a program for individuals that do not meet secondary market standards but
are eligible for private mortgage insurance. The program underwriting guidelines match those as established by the private mortgage insurance company. Borrowers may choose from either an ARM or
balloon product as a financing option.

The
Bank also offers fixed-rate 10- to 30-year mortgage loans that conform to secondary market standards. Interest rates charged on these
fixed-rate loans are competitively priced on a daily basis according to market conditions. Residential loans generally do not include prepayment penalties.

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The
Bank also originates fixed-rate one- to four-family residential mortgage loans through the South Dakota Housing Development Authority ("SDHDA")
program. These loans generally have terms not to exceed 30 years and are insured by the Federal Housing Administration ("FHA"), Veterans Administration ("VA"), Rural Development or private
mortgage insurance. The Bank receives an origination fee of 1.00% of the loan amount from the borrower and a servicing fee of generally 0.38% from the SDHDA for these services. The Bank is the largest
servicer of loans for the SDHDA. At June 30, 2008, the Bank serviced $932.9 million of mortgage loans for the SDHDA. See Note 4 of "Notes to Consolidated Financial Statements,"
which is included in Part II, Item 8, "Financial Statements and Supplementary Data" in this Form 10-K for information on loan servicing.

In
underwriting one- to four-family residential mortgage loans, the Bank evaluates both the borrower's ability to make monthly payments and the value of the
property securing the loan. The property that secures the real estate loans made by the Bank is appraised by an appraiser approved under the Bank's appraisal policy. The Bank requires borrowers to
obtain title, fire and casualty insurance in an amount not less than the amount of the loan. Real estate loans originated by the Bank contain a "due-on-sale" clause allowing
the Bank to declare the unpaid principal balance due and payable upon the sale of the collateral property.

The
Bank offers on-line mortgage capabilities through QuickClick Online Mortgage Solutions, a service that allows customers to check rates, research loan options
and complete mortgage applications via the Bank's website. This service is currently available to branch locations in South Dakota and Minnesota.

Consumer Lending

Other Consumer Lending.The Bank's management considers its consumer loan products to be an important component of its lending strategy. Specifically, consumer
loans generally have shorter terms to maturity and carry higher rates of interest than one- to four-family residential mortgage loans. In addition, the Bank's management
believes that the offering of consumer loan products helps to expand and create stronger ties to its existing customer base by increasing the number of customer relationships and providing
cross-marketing opportunities.

Loans
secured by second mortgages, together with loans secured by all prior liens, are generally limited to 100.00% or less of the appraised or assessed value of the property securing
the loan and generally have maximum terms that do not exceed 10 to 15 years.

The
student loans originated by the Bank are guaranteed as to principal and interest by the South Dakota Education Assistance Corporation. The Bank typically sells such student loans
with servicing rights released approximately 120 days after funds have been disbursed to the student.

Consumer
loan terms vary according to the type of collateral, length of contract and creditworthiness of the borrower. The Bank offers both open- and closed-end
credit. Overdraft lending is extended through lines of credit that are tied to a checking account. The credit lines generally bear interest at 18.00% and are generally limited to no more than $2,000.
Loans secured by deposit accounts at the Bank are currently originated for up to 90.00% of the account balance (although historically the Bank has loaned up to 100.00% of the account balance), with a
hold placed on the account restricting the withdrawal of the account balance. The interest rate on such loans is typically equal to 2.00% above the contract rate.

The
underwriting standards employed by the Bank for consumer loans include an application, a determination of the applicant's payment history on other debts, and an assessment of the
ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed loan amount.

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Consumer
loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable
assets, such as automobiles or boats. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans.

Leasing Activities

General.Through its wholly-owned subsidiary, Mid America Capital, the Bank originates commercial and municipal leases. These products have a fixed interest rate
for the duration of the lease with terms typically ranging from 24 - 60 months. The leases generally are 100.00% financed with only the first or first and last months'
payments due at lease inception. As a result of the 100.00% financing and fixed interest rate, the yield on leases is higher than similar type lending products.

Leases
are originated generally in a five-state area in the upper Midwest. All leases are secured by the equipment leased, with personal guarantees of the borrowers normally
obtained on commercial leases.

Commercial Leases.In order to support the Bank and its customers and to improve the yield of its assets, Mid America Capital originates commercial leases to
customers primarily in the upper Midwest. Mid America Capital offers three types of commercial leases: capital, tax and Terminal Rental Adjustment Clause ("TRAC") leases. TRAC leases are generally for
medium- to heavy-duty titled equipment, such as semi-tractors and trailers and medium- to heavy-duty trucks. Leases may be structured with a contracted residual of
as little as $1.00 up to 20.00-25.00% of the equipment cost. Leases encompass a wide variety of equipment for a variety of commercial uses. The customer base tends to be small- to
medium-sized businesses that view leasing as another financing option that augments their overall operation. Repayment terms tend to be monthly in nature.

As
with commercial loans, commercial leases typically are made on the basis of the borrower's ability to make repayment from the cash flow of their business. As a result, the
availability of funds for the repayment of commercial leases may be substantially dependent on the success of the business itself. The collateral securing the leases will generally depreciate over
time, may be difficult to appraise and may fluctuate in value based on the success of the business.

Municipal Leases.The Bank and Mid America Capital also originate leases to municipal entities such as cities, counties, and public schools. The lessee must be a
political subdivision of the state in order to qualify as a municipal lease. Because the interest income earned on this type of lease is exempt from federal income taxes, the rate offered to the
municipality is usually substantially lower than a comparable commercial lease. Repayment terms generally are on a monthly, semi-annual or annual basis. Residuals are $1.00 for municipal
leases.

Repayment
is based on the municipality's ability to levy and collect taxes. Assuming the municipality has a bond rating, that bond rating, together with audited financial statements, are
the basis for the lease. On larger leases, bond ratings and financial statements will be reviewed annually.

9

---





Loan and Lease Portfolio Composition.The following table sets forth information concerning the composition of the Company's loan and lease portfolio from
continuing operations in dollar amounts and in percentages (before deductions for the undisbursed portion of loans in process, deferred fees and discounts and allowance for losses) as of the dates
indicated.

At June 30,2008

2007

2006

2005

2004Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total(Dollars in Thousands)One- to four-family(1)

$
108,548


13.36
%
$
125,525


15.97
%
$
108,342


14.57
%
$
106,832


15.46
%
$
104,492


15.80
%Multi-family


46,118


5.68


34,126


4.34


34,161


4.59


34,241


4.95


42,721


6.46Commercial business and real estate(2)(3)


310,379


38.20


281,357


35.79


248,060


33.35


223,812


32.39


213,696


32.32Agricultural real estate


78,043


9.60


48,030


6.11


31,484


4.23


23,954


3.47


20,449


3.09Construction and development


8,286


1.02


18,674


2.38


33,596


4.52


15,454


2.24


15,044


2.28Equipment finance leases(2)


19,250


2.37


22,267


2.83


29,343


3.95


33,090


4.79


26,942


4.07Agricultural business


91,934


11.31


69,608


8.86


57,985


7.80


50,088


7.25


42,953


6.50Consumer Loans:Automobile


58,807


7.24


98,238


12.50


106,900


14.37


108,621


15.72


101,669


15.38Deposit account


1,580


0.19


1,772


0.23


1,553


0.21


1,253


0.18


1,489


0.22Student(4)


614


0.08


263


0.03


420


0.06


400


0.06


324


0.05Junior liens on mortgages


81,250


10.00


79,113


10.06


84,898


11.42


87,243


12.63


85,684


12.96Other


7,724


0.95


7,079


0.90


6,932


0.93


5,968


0.86


5,748


0.87Total consumer loans


149,975


18.46


186,465


23.72


200,703


26.99


203,485


29.45


194,914


29.48Total gross loans and leases


812,533


100.00
%

786,052


100.00
%

743,674


100.00
%

690,956


100.00
%

661,211


100.00
%Less:Undisbursed portion of loans in process


(19,834
)




(10,387
)




(9,674
)




(6,350
)




(7,338
)Deferred fees and discounts


(193
)




582





883





1,289





1,029Allowance for losses


(5,933
)




(5,872
)




(5,657
)




(5,076
)




(3,605
)Total loans and leases receivable, net

$
786,573




$
770,375




$
729,226




$
680,819




$
651,297


---

10

---





The following table sets forth the composition of the Company's loan and lease portfolio from continuing operations by fixed- and
adjustable-rate in dollar amounts and in percentages (before deductions for the undisbursed portion of loans in process, deferred fees and discounts and allowance for losses) as of the
dates indicated. Variable loans are tied to various indices including prime rate and the treasury yield curve and have reset dates ranging from daily to several years.

At June 30,2008

2007

2006

2005

2004Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total(Dollars in Thousands)Fixed-Rate Loans and Leases:One- to four-family(1)


76,392


9.40
%
$
89,086


11.33
%
$
70,341


9.46
%
$
65,605


9.49
%
$
70,895


10.72
%Multi-family, commercial & construction(2)(3)


107,511


13.23


121,046


15.40


115,939


15.59


70,121


10.14


70,696


10.69Agricultural real estate


23,842


2.93


13,591


1.73


9,495


1.28


4,096


0.59


2,609


0.39Consumer(4)


110,699


13.63


146,686


18.66


151,354


20.35


141,942


20.54


133,012


20.12Agricultural business


17,022


2.09


14,007


1.78


6,673


0.90


6,759


0.98


3,905


0.59Equipment finance leases(2)


19,250


2.37


22,267


2.83


29,343


3.95


33,090


4.79


26,942


4.07Total fixed-rate loans and leases


354,716


43.65


406,683


51.73


383,145


51.53


321,613


46.53


308,059


46.58Adjustable-Rate Loans:One- to four-family(1)


32,156


3.96


36,439


4.64


38,001


5.11


41,227


5.97


33,597


5.08Multi-family, commercial & construction


257,271


31.67


213,111


27.12


199,878


26.87


203,386


29.44


200,765


30.36Agricultural real estate


54,201


6.67


34,439


4.38


47,770


6.42


19,858


2.87


17,840


2.70Consumer(4)


39,277


4.83


39,779


5.06


49,349


6.64


61,543


8.92


61,902


9.37Agricultural business


74,912


9.22


55,601


7.07


25,531


3.43


43,329


6.27


39,048


5.91Total adjustable-rate loans


457,817


56.35


379,369


48.27


360,529


48.47


369,343


53.47


353,152


53.42Total loans and leases


812,533


100.00
%

786,052


100.00
%

743,674


100.00
%

690,956


100.00
%

661,211


100.00
%Less:Undisbursed portion of loans in process


(19,834
)




(10,387
)




(9,674
)




(6,350
)




(7,338
)Deferred fees and discounts


(193
)




582





883





1,289





1,029Allowance for loan and lease losses


(5,933
)




(5,872
)




(5,657
)




(5,076
)




(3,605
)Total loans and leases receivable, net

$
786,573




$
770,375




$
729,226




$
680,819




$
651,297


---

11

---



The following schedule illustrates the scheduled principal contractual repayments of the Company's loan and lease portfolio at June 30, 2008. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing at the contractual maturity date. The schedule does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses.

Real Estate

Non-Real EstateOne- to Four-
Family(1)

Multi-
Family

Commerical

Agricultural

Construction &
Development

Consumer(2)

Commercial
Business(3)

Agricultural

Total(Dollars in Thousands)Due in less than 1 year

$
4,082

$
3,487

$
34,348

$
9,404

$
4,351

$
38,495

$
73,134

$
76,746

$
244,046Due in 1 to 5 years


27,130


15,626


52,718


19,336


601


93,499


57,316


13,113


279,339Due 5 years or greater


77,336


27,005


97,972


49,303


3,334


17,982


14,141


2,075


289,148Total

$
108,548

$
46,118

$
185,038

$
78,043

$
8,286

$
149,976

$
144,591

$
91,934

$
812,533


---

Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less
than their average contractual terms because of prepayments. In addition, due-on-sale clauses on loans generally give the Bank the right to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to
increase when current mortgage loan rates are substantially higher than rates on existing mortgage loans and decrease when rates on existing mortgages are substantially higher than current mortgage
loan rates.

The
following table sets forth the composition of the Company's deferred fees and discounts on loans as of the dates indicated.

At June 30,2008

2007

2006

2005

2004(Dollars in Thousands)One-to four-family

$
(599
)
$
(691
)
$
(616
)
$
(576
)
$
(561
)Multi-family, commercial real estate & construction


(232
)

(276
)

(348
)

(278
)

(334
)Consumer


44


103


113


122


113Agricultural


(70
)

(44
)

(32
)

(32
)

(32
)Equipment finance leases


39


40


63


80


77Commercial business


21


14


5


(15
)

(125
)Dealer reserve


604


1,436


1,698


1,988


1,891Total deferred fees and discounts

$
(193
)
$
582

$
883

$
1,289

$
1,029


Deferred
fees and discounts on loans and leases have trended to a net deferred cost position. In fiscal 2008, the net deferred fees and discounts on loans and leases decreased by
$775,000. This decrease was primarily due to a $832,000 decrease in dealer reserve, as a result of lower dollar volume of originated indirect automobile loans as the Company ceased originations in the
first quarter of fiscal 2008.

Potential Problem Loans

Nonperforming Assets.See "Asset Quality" under Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Form 10-K for discussion.

12

---



Classified Assets.Federal regulations provide for the classification of loans, leases and other assets, such as debt and equity securities considered by the OTS
to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of
the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the Company will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on
the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the Company to sufficient risk to warrant classification in one
of the aforementioned categories, but possess weaknesses, are required to be designated "criticized" or "special mention" by management.

When
the Company classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100.00% of that portion of the asset so classified or to
charge-off such amount. The Company's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Bank's Regional Director
at the regional OTS office, who may order the establishment of additional general or specific loss allowances.

In
connection with the filing of its periodic reports with the OTS and in accordance with its classification of assets policy, the Company regularly reviews problem loans and leases in
its portfolio to determine whether any loans or leases require classification in accordance with applicable regulations. On the basis of management's monthly review of its assets, at June 30,
2008, the Company had designated $22.2 million of its assets as special mention and $11.5 million of its assets as classified. Other potential problem loans are included in criticized
and classified assets. See "Asset Quality" under Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this
Form 10-K for further discussion.

Allowance for Loan and Lease Losses.See "Application of Critical Accounting Policies" and "Asset Quality" under Part II, Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K for discussion.

Investment Activities

The Bank is required under OTS regulation to maintain a sufficient amount of liquid assets. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments in relation to the return on loans.

Federally
chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper, investment grade corporate debt securities and mutual funds whose assets conform to the investments that a federally
chartered savings institution is otherwise authorized to make directly.

Generally,
the investment policy of the Bank is to invest funds among various categories of investments and maturities based upon the Bank's asset/liability management policies,
investment quality and marketability, liquidity needs and performance objectives.

At
June 30, 2008, the Company's investments in mortgage-backed securities totaled $189.6 million, or 17.2% of its total assets. As of such date, the Bank also had a
$11.2 million investment in the stock

13

---



of
the Federal Home Loan Bank of Des Moines ("FHLB" or "FHLB of Des Moines") in order to satisfy the FHLB of Des Moines' requirement for membership.

The
composition and maturities of the investment securities portfolio, excluding equity securities, are indicated in the following table.

At June 30, 2008Less Than 1 Year

1 to 5 Years

5 to 10 Years

Over 10 Years

Total Investment
SecuritiesAmortized
Cost

Weighted
Average
Yield

Amortized
Cost

Weighted
Average
Yield

Amortized
Cost

Weighted
Average
Yield

Amortized
Cost

Weighted
Average
Yield

Amortized
Cost

Fair Value(Dollars in Thousands)U.S. government agencies & corporations






%
$
6,174


5.07
%
$
2,316


5.41
%





%
$
8,490

$
8,663Federal Home Loan Bank








2,999


5.23


945


5.50








3,944


4,031Municipal bonds


230


2.63


3,376


3.71


4,723


3.81


3,990


3.96


12,319


12,181Trust preferred securities




















12,372


4.64


12,372


10,292Mortgage-backed securities








1,777


5.25


52,054


5.05


137,116


5.29


190,947


189,567Total investment securities

$
230




$
14,326




$
60,038




$
153,478




$
228,072

$
224,734


The effective maturities for the Bank's mortgage-backed securities are much shorter due to the combination of prepayments and the variable nature
of $63.1 million of mortgage-backed securities. The variable or hybrid (fixed for a period of time and then variable thereafter) structure gives the Bank flexibility in risk management of the
balance sheet.

The
Company's investment securities portfolio did not contain non-investment grade bonds (i.e., "junk bonds") or other corporate debt securities.

No
other-than-temporary impairments were recorded against earnings during fiscal years 2008, 2007 or 2006. See Note 1, "Summary of Significant Accounting
Policies," and Note 2, "Investment Securities," of "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 of this Form 10-K for
additional information.

The
Bank's investment security portfolio is managed in accordance with a written investment policy adopted by the Board of Directors. Investments may be made by the Bank's officers
within specified limits and approved in advance by the Board of Directors for transactions over these limits. At the present time, the Bank does not have any investments that are held for trading
purposes. At June 30, 2008, the Company had $225.0 million of securities available for sale, including mortgage-backed securities of $189.6 million. See Note 2 of "Notes to
Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Form 10-K for further information on the
Company's investment portfolio.

Sources of Funds

General.The Company's primary sources of funds are earnings, in-market deposits, FHLB advances and other borrowings, amortization and repayments of
loan principal, mortgage-backed securities and callable agency securities. Secondary sources include sales of mortgage loans, sales and/or maturities of securities,
out-of-market deposits and short-term investments.

Borrowings
of the Bank are primarily from the FHLB of Des Moines, and may be used on a short-term basis to compensate for seasonal reductions in deposits or deposit inflows
at less than projected levels, and may be used on a longer-term basis to support expanded lending activities. The Bank has established collateral at the Federal Reserve Bank ("FRB") as a
contingent source of funding. See Note 7 of the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of
this Form 10-K for further detail of the Company's borrowings.

14

---



Deposits.The Bank offers a variety of deposit accounts having a wide range of interest rates and terms. The Bank's deposits consist of statement savings accounts,
checking accounts, money market and certificate of deposit accounts ranging in terms from 30 days to five years. The Bank primarily solicits deposits from its market area. The Bank relies
primarily on customer service, competitive pricing policies and advertising to attract and retain these deposits. Based on liquidity needs, the Bank may, from time to time, acquire
out-of-market deposits.

The
flow of deposits is influenced by general economic conditions, changes in money market and prevailing interest rates and competition.

The
variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. In recent years,
the Bank has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. The Bank manages the pricing of its deposits in
keeping with its asset/liability management and profitability objectives. Based on its experience, the Bank believes that its savings, money market, and checking accounts are stable sources of
deposits. However, the ability of the Bank to attract and maintain certificates of deposit, and the rates paid on these deposits, has been and will continue to be significantly affected by market
conditions.

15

---





The
following table sets forth the dollar amount of deposits in the various types of deposit accounts offered by the Bank as of the dates indicated.

At June 30,2008

2007

2006Amount

Percent of
Total

Amount

Percent of
Total

Amount

Percent of
Total(Dollars in Thousands)Transaction Accounts:Noninterest bearing accounts

$
90,598


11.55
%
$
86,679


10.62
%
$
84,757


11.02
%Interest bearing accounts weighted average rates of .64%, 1.97% and 0.95% at June 30, 2008, 2007 and 2006


90,125


11.49


87,030


10.67


54,862


7.14Savings accounts weighted average rates of 1.46%, 3.26% and 3.40% at June 30, 2008, 2007 and 2006


78,575


10.02


66,235


8.12


76,695


9.97Money market accounts weighted average rates of 1.53%, 3.84% and 3.89% at June 30, 2008, 2007 and 2006


171,689


21.89


212,546


26.05


232,471


30.23Total transaction accounts


430,987


54.95


452,490


55.46


448,785


58.36In-Market Certificates of Deposit:0.00 - 3.99%


124,448


15.87


45,387


5.56


124,302


16.164.00 - 4.99%


106,627


13.60


78,457


9.62


104,320


13.575.00 - 5.99%


94,727


12.08


167,710


20.56


34,135


4.446.00 - 6.99%


193


0.02


304


0.04


7


0.007.00 - 7.99%

















Total in-market certificates of deposit


325,995


41.57


291,858


35.78


262,764


34.17Out-of-market certificates of deposit weighted average rate of 2.98%, 5.10% and 4.69% at June 30, 2008, 2007 and 2006


27,255


3.48


71,516


8.76


57,453


7.47Total certificates of deposit


353,250


45.05


363,374


44.54


320,217


41.64Total deposits

$
784,237


100.00
%
$
815,864


100.00
%
$
769,002


100.00
%


16

---



The following table sets forth the amount of the Company's certificates of deposit and other deposits by time remaining until maturity as of June 30, 2008.

MaturityLess Than 3 Months

3 to 6 Months

6 to 12 Months

Over 12 Months

TotalCertificates of deposit less than $100,000(1)

$
44,961

$
22,811

$
47,577

$
76,268

$
191,617Certificates of deposit of $100,000 or more


32,783


12,725


13,553


54,898


113,959Out-of-market certificates of deposit(2)


17,179


8,982


1,094


0


27,255Public funds(3)(4)


9,369


7,231


2,707


1,112


20,419Total certificates of deposit

$
104,292

$
51,749

$
64,931

$
132,278

$
353,250


---

The
Bank solicits certificates of deposit of $100,000 or greater from various state, county and local government units which carry rates which are negotiated at the time of deposit. See
Note 6 of "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Form 10-K.
Deposits at June 30, 2008, and 2007 included $76.5 million and $73.3 million, respectively, of deposits from one local governmental entity, the majority of which are savings
account balances.

Borrowings.Although deposits are the Bank's primary source of funds, the Bank's policy has been to utilize borrowings when they are a less costly source of funds
or can be invested at a positive rate of return.

The
Bank's borrowings consist primarily of advances from the FHLB of Des Moines upon the security of its capital stock of the FHLB of Des Moines and certain pledgeable loans, including
but not limited to, its mortgage related loans, mortgage-backed securities and U.S. Government and other agency securities. Such advances can be made pursuant to several different credit programs,
each of which has its own interest rate and range of maturities. At June 30, 2008, the Bank's FHLB advances totaled $198.3 million, representing 19.1% of total Company liabilities. See
Note 7 of "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Form 10-K for
further detail of the Company's borrowings.

17

---



The
following table sets forth the maximum month-end balances and average balances of FHLB and FRB advances and other borrowings at the dates indicated.

Years Ended June 30,2008

2007

2006(Dollars in Thousands)Maximum Month-End Balance:FHLB and FRB advances

$
244,040

$
131,975

$
152,369Other borrowings


180


100


700Average Balance:FHLB and FRB advances

$
152,140

$
106,150

$
119,408Other borrowings


149


2


287


The
following table sets forth certain information as to the Bank's FHLB and FRB advances and other borrowings of the Company at the dates indicated.

June 30,2008

2007

2006(Dollars in Thousands)Overnight federal funds purchased

$
29,920

$


$
1,120Fixed-rate FHLB advances


168,355


68,500


90,500Other borrowings


179


100


Total borrowings

$
198,454

$
68,600

$
91,620Weighted average interest rate of borrowings


3.88
%

4.78
%

4.51
%


Competition

The banking business is highly competitive and the Bank experiences competition in each of its markets from many other financial
institutions, many of which are larger and may have significantly greater financial and other resources. Specifically, the Bank competes with commercial banks, credit unions, savings and loan
associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as super-regional, national and
international financial institutions, that operate offices in our primary market areas and elsewhere. Many of these competitors are also well-established financial institutions.

Competitors
that are not depository institutions are generally not subject to the extensive regulations that apply to the Bank. The Bank competes with these institutions both in
attracting deposits and in making loans. The Bank competes for deposits by offering a variety of deposit accounts at competitive rates, convenient business hours and convenient branch locations with
inter-branch deposit and withdrawal privileges at each. The Bank competes for loans on the basis of quality of service, interest rates, loan fees and loan type. In addition, the Bank must attract its
customer base from other existing financial institutions and from new residents. In new markets that the Bank may enter, the Bank will also compete against well-established community banks
that have developed relationships within the community.

Employees

At June 30, 2008, the Bank had a total of 307 full-time equivalent employees ("FTEs") including 5 FTEs of the
Bank's subsidiary corporations. The Bank's employees are not represented by any collective bargaining group. Management considers its relations with its employees to be good.

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Regulation

General.The Bank is a federally chartered thrift institution, the deposits of which are federally insured by the DIF. Accordingly, the Bank is subject to broad
federal regulation and oversight extending to all its operations, by its primary federal regulator, the OTS, and by its deposit insurer, the FDIC. The Bank is a member of the FHLB of Des Moines and is
subject to certain limited regulation by the Federal Reserve Board. As the unitary thrift holding company of the Bank, the Company is also subject to federal regulation and oversight by the OTS. The
purpose of the regulation of the Company, like other depository institution holding companies, is to protect subsidiary institutions where deposits are federally insured.

Certain
of these regulatory requirements and restrictions are discussed below or elsewhere in this Form 10-K. The following discussion is intended to be a summary of
the material statutes, regulations and policies applicable to savings associations and their holding companies, and it does not purport to be a complete discussion of all such statutes, regulations
and policies.

Regulation of Federal Savings Associations.The OTS has extensive authority over the operations of federal savings associations, such as the Bank. This regulation
and supervision establishes a comprehensive framework of activities in which a federal savings association can engage and is intended primarily for the protection of the DIF and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such laws and regulations or interpretations thereof, whether by the
OTS, the FDIC or through legislation, could have a material adverse impact on the Company and the Bank and their operations and stockholders.

The
Bank is required to file periodic reports with the OTS and is subject to periodic examinations primarily by the OTS and to a lesser extent by the FDIC. The last examination of the
Bank by the OTS concluded on June 28, 2008.

Assessments.The OTS has established a schedule for the assessment of fees upon all savings associations to fund the operations of the OTS. The general assessment,
paid on a semiannual basis, is computed by totaling three components: the Bank's total assets, supervisory condition, and complexity of operations.
The Bank's OTS assessment (standard assessment) for the fiscal year ended June 30, 2008, was approximately $219,206.

Enforcement.The OTS has primary enforcement responsibility over savings associations, including the Bank. This enforcement authority includes, among other things,
the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of
laws and regulations and to unsafe or unsound practices. Under the Federal Deposit Insurance Act, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken
with respect to a particular savings association. If action is not taken by the OTS, the FDIC may take action under certain circumstances.

Safety and Soundness Standards.Under federal law, the OTS has adopted a set of guidelines prescribing safety and soundness standards. The guidelines establish
general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and
compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.
The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services
performed by an executive officer, employee, director or principal stockholder.

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In
addition, the OTS adopted regulations that authorize, but do not require, the OTS to order an institution that has been given notice by the OTS that it is not satisfying any of such
safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an
accepted compliance plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing corrective actions and other actions of the types to which an
undercapitalized association is subject under the "prompt corrective action" provisions of federal law. If an institution fails to comply with such an order, the OTS may seek to enforce such order in
judicial proceedings and to impose civil money penalties.

Prompt Corrective Regulatory Action.Under the OTS prompt corrective action regulations, the OTS is
required to take certain, and is authorized to take other, supervisory actions against undercapitalized savings banks. For this purpose, a savings bank is placed in one of the following five
categories based on the association's capital:



The
severity of the action authorized or required to be taken under the prompt corrective action regulations increases as a bank's capital decreases within the three undercapitalized
categories. All banks are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person if, following such distribution, the bank would be
undercapitalized. The OTS is required to monitor closely the condition of an undercapitalized bank and to restrict the growth of its assets.

An
undercapitalized bank is required to file a capital restoration plan within 45 days of the date the bank receives notices that it is within any of the three
undercapitalized categories, and the plan must be guaranteed by any parent holding company. The aggregate liability of a parent holding company is limited to the lesser
of:



If
a bank fails to submit an acceptable plan, it is treated as if it were "significantly undercapitalized." Banks that are "significantly" or "critically undercapitalized" are subject to
a wider range of regulatory requirements and restrictions. Under the OTS regulations, generally, a federally chartered savings bank is treated as "well-capitalized" if its total
risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, its leverage ratio is 5% or greater, and it is not subject to any order
or directive by the OTS to meet a specific capital level.

At
June 30, 2008, the Bank met the criteria for being considered "well-capitalized."

Business Activities.The activities of federal savings banks are governed by federal laws and regulations. These laws and regulations delineate the nature and
extent of the activities in which federal savings associations may engage. In particular, many types of lending authority for federal savings associations are limited to a specified percentage of the
institution's capital or assets.

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Loan and Investment Powers.The Bank derives its lending and investment powers from the HOLA, and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities and certain other assets. The Bank
may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage
activities. These investment powers are subject to various limitations, including (a) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four
highest rating categories; (b) a limit of 400.00% of an association's capital on the aggregate amount of loans secured by non-residential real estate property; (c) a limit of
20.00% of an association's assets on the aggregate amount of commercial
and agricultural loans and leases with the amount of commercial loans in excess of 10.00% of assets being limited to small business loans; (d) a limit of 35.00% of an association's assets on
the aggregate amount of secured consumer loans and acquisitions of certain debt securities, with amounts in excess of 30.00% of assets being limited to loans made directly to the original obligor and
where no third-party finder or referral fees were paid; (e) a limit of 5.00% of assets on non-conforming loans (loans in excess of the specific limitations of the HOLA); and
(f) a limit of the greater of 5.00% of assets or an association's capital on certain construction loans made for the purpose of financing what is or is expected to become residential property.
In addition, the HOLA and the OTS regulations provide that a federal savings association may invest up to 10.00% of its assets in tangible personal property for leasing purposes. At June 30,
2008, the Bank met the 10.00% leasing limitation with 1.74% of total Bank assets. Such general leases, however, do not have to be aggregated with the institution's loans for purposes of the HOLA's
investment and lending limitations. At June 30, 2008, the Bank met the 20.00% limitation with 18.85% of total Bank assets.

Loans-To-One Borrower.Under the HOLA, the Bank is generally subject to the same limits on loans-to-one borrower as
are imposed on national banks. With specified exceptions, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15.00% of the association's unimpaired
capital and surplus. Additional amounts may be loaned, not in excess of 10.00% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily-marketable
collateral. At June 30, 2008, the Bank's lending limit under this restriction was $13.3 million.

Insurance of Accounts and Regulation by the FDIC.The Bank is a member of, and pays deposit insurance assessments to, the DIF, which is administered by the FDIC.
Savings deposits are generally insured up to $100,000 per insured member (as defined by law and regulation) by the FDIC and such insurance is backed by the full faith and credit of the United States
Government. Effective April 1, 2006, through the Federal Deposit Insurance Reform Act of 2005, the maximum insurance coverage for self-directed retirement plan deposits only,
increased from $100,000 to $250,000. All other deposit coverage remains at $100,000. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a
serious risk to the DIF. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the OTS an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or unsound condition.

The
DIF was formed on March 31, 2006, following the merger of the Bank Insurance Fund and the Savings Association Insurance Fund in accordance with the Federal Deposit Insurance
Reform Act of 2005 (the "Deposit Insurance Fund Act"). In addition to merging the insurance funds, the Deposit Insurance Fund Act established a statutory minimum and maximum designated reserve ratio
for the DIF and granted the FDIC greater flexibility in establishing the required reserve ratio. In its

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regulations
implementing the Deposit Insurance Fund Act, the FDIC has set the current annual designated reserve ratio for the DIF at 1.25%.

In
order to maintain the DIF, member institutions are assessed an insurance premium. The amount of each institution's premium is currently based on the balance of insured deposits and
the degree of risk the institution poses to the DIF. Under the assessment system, the FDIC assigns an institution to one of nine risk categories using a two-step process based first on
capital ratios (the capital group assignment) and then on other relevant information (the supervisory subgroup assignment). Each risk category is assigned an assessment rate. Assessment rates
currently range from 0.00% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.43%
of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concerns). The FDIC is authorized to raise the assessment rates as necessary to
maintain the DIF. The Bank's assessment rate at June 30, 2008 was 0.056%. Any increase in insurance assessments could have an adverse effect on the earnings of insured institutions, including
the Bank.

The
Federal Deposit Insurance Reform Act of 2005 allows "eligible insured depository institutions" to share a one-time assessment credit pool of approximately
$4.7 billion. To be eligible, an institution must have been in existence on December 31, 1996 and have paid a deposit insurance assessment prior to that date, or be a "successor" to such
an institution. The Bank's remaining assessment credit is $111,219, which will be applied to reduce future deposit insurance assessments.

In
addition, all FDIC-insured institutions are required to pay assessments to the FDIC at an annual rate of approximately 0.0124% of insured deposits to fund interest
payments on bonds issued by the Financing Corporation ("FICO"), an agency of the federal government established in 1987 to recapitalize the predecessor to the DIF. These assessments, which are
adjusted quarterly, will continue until the FICO bonds mature in 2017 through 2019.

The
Bank's assessment rate for the fiscal year ending June 30, 2008, was 0.056% and the premium paid for this period was $91,872. The FDIC has authority to increase insurance
assessments. A significant increase in DIF insurance premiums would have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what the insurance
assessment rate will be in the future.

Under
federal law, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance.

Regulatory Capital Requirements.OTS regulations require the Bank to meet three minimum capital standards:



In
assessing an institution's capital adequacy, the OTS takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish
higher capital requirements for individual institutions where necessary. The Bank, as a matter of prudent management, targets as its goal the maintenance of capital ratios which exceed these minimum

22

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requirements
and that are consistent with the Bank's risk profile. At June 30, 2008, the Bank exceeded each of its capital requirements as shown in the following table:

Amount(2)

Percent of
Applicable
Assets(1)(Dollars in Thousands)GAAP Capital

$
87,653


7.94
%Tier 1 (core) capital

$
85,623


7.78
%Required


55,034


4.00Excess over requirement

$
30,589


3.78
%Risk-based capital

$
91,417


10.83
%Required


84,398


8.00Excess over requirement

$
7,019


2.83
%






The
Federal Deposit Insurance Corporation Improvement Act (the "FDICIA") requires that the OTS and other federal banking agencies revise their risk-based capital standards,
with appropriate transition rules, to ensure that they take into account interest rate risk, concentration of risk and the risks of non-traditional activities. The OTS monitors the
interest rate risk of individual institutions through the OTS requirements for interest rate risk management, the ability of the OTS to impose individual minimum capital requirements on institutions
that exhibit a high degree of interest rate risk, and the requirements of Thrift Bulletin 13a, which provides guidance on the management of interest rate risk and the responsibility of boards
of directors in that area.

The
OTS continues to monitor the interest rate risk of individual institutions through analysis of the change in net portfolio value ("NPV"). NPV is defined as the net present value of
the expected future cash flows of an entity's assets and liabilities and, therefore, hypothetically represents the value of an institution's net worth. The OTS has also used this NPV analysis as part
of its evaluation of certain applications or notices submitted by savings banks. The OTS, through its general oversight of the safety and soundness of savings associations, retains the right to impose
minimum capital requirements on individual institutions to the extent the institution is not in compliance with certain written guidelines established by the OTS regarding NPV analysis. The OTS has
not imposed any such requirements on the Bank.

Limitations on Dividends and Other Capital Distributions.The OTS imposes various restrictions or requirements on the Bank's ability to make capital distributions,
including cash dividends. A savings institution that is the subsidiary of a savings and loan holding company must file a notice with the OTS at least 30 days before making a capital
distribution. The Bank must file an application for prior approval if the total amount of its capital distributions, including the proposed distribution, for the applicable calendar year would exceed
an amount equal to the Bank's net income for that year plus retained net income for the previous two years.

The
OTS may disapprove of a notice or application if:



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During
the fiscal year ended June 30, 2008, the Bank paid cash dividends to the Company totaling $5.2 million.

Liquidity.All savings associations, including the Bank, are required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. For
a discussion of what the Bank includes in liquid assets, see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this
Form 10-K.

Branching.Subject to certain limitations, the HOLA and the OTS regulations permit federally chartered savings associations to establish branches in any state of
the United States. The authority to establish such branches is available (a) in states that expressly authorize branches of savings associations located in another state or (b) to an
association that qualifies as a "domestic building and loan association" under the Internal Revenue Code of 1986, as amended, which imposes qualification requirements similar to those for a "qualified
thrift lender" under the HOLA. See the section below entitled "Qualified Thrift Lender Test." This authority under the HOLA and the OTS regulations
preempts any state law purporting to regulate branching by federal savings associations.

Community Reinvestment.Under the Community Reinvestment Act (the "CRA"), as implemented by the OTS regulations, the Bank has a continuing and affirmative
obligation consistent with its safe and
sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the
OTS, in connection with its examination of a savings association, to assess the Bank's record of meeting the credit needs of its community and to take such record into account in its evaluation of
certain applications by the Bank. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received an "Outstanding" CRA rating in the OTS evaluation, which was
last completed on May 29, 2008.

The
CRA regulations rate an institution based on its actual performance in meeting community needs. In particular, the rating system focuses on three tests: (a) a lending test, to
evaluate the institution's record of making loans in its assessment areas; (b) an investment test, to evaluate the institution's record of investing in community development projects,
affordable housing, and programs benefiting low or moderate income individuals and businesses; and (c) a service test, to evaluate the institution's delivery of services through its branches,
ATMs and other offices.

Qualified Thrift Lender ("QTL") Test.Under the HOLA, the Bank must comply with the qualified thrift lender, or "QTL" test. Under the
QTL test, the Bank is required to maintain at least 65.00% of its "portfolio assets" (total assets less (a) specified liquid assets up to 20.00% of total assets, (b) intangibles,
including goodwill, and (c) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain
mortgage-backed securities, credit card loans, student loans and small business loans) in at least nine months of the most recent 12 month period. The Bank may also satisfy the QTL test by
qualifying as a "domestic building and loan association" as defined in the Internal Revenue Code of 1986, as amended.

At
June 30, 2008, the Bank held 74.82% of its portfolio assets in qualified thrift investments and had more than 65.00% of its portfolio assets in qualified thrift investments in
12 of the 12 months

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during
the fiscal year ended June 30, 2008, and thus qualified under the QTL test. The Bank has met the QTL test since its inception.

A
savings bank that fails the QTL test and is unable to demonstrate a reasonable likelihood of meeting it in the future may be required to convert to a bank charter and will generally be
prohibited from: (1) engaging in any new activity not permissible for a national bank, (2) paying dividends not permissible under national bank regulations, and (3) establishing
any new branch office in a location not permissible for a national bank. In addition, if the institution does not re-qualify under the QTL test within three years after failing the test,
the institution would be prohibited from engaging in any activity
not permissible for a national bank and may have to repay any outstanding advances from the Federal Home Loan Bank as promptly as possible.

Transactions with Affiliates.The Bank's authority to engage in transactions with its "affiliates" is limited by the OTS regulations, Sections 22(g), 22(h)
23A and 23B of the Federal Reserve Act (the "FRA") and Regulation W issued by the Federal Reserve Board, Section 11 of the HOLA as well as any additional limitations adopted by the OTS.
OTS regulations regarding transactions with affiliates conform to Regulation W. These provisions, among other things, prohibit or limit a savings bank from extending credit to, or entering into
certain transactions with, its affiliates and principal stockholders, directors and executive officers.

In
addition, the OTS regulations include additional restrictions on savings banks under Section 11 of the HOLA, including provisions prohibiting a savings bank from making a loan
to an affiliate that is engaged in non-bank holding company activities and provisions prohibiting a savings association from purchasing or investing in securities issued by an affiliate
that is not a subsidiary. OTS regulations also include certain specific exemptions from these prohibitions. The FRB and the OTS require each depository institution that is subject to
Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W and the OTS regulations regarding transactions with affiliates.

Section 402
of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") prohibits the extension of personal loans to directors and executive officers of issuers (as defined in
Sarbanes-Oxley). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as the Bank, that are subject to the insider lending restrictions of
Section 22(h) of the FRA.

Real Estate Lending Standards.The OTS and the other federal banking agencies adopted regulations to prescribe standards for extensions of credit that
(a) are secured by real estate or (b) are made for the purpose of financing the construction of improvements on real estate. The OTS regulations require the Bank to establish and
maintain written internal real estate lending standards that are consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its real
estate lending activities. The standards also must be consistent with accompanying OTS guidelines, which include loan-to-value ratios for the different types of real estate
loans. The Bank is also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions are reviewed and
justified appropriately. The guidelines also list a number of lending situations in which exceptions to the loan-to-value standards are justified.

Nontraditional Mortgage Products.The federal banking agencies recently published final guidance for
institutions that originate or service nontraditional or alternative mortgage products, defined to include all residential mortgage loan products that allow borrowers to defer repayment on principal
or interest, such as interest-only mortgages and payment option adjustable-rate mortgages. No portion of the Bank's adjustable rate residential mortgage loans consist of
interest-only or payment option mortgage loans.

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Recognizing that alternative mortgage products expose institutions to increased risks as compared to traditional loans where payments amortize or reduce the principal amount, the
guidance required increased scrutiny for alternative mortgage products. Institutions that originate or service alternative mortgages should have (a) strong risk management practices that
include maintenance of capital levels and allowance for loan losses commensurate with the risk; (b) prudent lending policies and underwriting standards that address a borrower's repayment
capacity; and (c) programs and practices designed to ensure that consumers receive clear and balanced information to assist in making informed decisions about mortgage products. The guidance
also recommends heightened controls and safeguards when an institution combines an alternative mortgage product with features that compound risk, such as a simultaneous second-lien or the
use of reduced documentation to evaluate a loan application.

The
Bank is required to comply with the guidance as it is interpreted and applied by the OTS.

Privacy Regulations.Under the OTS regulations adopted pursuant to the Gramm-Leach-Bliley Act of 1999, the Bank is required to adopt procedures to protect
customers' "nonpublic personal information." The regulations generally require that the Bank disclose its privacy policy, including identifying with whom it shares a customer's "nonpublic personal
information," to customers at the time of establishing the customer relationship and annually thereafter. In addition, the Bank is required to provide its customers with the ability to
"opt-out" of having it share their personal information with unaffiliated third parties and not to disclose account numbers or access codes to nonaffiliated third parties for marketing
purposes. The Bank currently has a privacy protection policy in place, which has been reviewed, for compliance with the regulations.

Protection of Customer Information.In addition to certain state laws governing protection of customer information, the Bank is subject to federal regulatory
guidelines establishing standards for safeguarding
customer information. These regulations implement certain provisions of the Gramm-Leach-Bliley Act. The guidelines describe the agencies' expectations for the creation, implementation and maintenance
of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its
activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to
the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.
Federal guidelines also impose certain customer disclosures and other actions in the event of unauthorized access to customer information.

Trust Activities Regulation.The Bank derives its trust powers from Section 5(n) of the HOLA and the regulations and policies of the OTS. Under these laws,
regulations and policies, the trust activities of federal savings banks are governed by both federal and state laws. Generally, the scope of trust activities that the Bank can provide will be governed
by the laws of the states in which the Bank is "located" (as such term is defined under the regulations of the OTS), while other aspects of the trust operations of the Bank are governed by federal
laws and regulations. If the trust activities of a federal savings bank are located in more than one state, however, then the scope of fiduciary services the federal savings bank can provide will vary
depending on the laws of each state.

The
Bank, through its trust department, acts as trustee, personal representative, administrator, guardian, custodian, record keeper, agent, registrar, advisor and manager for various
accounts. As of June 30, 2008, the trust department of the Bank maintained approximately $95.0 million in assets under management.

Federal Reserve System.Under FRB regulations, the Bank is required to maintain noninterest-earning reserves against its transaction accounts. FRB regulations
generally require that (a) reserves of 3.00% must be maintained against aggregate transaction account balances of $48.3 million or less,

26

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subject
to adjustment by the FRB, and (b) a reserve of 10% must be maintained against that portion of total transaction accounts in excess of $48.3 million. The first $7.8 million
of otherwise reservable balances are exempted from the reserve requirements. The Bank is in compliance with these reserve requirements at June 30, 2008. Because required reserves must be
maintained in the form of either vault cash, a noninterest bearing account at a FRB, or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce
the Bank's interest-earning assets to the extent that the requirement exceeds vault cash.

Federal Home Loan Bank System.The Bank is a member of the FHLB of Des Moines, which is one of 12 regional FHLBs that administers the home financing credit
function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLB. These policies and
procedures are subject to the regulation and oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the
FHLB. The Bank, as a member of the FHLB of Des Moines, is required to acquire and hold shares of capital stock in the FHLB of Des Moines equal to 0.12% of the total assets of the Bank at
December 31 annually. The Bank is also required to own activity-based stock, which is based on 4.45% of the Bank's outstanding advances. These percentages are subject to change at the
discretion of the FHLB Board of Directors.

At
June 30, 2008, the Bank had $11.2 million in FHLB stock, which was in compliance with this requirement. The Bank receives dividends on its FHLB stock, subject to
approval by the FHLB. For the fiscal year ended June 30, 2008, dividends paid by the FHLB of Des Moines to the Bank totaled approximately $304,000, which constitutes a $17,000 decrease in the
amount of dividends received in fiscal 2007.

USA Patriot Act.The Bank is subject to the OTS and Financial Crimes Enforcement Network regulations implementing the Bank Secrecy Act, as amended by the USA
Patriot Act, which gives the federal government expanded powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing,
and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA Patriot Act takes measures intended to encourage information-sharing
among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III of the USA Patriot Act impose affirmative obligations on a broad range of financial institutions,
including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

Among
other requirements, Title III of the USA Patriot Act imposes the following requirements with respect to financial institutions:



27

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The Sarbanes-Oxley Act.As a public company, we are subject to the Sarbanes-Oxley Act, which implements a broad range of corporate governance and accounting
measures for public companies designed to promote honesty and transparency in corporate America and to better protect investors from corporate wrongdoing.

The
Sarbanes-Oxley Act's principal legislation and the derivative rulemaking promulgated by the SEC include:



28

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Furthermore,
the NASDAQ Stock Market (the "NASDAQ") has also implemented corporate governance rules which implement the mandates of the Sarbanes-Oxley Act. The material NASDAQ rules
include, among other things, ensuring that a majority of the board of directors are independent of management, establishing and publishing a code of conduct for directors, officers and employees, and
requiring stockholder approval of all new stock option plans and all material modifications. These rules affect the Company because its common stock is listed on the NASDAQ Stock Market under the
symbol "HFFC."

The
Company anticipates additional expenses in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulation. Management presently anticipates that the associated
internal costs and third party expenses may be significant.

Holding Company Regulation.The Company is a unitary savings and loan holding company within the meaning of the HOLA. As such, the Company is required to register
with and be subject to OTS examination and supervision as well as certain reporting requirements. In addition, the OTS has enforcement authority over the Company and any of its non-savings
institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability
of a subsidiary savings bank. Unlike bank holding companies, a savings and loan holding company is not subject to any regulatory capital requirements or to supervision by the Federal Reserve System.

"Grandfathered" Savings and Loan Holding Company Status.Because the Company acquired the Bank prior to May 4, 1999, the Company is a "grandfathered"
unitary savings and loan holding company under the Gramm-Leach-Bliley Act. As such, the Company has restrictions on its business activities, provided the Bank continues to be a "qualified thrift
lender." If, however, the Company is acquired by a non-financial company, or if it acquires another savings association subsidiary (and becomes a multiple savings and loan holding
company), the Company will terminate its "grandfathered" unitary savings and loan holding company status, and become subject to certain additional limitations on the types of business activities in
which the Company could engage. All "non-grandfathered" unitary savings and loan holding companies are limited to financially related activities permissible for bank holding companies, as
defined under the Gramm-Leach-Bliley Act.

Restrictions Applicable to All Savings and Loan Holding Companies.Federal law prohibits a savings and loan holding company, including the Company, directly or
indirectly, from acquiring:



A
savings and loan holding company may not acquire as a separate subsidiary an insured institution that has a principal office outside of the state where the principal office of its
subsidiary institution is located, except:



29

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In
addition, if the Bank fails the QTL test (discussed above), the Company must register with the FRB as a bank holding company under the Bank Holding Company Act within one year of the
Bank's failure to so qualify.

The
HOLA prohibits a savings and loan holding company (directly or indirectly, or through one or more subsidiaries) from acquiring another savings association or holding company thereof
without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not federally
insured. In evaluating applications by holding companies to acquire savings associations, the OTS must consider the financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.

Federal Securities Law.The common stock of the Company is registered with the SEC under the Exchange Act. The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act.

Company
stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in
accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.

Delaware General Corporation Law.The Company is incorporated under the laws of the State of Delaware. Thus, the Company is subject to regulation by the State of
Delaware and the rights of the Company's stockholders are governed by the Delaware General Corporation Law.

Federal and State Taxation

The Company and its direct and indirect subsidiaries file a consolidated federal income tax return on a fiscal year basis. In
addition, each of Trust III, Trust IV, Trust V and Trust VI are required to file individual trust returns on a calendar year basis.

In
addition to the regular income tax, corporations, including savings associations such as the Bank, generally are subject to a minimum tax. An alternative minimum tax is imposed at a
minimum tax rate of 20.00% on alternative minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available exemption. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax and net
operating losses can offset no more than 90.00% of alternative minimum taxable income.

To
the extent earnings appropriated to a savings association's bad debt reserves for "qualifying real property loans" and deducted for federal income tax purposes exceed the allowable
amount of such reserves computed under the experience method and to the extent of the association's supplemental reserves for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other distributions to a shareholder (including distributions on redemption, dissolution or liquidation) or for any other purpose (except
to absorb bad debt losses). As of June 30, 2008, the Bank's Excess for tax purposes totaled approximately $4.8 million.

South Dakota Taxation.The Bank is subject to the South Dakota Franchise tax to the extent that such corporations are engaged in business in the state of South
Dakota. South Dakota does not have a

30

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corporate
income tax. The franchise tax will be imposed at a rate of 6.00% on franchise taxable income which is computed in the same manner as federal taxable income with some minor variations to
comply with South Dakota law, other than the carryover of net operating losses which is not permitted under South Dakota law. A South Dakota return of franchise tax must be filed annually.

Minnesota Taxation.The Bank is subject to the Minnesota Corporate Income tax to the extent that such corporations are engaged in business in the state of
Minnesota. The Corporate Income tax is imposed at a rate of 9.8% on corporate taxable income, which is computed in the same manner as federal taxable income with some minor variations to comply with
Minnesota law. A Minnesota return of Corporate Income tax must be filed annually.

Delaware Taxation.As a Delaware holding company, the Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay
an annual fee to the State of Delaware. The Company is also subject to an annual franchise tax imposed by the State of Delaware, which is made in quarterly payments.

Taxation in Other States.Mid America Capital is required to file state income tax returns in those states
which lessees have operations. The total taxes paid in the year ended June 30, 2008 were not material to the operation of the Company.

Executive Officers of the Company

Information regarding the executive officers of the Company and the Bank is set forth below.

Curtis L. HageMr. Hage, age 62, is Chairman, President and Chief Executive Officer of the Company. He was elected to
the position of Chairman of the Board of Directors of the Company in September 1996 and has held the positions of President and Chief Executive Officer since February 1991. Prior to such time,
Mr. Hage served as Executive Vice President of the Bank since 1986. Since joining the Bank in 1968, he served in various capacities prior to being elected Executive Vice President.
Mr. Hage received his M.B.A. from the University of South Dakota and attended the Graduate School of Savings Institution Management at the University of Texas.

Darrel L. PosegateMr. Posegate, age 50, has served as Executive Vice President, Chief Financial Officer and Treasurer
of the Company since January 2002. He has served as President of the Bank since October 2006 and as Executive Vice President, Chief Financial Officer and Treasurer of the Bank from January 2002 until
October 2006. Prior to such time, he was employed in senior leadership roles in the banking industry since 1983. Mr. Posegate received his B.A. degree from Luther College, Decorah, Iowa, and is
a Certified Public Accountant.

David A. BrownMr. Brown, age 47, has served as the Senior Vice President/Business Banking of the Bank from November
1999 until May 2008 at which time he was promoted to the position of Senior Vice President/Community Banking. Prior to joining the Bank, Mr. Brown served as Vice President/Manager Commercial
Banking of Firstar Bank, Sioux City, Iowa, a national banking institution, a position he held since December 1998. Mr. Brown received his M.B.A. and a B.S. in Business Administration from the
University of South Dakota.

Jon M. GadberryMr. Gadberry, age 46, has served as Senior Vice President/Wealth Management of the Bank since December
2007. Prior to joining the Bank, Mr. Gadberry was employed by Bank of the West as Vice President/Trust Manager from November 2004 to December 2007. Mr. Gadberry received his B.S. in
Business Administration from Concordia College in Moorhead, Minnesota.

Mary F. HitzemannMs. Hitzemann, age 55, has served as the Senior Vice President/Human Resources of the Bank since
October 1993. Ms. Hitzemann joined the Bank in
January 1993. Prior to that time, she was employed as Vice President of Human Resources for Rapid City Regional Hospital from May 1989 to May 1992. Ms. Hitzemann received her B.A. degree from
Augustana College.

31

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Brent R. OlthoffMr. Olthoff, age 37, has served as Senior Vice President, Chief Financial Officer and Treasurer of the
Bank since April 2007. Mr. Olthoff joined the Bank in July 2001, and was promoted to Vice President/Finance in July 2004. Prior to serving in his current role, Mr. Olthoff was employed
by FTN Financial, a capital markets firm in Memphis, Tennessee, where he was Vice President/Asset Strategies from February 2006 to April 2007. Mr. Olthoff received his B.B.A degree in Finance
from Iowa State University.

Natalie A. Sundvold, formerly Natalie A. SolbergMs. Sundvold, age 45, has served as the Senior Vice
President/Service & Support of the Bank since October 2002. She joined the Bank in February 1994 as manager of the phone banking center and was promoted to Vice President/In-Touch
Banking in October 1995. Prior to joining the Bank, she was employed by the Bank of New York from October 1989 to October 1993. Ms. Sundvold received her B.S. from Northern State University.

Michael WestbergMr. Westberg, age 41, has served as the Senior Vice President/Retail Banking of the Bank from July
2006 to May 2008 at which time he was promoted to the position of Senior Vice President/Corporate Strategy. Mr. Westberg joined the Bank in February 1996 as a branch manager. Prior to joining
the Bank, he was employed with First Savings Bank, Beresford (South Dakota) from 1992 to 1996; and The Associates, Dallas, Texas, from 1989 to 1992. Mr. Westberg attended Illinois State
University majoring in business and is a graduate of the American Bankers Association National School of Banking.

Item 1A.Risk Factors

The following are certain material risks that our management believes are specific to us and our business. You should understand that
it is not possible to predict or identify all such potential risks and, as such, this list of risk factors should not be viewed as all-inclusive or in any particular order. An investment
in shares of our common stock involves various risks. Before deciding to make an investment decision regarding our common stock, you should carefully consider the risks described below in conjunction
with the other information in this Form 10-K and information incorporated by reference into this Form 10-K, including our consolidated financial statements and
related notes which are set forth in Part II, Item 8 "Financial Statements and Supplementary Data" of this Form 10-K. Our business, financial condition and results of
operations could be harmed by any of the following risks or by other risks that have not been identified or that the Company may believe are immaterial or unlikely. The value or market price of our
common stock could decline due to any of these risks, and you may lose all or part of your investment. The risks discussed below also include forward-looking statements and our actual results may
differ substantially from those discussed in these forward-looking statements.

Risks Related to Our Business

We face strong competition for customers, which could prevent us from obtaining customers and may cause us to pay higher interest rates to attract deposits and charge lower rates to obtain the loan
volume we need to grow, any of which may reduce our profitability.The banking business is highly competitive and we experience competition in each of our markets
from many other financial institutions, many of which are larger and may have significantly greater financial and other resources than we have. Specifically, we compete with commercial banks, credit
unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as
super-regional, national and international financial institutions, that operate offices in our primary market areas and elsewhere. Many of these competitors are also well-established
financial institutions.

Competitors
that are not depository institutions are generally not subject to the extensive regulations that apply to us. We compete with these institutions both in attracting deposits
and in

32

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making
loans. In addition, we must attract our customer base from other existing financial institutions and from new residents. There is a risk that we will not be able to compete successfully with
these other financial institutions in our markets, and that we may have to pay higher interest rates to attract deposits or charge lower interest rates to obtain loan volume, resulting in reduced
profitability. In new markets that we may enter, we will also compete against well-established community banks that have developed relationships within the community.

Changes in interest rates may reduce our profitability.Our profitability depends in large part on our net interest income, which is the difference between
interest earned from interest-earning assets, such as loans and mortgage-backed securities, and interest paid on interest-bearing liabilities, such as deposits and borrowings. Our net interest income
will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. Many factors
cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions. While we intend to manage the effects of changes in interest
rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our efforts may not be effective in a changing rate environment and our financial condition and results of
operations may suffer.

Interest
rates were at historically low levels until June 2004 at which time the Federal Reserve began increasing short-term interest rates 17 times or 425 basis points
through June 29, 2006. Beginning September 18, 2007, the Federal Reserve began an interest rate easing of 325 basis points through April 30, 2008. During this period, a flattening
and slight inversion of the treasury yield curve caused by increasing short-term rates and lagging long-term rates had a negative impact on our net interest margin. In fiscal
2008, as short-term interest rates decreased, the Company experienced a positive effect to its net interest margin If short-term interest rates rise, and if rates on our
deposits and borrowings re-price upwards faster than the rates on our long-term loans and investments, the Company may experience compression of our net interest margin, which
will have a negative effect on our profitability.

Our growth may require us to raise additional capital that may not be available when it is needed or may not be available on terms acceptable to us.We are
required by regulatory authorities to maintain adequate levels of capital to support our operations. To support our future continued growth, we may need to raise additional capital. Our ability to
raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control. Accordingly, we cannot assure you of our ability to raise
additional capital, if needed, on terms acceptable to us. If we cannot
raise additional capital when needed, our ability to further expand our operations through internal growth could be materially impaired.

In
the event that we are able to raise capital through the issuance of additional shares of common stock or other securities, the ownership interests of current investors would be
diluted and the per share book value of our common stock may be diluted. New investors may also have rights, preferences and privileges senior to the holders of our common stock, which may adversely
affect the holders of our common stock.

We
may look to sell production assets, such as mortgage loans, into the secondary market as a means to manage the size of the balance sheet and manage the use of capital. The demand for
these products in the capital markets is not driven by us and may not benefit us at the time we look to sell the loans.

We are subject to extensive regulations that may limit or restrict our activities and the cost of compliance is high.We operate in a highly regulated industry and
are subject to examination, supervision and comprehensive regulation by various regulatory agencies. Banking regulations are primarily intended to protect the federal deposit insurance funds and
depositors, not stockholders. Our compliance with these

33

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regulations
is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits
and locations of offices. We are also subject to regulatory capital requirements, which require us to maintain adequate capital to support our growth. If we fail to meet these capital and other
regulatory requirements, our ability to grow, our cost of funds and FDIC insurance, our ability to pay dividends on common stock, and our ability to make acquisitions could be materially and adversely
affected.

Congress
and federal agencies continually review laws, regulations and policies applicable to the banking industry for possible changes, and we cannot predict the effects of these
changes on our business and profitability. Because, like all banks and bank holding companies, government regulation greatly affects our business and financial results, our cost of compliance could
adversely affect our ability to operate profitably. See "Regulation" under Part I, Item 1 "Business" of this Form 10-K for a detailed discussion of regulation
requirements.

Changes in or interpretations of accounting standards may materially impact our financial statements.Accounting principles generally accepted in the United
States of America and accompanying accounting pronouncements, implementation guidelines, interpretations and practices for many aspects of our
business are complex and involve subjective judgments, including, but not limited to accounting for the allowance for loan and lease losses and pending and incurred but not reported health claims.
Changes in these estimates or changes in other accounting rules and principles, or their interpretation, could significantly change our reported earnings and operating results, and could add
significant volatility to those measures, without a comparable underlying change in cash flow from operations.

Our success is influenced by growth in South Dakota and lack of growth or changes in national and South Dakota economic and political conditions could adversely affect our earnings, as our borrowers'
ability to repay loans and the value of the collateral securing our loans decline and as loans and deposits decline.Our success and growth is significantly
influenced by the growth in population and income levels and deposits in our primary market areas, which are mainly in South Dakota. If the communities in which we operate do not grow or if prevailing
economic conditions locally or nationally are unfavorable, our business may be negatively affected.

Additionally,
there are inherent risks associated with our lending activities, including credit risk, which is the risk that borrowers may not repay outstanding loans or the value of the
collateral securing loans will decrease. Conditions such as inflation, recessions, unemployment, changes in interest rates and money supply and other factors beyond our control may adversely affect
the ability of our borrowers to repay their loans and the value of collateral securing the loans, which could adversely affect our earnings. Because our business operations and activities are
concentrated in the State of South Dakota and most of our credit exposure is in that state, we are specifically at risk from adverse economic, political and business conditions that affect South
Dakota.

Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolios, which could adversely affect our operating results.Like all
financial institutions, we maintain an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. Although we believe that our allowance for loan losses
is maintained at a level adequate to absorb probable losses inherent in our loan portfolio as of the corresponding balance sheet date, the determination of the appropriate level of the allowance for
loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.
Accordingly, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results by
decreasing our net income.

In
evaluating the adequacy of our allowance for loan losses, we consider numerous quantitative factors, including our historical charge-off experience, growth of our loan
portfolio, changes in the

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composition
of our loan portfolio and the volume of delinquent and criticized loans. In addition, we use information about specific borrower situations, including their financial position and
estimated collateral values, to estimate the risk and amount of loss for those borrowers. Finally, we also consider many qualitative factors, including general and economic business conditions,
duration of the current business cycle, current general market collateral valuations, trends apparent in any of the factors we take into account and other matters, which are by nature more subjective
and fluid. Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding our borrowers' abilities to successfully execute their business
models through changing economic environments, competitive challenges and other factors. In considering information about specific borrower situations our analysis is subject to the risk that we are
provided inaccurate or incomplete information. Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary from our current estimates.

Additionally,
bank regulators periodically review our allowance for loan losses and may require an increase in the provision for loan losses or recognize loan charge-offs
based upon their judgments, which may be different from ours. Any increase in our allowance for loan losses or loan charge-offs required by these regulatory authorities may adversely
affect our operating results.

The net realizable value of our investment securities could be lower than the fair value assigned under generally accepted accounting principles.We determine the
fair value of our investment securities based on the most recent quoted market price for such securities as of the applicable balance sheet date. We use quoted market prices to determine the amount of
any unrealized losses that may be reflected in our other comprehensive income and the net book value of our investment securities. The price at which a security could be sold in a market transaction
could be significantly lower than the quoted market price for the security, particularly if the quoted market price is based on infrequent trading history, the market for the security is illiquid, or
could be dependent on the size of the trade. The risk that there will be a material difference between the fair value that we assign to a security and its net realizable value is particularly
significant for certain securities that we hold in our investment portfolio, including our "private label" collateralized mortgage obligation and our rated pooled trust preferred securities. If the
net realizable value is lower than the fair value that we assign to a security, impairment losses could be required in the future.

Our ability to secure wholesale funding to supplement core deposits may prove insufficient.We must maintain sufficient funds to respond to the obligations of our
depositors and borrowers. As part of our liquidity management, we use a number of funding sources to supplement our core deposit growth. These
sources include brokered certificates of deposit, federal funds purchased, Federal Reserve Bank and FHLB advances. Adverse operating results or changes in industry conditions could lead to an
inability to replace these additional funding sources at maturity. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is
not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not
increase proportionately to cover our costs, and our profitability would be adversely affected.

Our ability to retain and attract qualified employees is critical to the success of our business and the failure to do so may materially adversely affect our
performance.Our people are our most important resource and competition for qualified employees is intense. In order to retain and attract qualified employees, we
must compensate such employees at market levels. Typically, those levels have caused employee compensation to be our greatest noninterest expense. In addition, because certain information concerning
our employee compensation is included in our filings with the SEC and is, therefore, available to our competitors, we believe that our employees may be more highly recruited by our competitors. If we
are unable to continue to retain and attract qualified employees, or if

35

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compensation
costs required to retain and attract qualified employees becomes more expensive, our performance, including our competitive position, could be affected.

Our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.Our
reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and
retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our
reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected.

Revenues from our Trust and Asset Management business are significant to our earnings.We believe that the revenues which are derived from our Trust and Asset
Management business are significant to our business. The success of our Trust and Asset Management business is dependent on our ability to produce investment returns which meet the expectations of our
clients. Administering or managing assets in accordance with the terms of governing documents and applicable laws is also important to client satisfaction. Our inability to succeed in either of the
foregoing areas could negatively affect our revenues we receive from our Trust and Asset Management business.

Natural disasters, acts of war or terrorism, and other external events could significantly impact our business.Severe weather, natural disasters, acts of war or
terrorism, and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of
borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Although
management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material
adverse effect on our financial condition and results of operations.

Risks Related to Our Common Shares

The trading volume in our common stock has been low, and the sale of a substantial number of shares of our common stock in the public market could depress the price of our common stock and make it
difficult for you to sell your shares.Our common stock is listed to trade on the NASDAQ Stock Market, but is thinly traded. As a result, you may not be able to
sell your shares of common stock on short notice. Additionally, thinly traded stock can be more volatile than stock trading in an active public market. The sale of a substantial number of shares of
our common stock at one time could temporarily depress the market price of our common stock, making it difficult for you to sell your shares and impairing our ability to raise capital.

Our ability to pay dividends depends primarily on dividends from our banking subsidiary, Home Federal Bank, which is subject to regulatory limits.We are a unitary
thrift holding company and our operations are conducted primarily by our banking subsidiary, Home Federal Bank. Since we receive substantially all of our revenue from dividends from Home Federal Bank,
our ability to pay dividends on our common stock depends on our receipt of dividends from Home Federal Bank. Dividend payments from Home Federal Bank are subject to legal and regulatory limitations,
generally based on net income and retained earnings. The ability of Home Federal Bank to pay dividends to us is also subject to its profitability, financial condition, capital expenditures and other
cash flow requirements. There is no assurance that Home Federal Bank will be able to pay dividends to us in the future or that we will generate adequate cash flow to pay dividends in the future. The
inability to receive dividends from Home Federal Bank could have an adverse affect on our business and financial conditions. Additionally, we may elect in the future to defer interest payments on our
subordinated debentures payable to trusts. The indenture agreements prohibit dividend payments on common stock following the

36

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deferral
of interest payments on the subordinated debentures underlying trust preferred securities. Similarly, our failure to pay dividends on our common stock could have a material adverse effect on
the market price of our common stock.

We are subject to security and operational risks relating to our use of technology that could damage our reputation and our business.Security breaches in our
internet banking activities or other communication and information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose
us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. We rely on standard internet and other
security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security
measures.

Certain provisions of our certificate of incorporation and bylaws, as well as Delaware and federal law, may discourage, delay or prevent an acquisition of control of
us.Certain provisions included in our certificate of incorporation and bylaws, as well as certain provisions of the Delaware General Corporation Law and federal
law, may discourage, delay or prevent potential acquisitions of control of us, particularly when attempted in a transaction that is not negotiated directly with, and approved by, our Board of
Directors, despite possible benefits to our stockholders.

Specifically,
our certificate of incorporation and bylaws include certain provisions that:



Furthermore,
federal law requires OTS approval prior to any direct or indirect acquisition of "control" (as defined in OTS regulations) of the Bank, including any acquisition of control
of us.

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Item 1B.Unresolved Staff Comments

None.

Item 2.Properties

The Company and its direct and indirect subsidiaries conduct their business at the main office located at 225 South Main Avenue, Sioux
Falls, South Dakota, 57104. Currently, the Bank also conducts business from 32 other offices located in its primary market area. Of such 33 total business offices, the Company owns 15, including the
main office, and leases 18 others.

The
total net book value of the Company's premises and equipment (including land, building, leasehold improvements and furniture, fixtures and equipment) at June 30, 2008 was
$14.8 million. The Company previously announced a new facility in Watertown, South Dakota to be constructed in fiscal 2009 which will replace an existing branch office. Management believes
there is a continuing need to keep facilities and equipment up-to-date and continued investment will be necessary in the future.

Item 3.Legal Proceedings

On June 26, 2006, the Company filed a $3.8 million lawsuit against MetaBank and two individuals, J. Tyler Haahr and
Daniel A. Nelson, for their role in a participation loan, alleging fraud, breach of fiduciary duty, conspiracy and negligent misrepresentation. These damages were the result of a failure by the lead
bank to make disclosures regarding an investigation of the commercial customer by the Iowa Attorney General at the time the Bank agreed to an extension of loan participation agreements. Legal
proceedings are currently pending in the Second Judicial Circuit Court, Minnehaha County, South Dakota. Summary judgment motions have been denied, which management believes are favorable to the
Company, and the lawsuit is scheduled for trial during the Company's second fiscal quarter.

In
addition, the Company, the Bank and each of their subsidiaries are, from time to time, involved as plaintiff or defendant in various legal actions arising in the normal course of
their businesses. While the ultimate outcome of any such proceedings cannot be predicted with certainty, it is generally the opinion of management, after consultation with counsel representing the
Bank and the Company in any such proceedings, that the resolution of any such proceedings should not have a material effect on the Company's consolidated financial position or results of operations.
The Company, the Bank and each of their subsidiaries are not aware of any legal actions or other proceedings contemplated by governmental authorities outside of the normal course of business.

Item 4.Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of stockholders, through the solicitation of proxies or otherwise, during the quarterly period ended
June 30, 2008.

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PART II

Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Stock Listing

The Company's common stock is traded under the symbol "HFFC" on the NASDAQ Stock Market.

The
following table sets forth the range of high and low sale prices for the Company's common stock for each of the fiscal quarters of the two years ended June 30, 2008 and 2007.
Quotations for such periods are as reported by the NASDAQ Stock Market.

FISCAL 2008

HIGH

LOW1st Quarter

$
18.15

$
15.722nd Quarter

$
16.75

$
14.143rd Quarter

$
16.55

$
14.924th Quarter

$
18.03

$
16.00




FISCAL 2007

HIGH

LOW1st Quarter

$
17.50

$
15.752nd Quarter

$
17.73

$
16.103rd Quarter

$
18.50

$
17.114th Quarter

$
18.44

$
17.17


As
of September 16, 2008, the Company had 486 holders of record of its common stock.

The
transfer agent for the Company's common stock is Mellon Investor Services, PO Box 3315, South Hackensack, New Jersey, 07606-1915.

Dividends

The Company paid cash dividends on a quarterly basis of $0.1050, $0.1075, $0.1075 and $0.1075 per share throughout fiscal 2008. The
Company paid cash dividends on a quarterly basis of $0.1025, $0.1050, $0.1050 and $0.1050 per share in fiscal 2007. The Board of Directors intends to continue the payment of quarterly cash dividends,
dependent on the results of operations and financial condition of the Company, tax considerations, industry standards, economic conditions, general business practices and other factors the Board of
Directors deems relevant. On July 28, 2008, the Board of Directors announced the approval of a cash dividend of $0.1125 per share and the Company paid the respective cash dividends on
August 15, 2008 to shareholders of record on August 8, 2008. The Company's ability to pay dividends is dependent on the dividend payments it receives from its subsidiary, the Bank, which
are subject to OTS regulations. See Item 1, "BusinessRegulation" of this Form 10-K. The ability of the Company to pay dividends is also subject to the terms of
the agreements on subordinated debentures payable to trusts, should the Company elect to defer interest payments. In addition, the Company's ability to pay dividends is subject to the terms of its
line of credit with First Tennessee Bank, NA. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources" of this Form 10-K.

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Stockholder Return Performance

The following line graph compares the cumulative total stockholder return on the Company's common stock to the comparable cumulative
total return of the NASDAQ Market Index and the NASDAQ Bank Index for the last five years.

The
performance graph assumes that on July 1, 2003, $100 was invested in the Company's common stock (at the closing price of the previous trading day) and in each of the indexes.
The comparison assumes the reinvestment of all dividends. Cumulative total stockholder returns for the Company's common stock, NASDAQ Market Index and the NASDAQ Bank Index are based on the Company's
fiscal year ending June 30.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN  AMONG HF FINANCIAL CORP.  NASDAQ MARKET INDEX AND NASDAQ BANK INDEX

GRAPHIC

ASSUMES
$100 INVESTED ON JULY 1, 2003
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING JUNE 30, 2008

Equity Compensation Plan

The following table sets forth certain information about the common stock that may be issued upon exercise of options, warrants and
rights under all of the Company's existing equity compensation plans, including the 2002 Stock Option and Incentive Plan, the 1996 Director Restricted Stock Plan, and the 1991 Stock Option Plan
(collectively, the "Incentive Plans"). The 1996 Director Restricted Stock Plan expired on January 1, 2007, and the 1991 Stock Option Plan expired on October 27, 2002. Although the column
below entitled "Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights" includes common stock to be issued upon unexpired options issued under the 1991 Stock Option
Plan, no common stock remains available for future awards under the

40

---



1991
Stock Option Plan. Additionally, no common stock remains available for future awards under the 1996 Director Restricted Stock Plan.

Plan Category

Number of Shares to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights

Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights

Number of Shares
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Shares Reflected
in the First Column)(1)Equity plan compensation plans approved by stockholders


248,176

$
13.12


547,629Equity plan compensation plans not approved by stockholders


N/A


N/A


N/ATotal


248,176

$
13.12


547,629


---

Sales of Unregistered Stock

The Company had no sales of unregistered stock during the fiscal year ended June 30, 2008.

Issuer Purchases of Equity Securities

The following table sets forth the purchases by the Company of its common stock during the quarterly period ended June 30, 2008:

Period

Total Number
of Shares
Purchased(1)

Average
Price Paid
per Share

Total Number of
Shares Purchased
as Part of Publicly
Announced
Programs(2)(3)

Maximum Number of
Shares that May Yet
Be Purchased Under
the Current ProgramApril 1 - 30, 2008




$
0.00





300,049May 1 - 31, 2008


6,527

$
17.09


6,527


388,794June 1 - 30, 2008




$
0.00





388,7944th Quarter Total


6,527

$
17.09


6,527


---

41

---





Item 6.    Selected Financial Data

The following table sets forth selected consolidated financial statement and operations data with respect to the Company for the
periods indicated. This information should be read in conjunction with the Financial Statements and related notes appearing in Part II, Item 8 "Financial Statements and Supplementary
Data" of this Form 10-K and with Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this
Form 10-K. The Company's selected financial statement and operations data for fiscal year 2004 have been derived from audited consolidated financial statements, which have been
audited by McGladrey & Pullen, LLP, independent public accountants. The Company's selected financial statement and operations data for each of the fiscal years 2005 through 2008 have
been derived from audited consolidated financial statements, which have been audited by Eide Bailly, LLP, independent public accountants.

At June 30,2008

2007

2006

2005

2004(Dollars in Thousands)Selected Statement of Financial Condition Data:Total assets

$
1,103,494

$
1,001,454

$
961,294

$
897,874

$
847,070Securities available for sale


225,004


142,223


145,518


142,429


122,715FHLB stock


11,245


5,058


5,647


7,699


5,469Loans and leases receivable


777,777


761,599


721,603


670,581


640,946Loans held for sale


8,796


8,776


7,623


10,238


10,351Deposits


784,237


815,864


769,002


681,216


658,719Advances from FHLB and other borrowings


198,454


68,600


91,620


119,664


93,750Subordinated debentures payable to trusts


27,837


27,837


27,837


27,837


27,837Stockholders' equity


64,203


62,270


56,058


53,635


51,649


42

---





Years Ended June 30,2008

2007

2006

2005

2004(Dollars in Thousands, Except Per Share Data)Selected Statement of Income Data:Interest and dividend income

$
63,174

$
61,874

$
53,411

$
44,946

$
40,260Interest expense


33,298


36,240


27,762


18,747


15,188Net interest income


29,876


25,634


25,649


26,199


25,072Provision for losses on loans and leases


1,994


1,198


5,279


2,681


2,020Net interest income after provision for losses
on loans and leases


27,882


24,436


20,370


23,518


23,052Loan servicing income


2,211


1,803


1,123


1,248


1,334Gain on sale of land, net








3557





Gain on sale of branches, net





2,763








Gain on sale of loans, net


1,197


923


969


924


1,555Gain on sale of securities, net


3





3


20


43Other noninterest income


7,922


7,707


7,199


6,822


6,896Noninterest expense


(30,606
)

(29,605
)

(26,499
)

(24,936
)

(24,773
)Income from continuing operations before income taxes


8,609


8,027


6,722


7,596


8,107Income tax expense


2,766


2,644


2,214


2,431


2,891Income from continuing operations


5,843


5,383


4,508


5,165


5,216Discontinued Operations:Income (loss) from operations of discontinued
segment (net of income taxes)














(Loss) on discontinued segment (net of income taxes)














Income (loss) from discontinued operations














Net income

$
5,843

$
5,383

$
4,508

$
5,165

$
5,216


43

---





Years Ended June 30,2008

2007

2006

2005

2004(Dollars in Thousands, Except Per Share Data)Basic earnings (loss) per share:(1)Net income

$
1.47

$
1.35

$
1.15

$
1.33

$
1.34Diluted earnings (loss) per share:(1)Net income


1.45


1.33


1.13


1.29


1.30Dividends declared per share(1)


0.43


0.42


0.41


0.40


0.39Dividend payout ratio(2)


29.25
%

30.93
%

35.20
%

30.03
%

29.33
%Interest rate spread (average during period)


2.70


2.36


2.60


3.02


3.18Net interest margin(3)


3.11


2.80


2.98


3.29


3.41Net interest margin, TE(4)


3.16


2.85


3.01


3.32


3.45Average interest-earning assets to average interest-
bearing liabilities


1.12


1.11


1.12


1.12


1.11Equity to total assets (end of period)


5.82


6.22


5.83


5.97


6.10Equity-to-assets ratio (ratio of average equity to
average total assets)


6.21


6.06


5.94


6.25


6.36Nonperforming assets to total assets (end of period)


0.34


0.40


0.40


0.78


0.27Allowance for loan and lease losses to nonperforming
loans and leases (end of period)(5)


191.08


167.87


168.11


73.24


174.75Allowance for loan and lease losses to total loans and
leases (end of period)


0.75


0.76


0.77


0.74


0.55Nonperforming loans and leases to total loans and
leases (end of period)(5)


0.39


0.45


0.46


1.01


0.32Noninterest expense to average total assets


2.97


3.00


2.87


2.91


3.11Net interest income after provision for losses for loans
and leases to noninterest expense (end of period)


91.10


82.54


76.87


94.31


93.05Return on assets (ratio of net income to average total assets)


0.57


0.55


0.49


0.60


0.66Return on equity (ratio of net income to average equity)


9.12


9.01


8.23


9.66


10.30Operating Efficiency Ratio(6)


70.75


76.56


71.41


67.68


68.57Efficiency Ratio(7)


74.27


76.24


68.83


70.81


70.98Number of full-service offices


33


33


35


34


34


---

44

---





Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations

This section should be read in conjunction with the following parts of this Form 10-K: Part II, Item 8
"Financial Statements and Supplementary Data," Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," and Part I, Item 1 "Business."

Executive Summary

The Company's net income for fiscal 2008 was $5.8 million, or $1.45 per diluted share, compared to $5.4 million, or $1.33
per diluted share for fiscal 2007. Return on average equity was 9.12% at June 30, 2008, compared to 9.01% at June 30, 2007.

Net
interest income for fiscal 2008 was $29.9 million, an increase of $4.2 million or 16.5% over the same period a year ago. The net interest margin was 3.11%, compared to
2.80% for the same period a year ago, an increase of 31 basis points. On a fully taxable equivalent basis, the net interest margin for fiscal 2008 was 3.16%, compared to 2.85% in fiscal 2007. The cost
of funds rate on interest-bearing liabilities decreased from 4.39% in fiscal 2007 to 3.87% in fiscal 2008, a change of 52 basis points. For the same period, yields on earning assets decreased from
6.75% to 6.58%, a decrease of 17 basis points. Increases in volume from fiscal 2007 to fiscal 2008 of average earning assets and interest-bearing liabilities were 4.8% and 4.2% respectively. The
Company was positioned to benefit from a steeper, more positive yield curve slope, and as such the net interest margin ratio benefitted as the Federal Funds Rate decreased 325 basis points in fiscal
2008.

Variability
of the net interest margin ratio may be affected by many aspects, including Federal Reserve policies for short-term interest rates, competitive and global
economic factors and customer preferences for various products and services.

The
Company held $12.4 million in trust preferred securities at June 30, 2008. These are comprised of rated, pooled securities issued primarily by banks throughout the
United States. The cash flows of the securities are derived from interest spreads between the issuer and the investor. These cash flows are used primarily to pay contractual interest. Principal
payments are received primarily by the issuer paying off the securities at redeemable dates. In general, if certain ratios within the investment structure are reduced below established levels, excess
interest cash flows are redirected to pay down principal in various tranches established by the investment structure.

The
allowance for loan and lease losses remained at $5.9 million at June 30, 2008, compared to $5.9 million at June 30, 2007, an increase of $61,000 or 1.0%.
The ratio of allowance for loan and lease losses to total loans and leases was 0.75% as of June 30, 2008 compared to 0.76% at June 30, 2007. Total nonperforming assets at June 30,
2008 were $3.7 million as compared to $4.0 million at June 30, 2007. The ratio of nonperforming assets to total assets improved to 0.34% for June 30, 2008, compared to
0.40% at June 30, 2007. The allowance for loan and lease losses is calculated based on loan and lease levels, loan and lease loss history, credit quality of the loan and lease portfolio, and
environmental factors such as economic health of the region and management experience. This risk rating analysis is designed to give the Company a consistent and systematic methodology to determine
proper levels for the allowance at a given time.

As
of June 30, 2008, the Company continued to record a receivable in the amount of $223,000 from the sale of certain loan participation interests in December 2005. The balance of
this receivable represents the remaining amount the Company expects to be paid on the receivable and the Company

45

---



has
requested such payment from the lead bank. In addition, on June 26, 2006, the Company filed a $3.8 million lawsuit against this lead bank for their role in this participation loan,
alleging fraud, breach of fiduciary duty, conspiracy, and negligent misrepresentation. See Part 1, Item 3 "Legal Proceedings" of this Form 10-K.

Total
deposits at June 30, 2008, were $784.2 million, a decrease of $31.6 million, or 3.9%, from June 30, 2007. Out-of-market
certificates of deposit declined $44.3 million to $27.3 million at June 30, 2008, as the Company pursued other sources of wholesale funding. Interest expense on deposits was
$24.7 million for fiscal 2008, a decrease of $3.8 million, or 13.4%, over the same period a year ago. A primary factor affecting interest expense was the decrease in money market rates
and other non-maturity deposit product rates.

The
total risk-based capital ratio was 10.83% at June 30, 2008, compared to 11.05% at June 30, 2007. This continues to place the Bank in the
"well-capitalized" category within OTS regulation at June 30, 2008, and is consistent within the "well-capitalized" OTS category in which the Company plans to operate.
The Company historically has been able to manage the size of its assets through secondary market loan sales of single-family mortgages, student loans and a loan securitization.

Noninterest
expense for fiscal 2008 was $30.6 million, compared to $29.6 million a year ago, an increase of $1.0 million or 3.4%. Compensation and employee benefits
for fiscal 2008 accounted for an increase of $1.2 million, or 6.7%, from the same period a year ago. Net healthcare costs, inclusive of self-funded health claims, administration
fees and fully-insured dental premiums offset by stop loss insurance receivable and employee reimbursements for fiscal 2008 were $1.5 million, compared to $2.1 million for the same
period a year ago, a decrease of $667,000 or 31.0%. This change is primarily due to lower health claims expense and recognition of stop loss insurance receipts.

Noninterest
income for fiscal 2008 was $11.3 million, compared to $13.2 million for the same period a year ago, a decrease of $1.9 million or 14.1%. Excluding the
one-time $2.8 million gain on sale of branches during fiscal 2007, the increase was $900,000 or 8.6%. This core increase was driven primarily by increases in loan servicing income
and fees on deposits. Loan servicing income increased in fiscal 2008 by $408,000 or 22.6% from fiscal 2007. Fees on deposits increased in fiscal 2008 by $256,000 or 5.0% from fiscal 2007.

The
Company focuses on balancing operating costs with operating revenue levels in order to provide better efficiency ratios over time and continues to review its operations for ways to
reduce its cost
structure while continuing to support long-term revenue enhancements. The operating efficiency ratio for fiscal 2008 was 70.75%, compared to 76.56% for the same period a year ago, a
decrease of 581 basis points. The operating efficiency ratio excludes the impact of net interest expense on the variable priced trust preferred securities and the one-time gain on sale of
branches. The Company has issued trust preferred securities primarily to provide funding for stock repurchases and to repay other borrowings. Net interest expense on the $27.8 million of trust
preferred securities outstanding decreased to $2.1 million for fiscal 2008, compared to $2.7 million for the same period a year ago, a decrease of $563,000 or 20.9%. The average rate
paid on these securities decreased 203 basis points, from 9.61% in fiscal 2007 to 7.58% in fiscal 2008. The total efficiency ratio was 74.27% at June 30, 2008, compared to 76.24% for the same
period a year ago, a decrease of 197 basis points. Contributing to this improvement in the efficiency ratio from a year ago include an increase in Company revenue to $41.2 million for fiscal
2008, or a 14.3% increase compared to the same period a year ago excluding the one-time gain on sale of branches of $2.8 million. It is the Company's continuing goal to move the
operating efficiency ratio towards the 50% level over the long term. Management believes that this can be accomplished through steady growth of the balance sheet and the containment of incremental
operating expenses.

Recent
events in the financial markets produce uncertainties to management about future operating results and the future financial condition of the Company. The interdependencies of the

46

---



national
economy and financial markets do affect the macro economics reviewed by management and may produce outcomes in the future which have not impacted the Company previously.

General

The Company is a financial services provider and, as such, has inherent risks that must be managed in order to achieve net income.
Primary risks that affect net income include credit risk, liquidity risk, operational risk, regulatory compliance risk and reputation risk. The Company's net income is derived by management of the net
interest margin, the ability to collect fees from services provided, by controlling the costs of delivering services and the management of loan and lease losses. The primary source of revenues comes
from the net interest margin, which represents the difference between income on interest-earning assets (i.e. loans and investment securities) and expense on interest-bearing liabilities
(i.e. deposits and borrowed funding). The net interest margin is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. Fees
earned include charges for deposit services, trust services and loan services. Personnel costs are the primary expenses required to deliver the services to customers. Other costs include occupancy and
equipment and general and administrative expenses.

Financial Condition Data

At June 30, 2008 the Company had total assets of $1,103.5 million, an increase of $102.0 million from the level at
June 30, 2007. The increase in assets was due primarily to increases in securities of $82.8 million, FHLB stock of $6.2 million, and net loans and leases receivable of
$16.2 million offset by a decrease in cash and cash equivalents of $1.3 million. The increase in liabilities of $100.1 million was due to increases in advances from the FHLB and
other borrowing of $129.9 million, offset by a decrease in deposits of $31.6 million from the levels at June 30, 2007. In addition, stockholders' equity increased to
$64.2 million at June 30, 2008, from $62.3 million at June 30, 2007, primarily due to net income of $5.8 million offset by cash dividends paid of
$1.7 million.

The
increase in securities of $82.8 million was due primarily to an increase in purchases of U.S. agency mortgage-backed securities, over sales, amortization and repayments of
principal. The increase in FHLB stock of $6.2 million was the result of increased stock requirement by FHLB based upon an increase in outstanding advances.

The
increase in net loans and leases receivable of $16.2 million was due primarily to an increase in purchases and originations over sales, amortization and repayments of
principal. During the first quarter of fiscal 2008, the Company announced that it had ceased origination of indirect auto loans. Indirect auto loan outstanding balances declined $38.8 million
during the fiscal year to $44.3 million at June 30, 2008. In addition, deferred fees and discounts decreased by $775,000 primarily due to a decrease of $832,000 for deferred fees and
discounts on indirect automobile loans that include prepaid dealer reserves.

The
decrease in cash and cash equivalents of $1.3 million was primarily due to the timing of items in clearing.

Advances
from the FHLB and other borrowings increased $129.9 million for the year ended June 30, 2008, primarily due to the Company increasing its short- and
long-term advances by a net of $99.9 million, while increasing overnight Federal Funds advances by $29.9 million during the fiscal year ended June 30, 2008.

The
$31.6 million decrease in deposits was primarily due to decreases in out-of-market certificates of deposit of $44.3 million, and money market
accounts of $40.9 million, offset by increases in in-market certificates of deposit of $34.1 million and savings accounts of $12.3 million.

47

---



Analysis of Net Interest Income

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

Average Balances, Interest Rates and Yields.The following table presents for the periods indicated, the total dollar amount of interest income from average
interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net
interest margin. The table does not reflect any effect of income taxes. Average balances consist of daily average balances for the Bank with simple average balances for all other companies. The
average balances include nonaccruing loans and leases. The yields on loans and leases include origination fees, net of costs, which are considered adjustments to yield.

Years Ended June 30,2008

2007

2006Average
Outstanding
Balance

Interest
Earned/
Paid

Yield/
Rate

Average
Outstanding
Balance

Interest
Earned/
Paid

Yield/
Rate

Average
Outstanding
Balance

Interest
Earned/
Paid

Yield/
Rate(Dollars in Thousands)Interest-earning assets:Loans and leases receivable(1)(3)

$
775,558

$
53,972


6.96
%
$
758,455

$
54,344


7.17
%
$
703,787

$
47,096


6.69
%Investment securities(2)(3)


176,652


8,844


5.01
%

152,132


7,209


4.74
%

151,139


6,133


4.06
%FHLB stock


8,511


358


4.21
%

6,406


321


5.01
%

6,871


182


2.65
%Total interest-earning assets


960,721

$
63,174


6.58
%

916,993

$
61,874


6.75
%

861,797

$
53,411


6.20
%Noninterest-earning assets


70,371








68,832








61,491Total assets

$
1,031,092







$
985,825







$
923,288Interest-bearing liabilities:Deposits:Checking and money market

$
268,264

$
6,979


2.60
%
$
282,312

$
10,436


3.70
%
$
274,093

$
8,281


3.02
%Savings


56,005


1,152


2.06
%

46,207


1,240


2.68
%

51,356


1,150


2.24
%Certificates of deposit


355,401


16,562


4.66
%

362,321


16,829


4.64
%

298,940


10,744


3.59
%Total interest-bearing deposits


679,670


24,693


3.63
%

690,840


28,505


4.13
%

624,389


20,175


3.23
%FHLB advances and other borrowings


152,289


6,494


4.26
%

106,151


5,061


4.77
%

119,727


5,357


4.47
%Subordinated debentures payable to trusts(4)


27,837


2,111


7.58
%

27,837


2,674


9.61
%

27,837


2,230


8.01
%Total interest-bearing liabilities


859,796

$
33,298


3.87
%

824,828

$
36,240


4.39
%

771,953

$
27,762


3.60
%Noninterest-bearing deposits


79,313








76,698








77,419Other liabilities


27,914








24,558








19,109Total liabilities


967,023








926,084








868,481Equity


64,069








59,741








54,807Total liabilities and equity

$
1,031,092







$
985,825







$
923,288Net interest income; interest rate spread




$
29,876


2.70
%



$
25,634


2.36
%



$
25,649


2.60
%Net interest margin(5)








3.11
%







2.80
%







2.98
%Net interest margin, TE(6)








3.16
%







2.85
%







3.01
%


---

48

---



Rate/Volume Analysis of Net Interest Income

The following schedule presents the dollar amount of changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes between the increases and decreases due to fluctuating outstanding balances that are due to the
levels and volatility of interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this
table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

Years Ended June 30,

Years Ended June 30,2008 vs. 2007

2007 vs. 2006Increase
(Decrease)
Due to
Volume

Increase
(Decrease)
Due to
Rate

Total
Increase
(Decrease)

Increase
Due to
Volume

Increase
(Decrease)
Due to
Rate

Total
Increase
(Decrease)(Dollars in Thousands)Interest-earning assets:Loans and leases receivable(1)

$
1,226

$
(1,598
)
$
(372
)
$
3,658

$
3,590

$
7,248Investment securities(2)


1,162


473


1,635


40


1,036


1,076FHLB stock


97


(60
)

37


(18
)

157


139Total interest-earning assets

$
2,485

$
(1,185
)
$
1,300

$
3,680

$
4,783

$
8,463Interest-bearing liabilities:Deposits:Checking and money market

$
(520
)
$
(2,938
)
$
(3,458
)
$
248

$
1,907

$
2,155Savings


263


(351
)

(88
)

(115
)

205


90Certificates of deposit


(322
)

55


(267
)

2,278


3,807


6,085Total interest-bearing deposits


(579
)

(3,234
)

(3,813
)

2,411


5,919


8,330FHLB advances and other borrowings


2,200


(766
)

1,434


(607
)

311


(296
)Subordinated debentures payable to trusts





(563
)

(563
)




444


444Total interest-bearing liabilities

$
1,621

$
(4,563
)
$
(2,942
)
$
1,804

$
6,674

$
8,478Net interest income increase (decrease)







$
4,242







$
(15
)


---

Application of Critical Accounting Policies

GAAP requires management to utilize estimates when reporting financial results. The Company has identified the policies discussed below
as Critical Accounting Policies because the accounting estimates require management to make certain assumptions about matters that may be uncertain at the time the estimate was made and a different
method of estimating could have been reasonably made that could have a material impact on the presentation of the Company's financial condition, changes in financial condition or results of
operations.

Allowance for Loan and Lease LossesGAAP requires the Company to set aside reserves or maintain an allowance against probable
loan and lease losses in the loan and lease portfolio. Management must develop a consistent and systematic approach to estimate the appropriate balances that will cover the probable losses. Due to the
uncertainty of future events, the approach includes a process that may differ significantly from other methodologies and still produce an estimate that is in accordance with GAAP.

49

---



The
allowance is compiled by utilizing the Company's loan and lease risk rating system, which is structured to identify weaknesses in the loan and lease portfolio. The risk rating system
has evolved to a process whereby management believes the system will properly identify the credit risk associated with the loan and lease portfolio. Due to the stratification of loans and leases for
the allowance calculation, the estimate of the allowance for loan and lease losses could change materially if the loan and lease risk rating system would not properly identify the strength of a large
or a few large loan and lease customers. Although management believes that it uses the best information available to determine the allowance, unforeseen market or borrower conditions could result in
adjustments and net earnings being significantly affected if circumstances differ substantially from the assumptions used in making the final determinations.

Mortgage Servicing Rights ("MSR")The Company records a servicing asset for contractually separated servicing from the
underlying mortgage loans. The asset is initially recorded at fair value and represents an intangible asset backed by an income stream from the serviced assets. The asset is amortized in proportion to
and over the period of estimated net servicing income.

At
each balance sheet date, the MSRs are analyzed for impairment, which occurs when the fair value of the MSRs is lower than the amortized book value. The Company's MSRs are primarily
servicing rights acquired on South Dakota Housing Development Authority first time homebuyers program. Due to the lack of quoted markets for the Company's servicing portfolio, the Company estimates
the fair value of the MSRs using present value of future cash flow analysis. If the analysis produces a fair value that is greater than or equal to the amortized book value of the MSRs, no impairment
is recognized. If the fair value is less than the book value, an expense for the difference is charged to earnings by initiating a MSR valuation account. If the Company determines this impairment is
temporary, any future changes in fair value are recorded as a change in earnings and the valuation. If the Company determines the impairment to be permanent, the valuation is written off against the
MSRs which results in a new amortized balance.

The
Company has included MSRs as a critical accounting policy because the use of estimates for determining fair value using present value concepts may produce results which may
significantly differ from other fair value analysis perhaps even to the point of recording impairment. The risk to earnings is when the underlying mortgages payoff significantly faster than the
assumptions used in the previously
recorded amortization. Estimating future cash flows on the underlying mortgages is a difficult analysis and requires judgment based on the best information available. The Company looks at alternative
assumptions and projections when preparing a reasonable and supportable analysis. Based on the Company's quarterly analysis of MSRs, there was no impairment to the MSRs at June 30, 2008.

Self-InsuranceThe Company has a self-insured healthcare plan for its employees up to certain limits.
To mitigate a portion of these risks, the Company has a stop-loss insurance policy through a commercial insurance carrier for coverage in excess of $65,000 per individual occurrence. The
estimate of self-insurance liability is based upon known claims and an estimate of incurred, but not reported ("IBNR") claims. IBNR claims are estimated using historical claims lag
information received by a third party claims administrator. Due to the uncertainty of health claims, the approach includes a process that may differ significantly from other methodologies and still
produce an estimate that is in accordance with GAAP. Although management believes that it uses the best information available to determine the accrual, unforeseen health claims could result in
adjustments to the accrual. These adjustments could significantly affect net earnings if circumstances differ substantially from the assumptions used in estimating the accrual.

Asset Quality

When a borrower fails to make a required payment on a loan within 10 to 15 days after the payment is due, the Bank generally
institutes collection procedures by issuing a late notice. The

50

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customer
is contacted again when the payment is between 17 and 40 days past due. In most cases, delinquencies are cured promptly; however, if a loan has been delinquent for more than
40 days, the Bank attempts additional written as well as verbal contacts and, if necessary, personal contact with the borrower in order to determine the reason for the delinquency and to effect
a cure, and, where appropriate, reviews the condition of the property and the financial circumstances of the borrower. Based upon the results of any such investigation, the Bank may: (i) accept
a repayment program which under appropriate circumstances could involve an extension in the case of consumer loans for the arrearage from the borrower, (ii) seek evidence, in the form of a
listing contract, of efforts by the borrower to sell the property if the borrower has stated that he is attempting to sell, or (iii) initiate foreclosure proceedings. When a loan payment is
delinquent for 90 days, the Bank generally will initiate foreclosure proceedings unless management is satisfied the credit problem is correctable.

Loans
are generally classified as nonaccrual when there are reasonable doubts as to the collectability of principal and/or interest and/or when payment becomes 90 days past due,
except loans which are well secured and in the process of collection. Interest collections on nonaccrual loans, for which the ultimate collectability of principal is uncertain, are applied as
principal reductions.

Leases
are generally classified as nonaccrual when there are reasonable doubts as to the collectability of principal and/or interest. Leases may be placed on nonaccrual when the lease
has experienced either four consecutive months with no payments or once the account is five months in arrears. Interest collections on nonaccrual leases, for which the ultimate collectability of
principal is uncertain, are applied as principal reductions.

When
a lessee fails to make a required lease payment within 10 days after the payment is due, Mid America Capital generally institutes collection procedures. The lessee may be
contacted by telephone on the 10th, but no later than the 30th day of delinquency. A late notice is automatically issued by the system on the 11th day of delinquency and is sent to the
lessee. The lease may be referred to legal counsel when the lease is past due beyond four payments and no positive response has been received or when other considerations are present.

Nonperforming
assets (nonaccrual loans and leases, accruing loans and leases delinquent more than 90 days and foreclosed assets) decreased to $3.7 million at
June 30, 2008 from $4.0 million at June 30, 2007, a decrease of $258,000. In addition, the ratio of nonperforming assets to total assets, which is one indicator of credit risk
exposure, improved to 0.34% at June 30, 2008, from 0.40% at June 30, 2007.

Nonaccruing
loans and leases increased $134,000 to $2.3 million at June 30, 2008 compared to $2.2 million at June 30, 2007. Included in nonaccruing loans and
leases at June 30, 2008 were eight loans totaling $503,000 secured by one- to four-family real estate, two commercial real estate loans totaling $429,000, one
agricultural real estate loan totaling $42,000, eleven commercial business loans totaling $555,000, two agricultural business loans totaling $201,000, one equipment finance lease totaling $27,000 and
37 consumer loans totaling $566,000.

The
Company's nonperforming loans and leases, which represent nonaccrual and past due 90 days and still accruing, have decreased $393,000 from the levels at June 30, 2007.
The risk rating system in place is designed to identify and manage the nonperforming loans and leases. Commercial and agricultural loans and equipment finance leases will have specific reserve
allocations based on collateral values or based on the present value of expected cash flows if the loans or leases are deemed impaired. Loans and leases that are not performing do not necessarily
result in a loss.

As
of June 30, 2008, the Company had $643,000 of foreclosed assets. The balance of foreclosed assets at June 30, 2008 consisted of $443,000 in equipment finance leases,
$124,000 in consumer collateral and $76,000 in single-family residences.

51

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At June 30, 2008, the Company had designated $22.2 million of its assets as special mention and classified $11.5 million of its assets that management has determined
need to be closely monitored because of possible credit problems of the borrowers or the cash flows of the secured properties. At June 30, 2008, the Company had $21.8 million in
multi-family, commercial real estate and agricultural participation loans purchased, of which $3.9 million were classified at June 30, 2008. These loans and leases were
considered in determining the adequacy of the allowance for loan and lease losses. The allowance for loan and lease losses is established based on management's evaluation of the risks probable in the
loan and lease portfolio and changes in the nature and volume of loan and lease activity. Such evaluation, which includes a review of all loans and leases for which full collectability may not be
reasonably assured, considers the estimated fair market value of the underlying collateral, present value of expected principal and interest payments, economic conditions, historical loss experience
and other factors that warrant recognition in providing for an adequate loan and lease loss allowance.

Although
the Company's management believes that the June 30, 2008 recorded allowance for loan and lease losses was adequate to provide for probable losses on the related loans and
leases, there can be no assurance that the allowance existing at June 30, 2008 will be adequate in the future.

In
accordance with the Company's internal classification of assets policy, management evaluates the loan and lease portfolio on a monthly basis to identify loss potential and determines
the adequacy of the allowance for loan and lease losses quarterly. Loans are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful. Foreclosed assets include
assets acquired in settlement of loans.

52

---



The
following table sets forth the amounts and categories of the Company's nonperforming assets from continuing operations for the periods indicated.

At June 30,2008

2007

2006

2005

2004(Dollars in Thousands)Nonaccruing loans and leases:One- to four-family

$
503

$
228

$
371

$
263

$
86Commercial real estate


429


25





70


75Commercial business


555


1441


341


4518


795Equipment finance leases


27


118


36


130


21Consumer


566


378


287


341


564Agricultural


244











20Total


2,324


2,190


1,035


5,322


1,561Accruing loans and leases delinquent more than 90 days:One- to four-family


306


470


358


98


Commercial real estate


24


178


308


292


Commercial business


71


213


814


1,052


221Equipment finance leases


9


88


302


71


281Consumer


119


1


7





Agricultural


252


358


541


96


Total


781


1,308


2,330


1609


502Foreclosed assets:One- to four-family


76


158


96


39


100Equipment finance leases


443


180


254





Consumer


124


170


177


50


112Total(1)


643


508


527


89


212Total nonperforming assets(2)

$
3,748

$
4,006

$
3,892

$
7,020

$
2,275Ratio of nonperforming assets to total assets(3)


0.34
%

0.40
%

0.40
%

0.78
%

0.27
%Ratio of nonperforming loans and leases to total loans and leases(4)


0.39
%

0.45
%

0.46
%

1.01
%

0.32
%


---

53

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The
following table sets forth information with respect to activity in the Company's allowance for loan and lease losses from continuing operations during the periods indicated.

Years Ended June 30,2008

2007

2006

2005

2004(Dollars in Thousands)Balance at beginning of period

$
5,872

$
5,657

$
5,076

$
3,605

$
3,842Charge-offs:One- to four-family


(3
)

(12
)

(1
)




(7
)Commercial real estate











(31
)

(92
)Commercial business


(894
)

(386
)

(3,389
)

(187
)

(457
)Equipment finance leases


(475
)

(162
)

(165
)

(269
)

(30
)Consumer


(853
)

(701
)

(1,066
)

(1,044
)

(1,143
)Agricultural


(20
)

(31
)

(502
)

(14
)

(835
)Total charge-offs


(2,245
)

(1,292
)

(5,123
)

(1,545
)

(2,564
)Recoveries:One- to four-family


2


3


1


9


4Commercial real estate





1


6





1Commercial business


8


9


15


31


3Equipment finance leases


34


0


40


2


64Consumer(1)


263


216


237


215


232Agricultural


5


80


126


78


3Total recoveries


312


309


425


335


307Net (charge-offs)


(1,933
)

(983
)

(4,698
)

(1,210
)

(2,257
)Additions charged to operations


1,994


1,198


5,279


2,681


2,020Allowance related to assets acquired (sold), net














Balance at end of period

$
5,933

$
5,872

$
5,657

$
5,076

$
3,605Ratio of net (charge-offs) during the period to average loans and leases outstanding during the period


(0.25
)%

(0.13
)%

(0.67
)%

(0.18
)%

(0.36
)%Ratio of allowance for loan and lease losses to total loans and leases at end of period


0.75
%

0.76
%

0.77
%

0.74
%

0.55
%Ratio of allowance for loan and lease losses to nonperforming loans and leases at end of period


191.08
%

167.87
%

168.11
%

73.24
%

174.75
%


54

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The
distribution of the Company's allowance for loan and lease losses and impaired loss summary are summarized in the following tables.

At June 30,2008

2007

2006

2005

2004Amount

Percent of Loans in
Each Category to
Total Loans

Amount

Percent of Loans in
Each Category to
Total Loans

Amount

Percent of Loans in
Each Category to
Total Loans

Amount

Percent of Loans in
Each Category to
Total Loans

Amount

Percent of Loans in
Each Category to
Total Loans(Dollars in Thousands)One- to four-family(1)

$
294


4.95
%
$
342


5.82
%
$
193


17.02
%
$
186


17.21
%
$
15


17.51
%Commercial and multi-family real estate(1)


875


14.75


647


11.02


396


26.54


261


19.66


220


20.57Commercial business(2)


2,174


36.64


2,795


47.60


3,133


17.42


2,953


22.96


1,270


22.85Consumer


1,190


20.06


1,178


20.06


1,432


26.99


1,343


29.45


1,736


29.48Agricultural


1,400


23.60


910


15.50


503


12.03


333


10.72


364


9.59Total

$
5,933


100.00
%
$
5,872


100.00
%
$
5,657


100.00
%
$
5,076


100.00
%
$
3,605


100.00
%


---

55

---





FAS 5
Allowance
for Loan and
Lease Losses

FAS 114
Impaired Loan
Valuation Allowance

FAS 5
Allowance
for Loan and
Lease Losses

FAS 114
Impaired Loan
Valuation AllowanceLoan Type

At June 30, 2008

At June 30, 2007(Dollars in Thousands)One- to four-family

$
294




$
342


Commercial real estate


740





524


Multi-family real estate


135





123


Commercial business


1,678





1,974


335Equipment finance leases


496





486


Consumer


1,190





1,178


Agricultural


1,270


130


860


50Total

$
5,803

$
130

$
5,487

$
385


FAS 114 Impaired Loan Summary

Number
of Loan
Customers

Loan
Balance

Impaired
Loan
Valuation
Allowance

Number
of Loan
Customers

Loan
Balance

Impaired
Loan
Valuation
AllowanceLoan Type

At June 30, 2008

At June 30, 2007(Dollars in Thousands)Commercial business


0

$
0

$
0


7

$
1,360

$
335Agricultural


2


316


130


1


121


50Total


2

$
316

$
130


8

$
1,481

$
385


The
allowance for loan and lease losses was $5.9 million at June 30, 2008, as compared to $5.9 million at June 30, 2007. The ratio of the allowance for loan
and lease losses to total loans and leases was 0.75% at June 30, 2008, compared to 0.76% at June 30, 2007. The Company's management has considered nonperforming assets and other assets
of concern in establishing the allowance for loan and lease losses. The Company continues to monitor its allowance for possible loan and lease losses and make future additions or reductions in light
of the level of loans and leases in its portfolio and as economic conditions dictate. The current level of the allowance for loan and lease losses is a result of management's assessment of the risks
within the portfolio based on the information revealed in credit reporting processes. The Company utilizes a risk-rating system on commercial business, agricultural, construction,
multi-family and commercial real estate loans, including purchased loans. A periodic credit review is performed on all types of loans and leases to establish the necessary reserve based on the
estimated risk within the portfolio. This assessment of risk takes into account the composition of the loan and lease portfolio, historical loss experience for each loan and lease category, previous
loan and lease experience, concentrations of credit, current economic conditions and other factors that in management's judgment deserve recognition. OTS regulators have reviewed the Company's
methodology for determining allowance requirements on the Company's loan and lease portfolio and have made no required recommendations for changes in methodology in the allowances during the three
year period ended June 30, 2008.

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

Although
management believes that it uses the best information available to determine the allowances, unforeseen market conditions could result in adjustments and net earnings being
significantly affected if circumstances differ substantially from the assumptions used in making the final

56

---



determinations.
Future additions to the Company's allowances result from periodic loan, property and collateral reviews and thus cannot be predicted in advance. See Note 1 of "Notes to
Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Form 10-K for a description of the
Company's policy regarding the provision for losses on loans and leases.

Comparison of the Years Ended June 30, 2008 and June 30, 2007

General.The Company's income was $5.8 million or $1.47 and $1.45 for basic and diluted earnings per share, respectively, for the year ended June 30,
2008, a $460,000 increase in earnings compared to $5.4 million or $1.35 and $1.33 for basic and diluted earnings per share, respectively, for the prior year. Fiscal year 2007 second quarter net
income included a non-recurring after-tax gain on sale of branches of $1.7 million or $0.42 diluted earnings per share. For the year ended June 30, 2008, the
return on average equity was 9.12%, a 1.2% increase compared to 9.01% in the prior year. For the year ended June 30, 2008, the return on average assets was 0.57%, a 3.6% increase compared to
0.55% in the prior year. As discussed in more detail below, the increases were due to a variety of key factors, including increases in net interest income of $4.2 million, offset by increases
in provision for losses on loans and leases of $796,000 and increases in noninterest expense of $1.0 million.

Interest and Dividend Income.Interest and dividend income was $63.2 million for the year ended June 30, 2008, as compared to $61.9 million
for the prior year, an increase of $1.3 million or 2.1%. A $1.2 million decrease in interest and dividend income was the result of a 2.5% decrease in the average yield on
interest-earning assets and a $2.5 million increase in interest and dividend income was the result of a 4.8% increase in the average volume of total interest-earning assets. The average yield
on interest-earning assets was 6.58% for the year ended June 30, 2008, as compared to 6.75% for the prior year. The average volume of loans and leases receivable increased from
$758.5 million for the year ended June 30, 2007, to $775.6 million for the year ended June 30, 2008. For the year ended June 30, 2008, the average yield on loans and
leases receivable was 6.96%, a decrease of 2.9% from 7.17% in the prior year. The overall increase in interest and dividend income was due in part to the repricing of loans and investments that
generally reflected national interest rates.

Interest Expense.Interest expense was $33.3 million for the year ended June 30, 2008, as compared to $36.2 million for the prior year, a
decrease of $2.9 million or 8.12%. A $3.2 million decrease was the result of an 11.9% decrease in the average rate paid on interest-bearing deposits. The average rate on interest-bearing
deposits was 3.63% for the year ended June 30, 2008, as compared to 4.13% for the prior year. A $766,000 decrease in interest expense was the result of a 10.6% decrease in the average yield on
FHLB advances and other borrowings to 4.26% for the year ended June 30, 2008, compared to 4.77% for the prior fiscal year, and a $2.2 million increase in interest expense was the result
of a 43.5% increase in the average balance of FHLB advances and other borrowings. In addition, interest expense decreased $563,000 due to the average yield on subordinated debentures payable to trust
decreasing to 7.58% for the year ended June 30, 2008, compared to 9.61% for the prior fiscal year.

Net Interest Income.The Company's net interest income for the year ended June 30, 2008, increased $4.2 million or 16.55%, to $29.8 million
compared to $25.6 million for the prior year. The Company's net interest margin increased to 3.11% for the year ended June 30, 2008, as compared to 2.80% for the prior year. The Company
continues to have a diversified loan portfolio comprised of a mix of consumer and business type lending. This mix helps the Company manage the net interest margin and interest rate risk by retaining
loan and lease production on the balance sheet or looking at alternatives through secondary markets.

Provision for Losses on Loans and Leases.The allowance for loan and lease losses is maintained at a level which is considered by management to be adequate to
absorb probable losses on existing

57

---



loans
and leases that may become uncollectible, based on an evaluation of the collectability of the loans and leases and prior loan and lease loss experience. The evaluation takes into consideration
such factors as changes in the nature and volume of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases, and current economic conditions that may
affect the borrower's ability to pay. The allowance for loan and lease losses is established through a provision for losses on loans and leases charged to expense. See "Asset Quality" above for
further discussion.

Provision
for losses on loans and leases increased $796,000 or 66.4%, to $2.0 million for the year ended June 30, 2008, as compared to $1.2 million in the prior
year. Net charge-offs increased from $1.0 million during fiscal 2007 to $1.9 million during fiscal 2008. Nonperforming assets decreased $258,000 for the year ended
June 30, 2008.

The
allowance for losses on loans and leases at June 30, 2008 was $5.9 million. The allowance remained from the June 30, 2007, balance of $5.9 million
primarily as a result of charge-offs exceeding recoveries by $1.9 million offset by the provision for losses on loans and leases of $2.0 million. The ratio of allowance for
loan and lease losses to nonperforming loans and leases at June 30, 2008, was 191.08% compared to 167.87% at June 30, 2007. The allowance for loan and lease losses to total loans and
leases at June 30, 2008, was 0.75% compared to 0.76% at June 30, 2007. The Bank's management believes that the June 30, 2008, recorded allowance for loan and lease losses is
adequate to provide for probable losses on the related loans and leases, based on its evaluation of the collectability of loans and leases and prior loss experience.

Noninterest Income.Noninterest income was $11.3 million for the year ended June 30, 2008, as compared to $13.2 million for the year ended
June 30, 2007, a decrease of $1.9 million or 14.12%. The decrease in noninterest income was due primarily to a one-time gain on sale of branches of $2.8 million in
fiscal 2007. During fiscal 2008 the Company experienced increases in loan servicing income of $408,000, gain on sale of loans of $274,000, fees on deposits of $256,000, and trust income of $30,000,
offset by decreases in other noninterest income of $71,000.

The
net gain on sale of branches of $2.8 million in fiscal 2007 was due to the sale of three branches and their associated book of business, as well as one physical location. The
sale was completed during the second quarter of fiscal 2007 and produced the one-time gain on sale. The proceeds of the sale were invested in new market locations and new marketing
initiatives.

Loan
servicing income increased by $408,000 to $2.2 million for the year ended June 30, 2008, as compared to $1.8 million for the prior year, primarily due to
increased originated and purchased servicing rights for SDHDA mortgage loans. At June 30, 2008, the Bank serviced $932.9 million of mortgage loans for the SDHDA.

Fees
on deposits increased by $256,000 to $5.4 million during the year ended June 30, 2008, as compared to $5.1 million for the prior year, primarily due to a
$278,000 net increase in income from point-of-sale purchases by customers and ATM service fees, and a $21,000 increase in net NSF/OD fees.

Trust
income increased by $30,000 to $966,000 during the year ended June 30, 2008, as compared to the prior year primarily due to further diversification of trust activities.
Assets under management decreased from $126.4 million to $95.0 million.

Other
noninterest income for the year ended June 30, 2008, was $1.6 million as compared to $1.6 million for the prior year, a decrease of $71,000.

Noninterest Expense.Noninterest expense was $30.6 million for the year ended June 30, 2008, as compared to $29.6 million for the prior year,
an increase of $1.0 million. The increase in noninterest expense was due primarily to increases in compensation and employee benefits of $1.2 million, and occupancy and equipment of
$35,000, offset by a decrease in advertising costs of $464,000.

58

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Compensation
and employee benefits increased $1.2 million during the year ended June 30, 2008, as compared to the prior fiscal year primarily due to increases in employee
variable pay compensation of $1.2 million related to performance incentives and offset by a decrease in net healthcare costs of $667,000. Net healthcare costs, inclusive of health claims and
administration fees offset by stop loss and employee reimbursement under the Company's self-insured health plan, was $1.5 million for the fiscal year ended June 30, 2007, a
decrease of 31.0% compared to the prior fiscal year. The Company has had a self-insured health plan since January 1994. Management continues to believe the current structure is a
reasonable alternative to traditional healthcare plans over the long term. The level of healthcare costs which the Company incurs may vary from year to year. The reduction in net healthcare costs for
the fiscal year ending June 30, 2008, does not necessarily indicate a trend. This is a challenging area for all companies and the Company continues to review its healthcare plans in an effort
to provide its employees with affordable health care.

Advertising
costs decreased $464,000 to $1.1 million for the year ended June 30, 2008 as compared to $1.5 million for the prior year, primarily due to new deposit
package programs marketed during the prior year.

Occupancy
and equipment costs increased $35,000 during the year ended June 30, 2008, as compared to the prior fiscal year. This increase was primarily the result of $20,000 of
increased rent expense, and $11,000 of increased furniture and fixture depreciation expense.

Income Tax Expense.The Company's income tax expense increased $122,000, or 4.63%, for the year ended June 30, 2008 to $2.8 million compared to
$2.6 million for the prior year. The increase was due primarily to the increase in income before taxes. The effective tax rate for the years ended June 30, 2008, and June 30,
2007, was 32.13% and 32.94%, respectively.

Comparison of the Years Ended June 30, 2007 and June 30, 2006

General.The Company's income was $5.4 million or $1.35 and $1.33 for basic and diluted earnings per share, respectively, for the year ended June 30,
2007, an $875,000 increase in earnings compared to $4.5 million or $1.15 and $1.13 for basic and diluted earnings per share, respectively, for the prior year. For the year ended June 30,
2007, the return on average equity was 9.01%, a 9.5% increase compared to 8.23% in the prior year. For the year ended June 30, 2007, the return on average assets was 0.55%, a 12.2% increase
compared to 0.49% in the prior year. As discussed in more detail below, the increases were due to a variety of key factors, including decreases in provision for losses on loans and leases of
$4.1 million and increases in noninterest income of $345,000 offset by increases in noninterest expense of $3.1 million.

Interest and Dividend Income.Interest and dividend income was $61.9 million for the year ended June 30, 2007 as compared to $53.4 million for
the prior year, an increase of $8.5 million or 15.8%. A $4.8 million increase in interest and dividend income was the result of an 8.9% increase in the average yield on interest-earning
assets and a $3.7 million increase in interest and dividend income was the result of a 6.4% increase in the average volume of total interest-earning assets. The average yield on interest-
earning assets was 6.75% for the year ended June 30, 2007 as compared to 6.20% for the prior year. The average volume of loans and leases receivable increased from $703.8 million for the
year ended June 30, 2006 to $758.5 million for the year ended June 30, 2007. For the year ended June 30, 2007 the average yield on loans and leases receivable was 7.17%, an
increase of 7.2% from 6.69% in the prior year. The overall increase in interest and dividend income was due in part to the repricing of loans and investments that generally reflected national interest
rates.

Interest Expense.Interest expense was $36.2 million for the year ended June 30, 2007 as compared to $27.7 million for the prior year, an
increase of $8.5 million or 30.5%. A $5.9 million increase was the result of a 27.9% increase in the average rate paid on interest-bearing deposits. The average rate on interest-bearing
deposits was 4.13% for the year ended June 30, 2007 as compared to 3.23% for the

59

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prior
year. A $311,000 increase in interest expense was the result of a 6.7% increase in the average yield on FHLB advances and other borrowings to 4.77% for the year ended June 30, 2007
compared to 4.47% for the prior fiscal year and a $607,000 decrease in interest expense was the result of an 11.3% decrease in the average balance of FHLB advances and other borrowings. In addition,
interest expense increased $444,000 due to the average yield on subordinated debentures payable to trust increasing to 9.61% for the year ended June 30, 2007 compared to 8.01% for the prior
fiscal year.

Net Interest Income.The Company's net interest income for the year ended June 30, 2007 decreased $15,000, or 0.1%, to $25.6 million compared to
$25.6 million for the prior year. The Company's net interest margin decreased to 2.80% for the year ended June 30, 2007 as compared to 2.98% for the prior year. The Company continues to
have a diversified loan portfolio comprised of a mix of consumer and business type lending. This mix helps the Company manage the net interest margin and interest rate risk by retaining loan and lease
production on the balance sheet or looking at alternatives through secondary markets.

Provision for Losses on Loans and Leases.The allowance for loan and lease losses is maintained at a level which is considered by management to be adequate to
absorb probable losses on existing loans and leases that may become uncollectible, based on an evaluation of the collectability of the loans and leases and prior loan and lease loss experience. The
evaluation takes into consideration such factors as changes in the nature and volume of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases, and
current economic conditions that may affect the borrower's ability to pay. The allowance for loan and lease losses is established through a provision for losses on loans and leases charged to expense.
See "Asset Quality" above for further discussion.

Provision
for losses on loans and leases decreased $4.1 million, or 77.3%, to $1.2 million for the year ended June 30, 2007 as compared to $5.3 million in the
prior year. Net charge-offs decreased from $4.7 million during fiscal 2006 to $1.0 million during fiscal 2007. Nonperforming assets increased $114,000 for the year ended
June 30, 2007.

The
allowance for losses on loans and leases at June 30, 2007 was $5.9 million. The allowance increased from the June 30, 2006 balance of $5.7 million
primarily as a result of charge-offs
exceeding recoveries by $1.0 million offset by the provision for losses on loans and leases of $1.2 million. The ratio of allowance for loan and lease losses to nonperforming loans and
leases at June 30, 2007 was 167.87% compared to 168.11% at June 30, 2006. The allowance for loan and lease losses to total loans and leases at June 30, 2007 was 0.76% compared to
0.77% at June 30, 2006. The Bank's management believes that the June 30, 2007 recorded allowance for loan and lease losses was adequate to provide for probable losses on the related
loans and leases, based on its evaluation of the collectability of loans and leases and prior loss experience.

Noninterest Income.Noninterest income was $13.2 million for the year ended June 30, 2007 as compared to $12.9 million for the year ended
June 30, 2006, an increase of $345,000, or 2.7%. The increase in noninterest income was due primarily to increases in loan servicing income of $680,000, fees on deposits of $595,000, trust
income of $87,000 and a one-time gain on sale of branches of $2.8 million, offset by decreases in other noninterest income of $174,000 and the one-time gain on sale of
land of $3.6 million completed in fiscal 2006.

The
net gain on sale of branches of $2.8 million was due to the sale of three branches and their associated book of business, as well as one physical location. The sale was
completed during the second quarter of fiscal 2007 and produced the one-time gain on sale. The proceeds of the sale were invested in new market locations and new marketing initiatives.

The
net gain on sale of land of $3.6 million was due to the completion of the sale of a parcel of land purchased for expansion several years ago. The sale was completed during the
second quarter of

60

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fiscal
2006 and produced the one-time gain on sale. The Company has acquired other locations in the interim and determined that it no longer needed this parcel for the expansion planned.

Loan
servicing income increased by $680,000 to $1.8 million for the year ended June 30, 2007 as compared to $1.1 for the prior year, primarily due to the purchase of
servicing rights during the first quarter of fiscal 2007.

Fees
on deposits increased by $595,000 to $5.1 million during the year ended June 30, 2007 as compared to $4.5 million for the prior year, primarily due to a
$357,000 increase in net NSF/OD fees and a $142,000 net increase in income from point-of-sale purchases by customers and ATM service fees.

Trust
income increased by $87,000 to $936,000 during the year ended June 30, 2007 as compared to the prior year primarily due to assets under management increasing from
$114.6 million to $126.4 million.

Other
noninterest income for the year ended June 30, 2007 was $1.6 million as compared to $1.8 million for the prior year, a decrease of $174,000. This decrease was
primarily due to $137,000 of securitization income recorded in fiscal 2006. There was no securitization income recorded in fiscal 2007. See "Consumer Lending  Other Consumer Lending" and
"Off-Balance Sheet Financing Arrangements" of this Form 10-K for more information on the
automobile securitization.

Noninterest Expense.Noninterest expense was $29.6 million for the year ended June 30, 2007 as compared to $26.5 million for the prior year,
an increase of $3.1 million. The increase in noninterest expense was due primarily to increases in compensation and employee benefits of $1.7 million, advertising of $685,000 and
occupancy and equipment of $459,000.

Compensation
and employee benefits increased $1.7 million during the year ended June 30, 2007 as compared to the prior fiscal year primarily due to increases in employee
variable pay compensation of $819,000 related to performance incentives and net healthcare costs of $654,000. Net healthcare costs, inclusive of health claims and administration fees offset by stop
loss and employee reimbursement under the Company's self-insured health plan, was $2.1 million for the fiscal year ended June 30, 2007, an increase of 43.7% compared to the
prior fiscal year. The Company has had a self-insured health plan since January 1994. Management continues to believe the current structure is a reasonable alternative to traditional
healthcare plans over the long term. This is a challenging area for all companies and the Company continues to review its healthcare plans in an effort to provide its employees with affordable health
care.

Advertising
costs increased $685,000 to $1.5 million for the year ended June 30, 2007 as compared to $856,000 for the prior year, primarily due to new deposit package
programs marketed during the year.

Occupancy
and equipment costs increased $459,000 during the year ended June 30, 2007 as compared to the prior fiscal year. This increase was primarily the result of $195,000 of
increased rent expense, $128,000 of increased furniture and fixture depreciation expense and $61,000 of increased building and property maintenance expense.

Income Tax Expense.The Company's income tax expense increased $430,000, or 19.4%, for the year ended June 30, 2007 to $2.6 million compared to
$2.2 million for the prior year. The increase was due primarily to the increase in income before taxes. The effective tax rate for the years ended June 30, 2007 and June 30, 2006
was 32.94%.

Liquidity and Capital Resources

The Company's liquidity is comprised of three primary classifications: cash flows from operating activities, cash flows from investing
activities and cash flows from financing activities. Net cash provided

61

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by
operating activities was $14.3 million for the fiscal year ended June 30, 2008. For the fiscal year ended June 30, 2007, net cash provided by operating activities was
$10.3 million. Net cash used in investing activities was $111.5 million for the fiscal year ended June 30, 2008. For the fiscal year ended June 30, 2007, net cash used in
investing activities was $44.1 million. Net cash provided by financing activities for the fiscal year ended June 30, 2008, was $95.9 million primarily due to an increase in FHLB
borrowing. This compares to net cash provided by financing activities in the prior fiscal year of $29.2 million primarily due to a net increase in deposit accounts of $80.4 million
offset by a $33.6 million sale of deposits related to branch sales completed in the second quarter of fiscal 2007.

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

Liquidity
management is both a daily and long-term responsibility of management. The Bank adjusts its investments in liquid assets based upon management's assessment of
(i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits, and (v) the objectives of its
asset/liability management program. Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term government and agency obligations. During the year ended
June 30, 2008, the Bank increased its borrowings with the FHLB and other borrowings by $129.8 million.

The
Bank anticipates that it will have sufficient funds available to meet current loan commitments. At June 30, 2008, the Bank had outstanding commitments to originate and
purchase mortgage and commercial loans of $40.4 million and to sell mortgage loans of $11.9 million. Commitments by the Bank to originate loans are not necessarily executed by the
customer. The Bank monitors the ratio of commitments to funding for use in liquidity management. At June 30, 2008, the Bank had no
outstanding commitments to purchase investment securities available for sale and no commitments to sell investment securities available for sale.

Although
in-market deposits are the Bank's primary source of funds, the Bank's policy has been to utilize borrowings where the funds can be invested in either loans or
securities at a positive rate of return or to use the funds for short-term liquidity purposes. The Bank currently has $15.0 million in an unsecured line of federal funds with First
Tennessee Bank, NA. The Bank currently has a $10.0 million federal funds accommodation from Northern Trust. There were no funds drawn on any line of credit at June 30, 2008. Also, the
Bank has implemented arrangements to acquire out-of-market certificates of deposit as an additional source of funding. As of June 30, 2008, the Bank had
$27.3 million in out-of-market certificates of deposit. The Bank may also seek other sources of contingent liquidity including additional federal funds purchased lines
with correspondent banks and lines of credit with the FRB.

The
Company has a line of credit for $6.0 million with First Tennessee Bank, NA for liquidity needs in the Company. The note is short-term in duration and is subject
to annual review. In case of default on the notes, the Company's ability to pay cash dividends may be restricted. At June 30, 2008, no funds were advanced on the line of credit. See
Note 7 of "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Form 10-K,
Part II, Item 7 "Financial Condition Data" of this Form 10-K and Exhibit 10.10 of this Form 10-K for additional information.

62

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

During
the year ended June 30, 2008, the Company had in effect a stock buy back program which was publicly announced on April 30, 2007 in which the Company was permitted to
repurchase up to 10% of the common stock of the Company that was outstanding on May 1, 2007. This stock buy back program expired on April 30, 2008. There were 99,092 shares purchased
under the program during the fiscal years ended June 30, 2007, and June 30, 2008.

The
Company approved a new stock buy back program, which began on May 1, 2008, and was publicly announced on April 28, 2008. Under this program, the Company may repurchase
up to 10% of the common stock of the Company outstanding on May 1, 2008, which equals 395,321 shares, through April 30, 2009. There were 6,527 shares purchased under the program during
the fiscal year ended June 30, 2008.

Savings
institutions insured by the FDIC are required to meet three regulatory capital requirements. If a requirement is not met, regulatory authorities may take legal or administrative
actions, including restrictions on growth or operations or, in extreme cases, seizure. Institutions not in compliance may apply for an exemption from the requirements and submit a recapitalization
plan. Under these capital requirements, at June 30, 2008, the Bank met all current capital requirements.

The
OTS has adopted capital requirements for savings institutions comparable to the requirement for national banks. The minimum OTS core capital requirement for
well-capitalized institutions is 5.00% of total adjusted assets. The Bank had Tier 1 (core) capital of 7.78% at June 30, 2008. The minimum OTS risk-based capital
requirement for
well-capitalized institutions is 10.00% of risk-weighted assets. The Bank had risk-based capital of 10.83% at June 30, 2008.

Off-Balance Sheet Financing Arrangements

During fiscal 2003, the Bank securitized and sold consumer automobile loans in the amount of $50.0 million through HFSC and Home
Federal Automobile Securitization Trust 2003-A. As a result of this securitization transaction, the Bank had off-balance sheet automobile loans in the amount of
$35.5 million at June 30, 2003. At June 30, 2005, the outstanding balance was $6.6 million. As part of the sales transaction, the Bank retained servicing responsibilities
and a retained interest in the interest payments from the receivables, which was subordinated to third party investors' interests. The receivables were sold without legal recourse to third party
conduits. The sale provided the Bank with an additional source of liquidity at interest rates more favorable than it could receive through other forms of financing. It also assisted in reducing
capital requirements and credit risk to the Bank, in addition to giving the Bank access to the national capital markets. The Bank had the option to execute a clean-up call when the
remaining balance of the loans outstanding was at 10% of the original balance. On November 9, 2005, the Bank exercised its option to execute the cleanup call by purchasing the outstanding
principal balances of the securitized motor vehicle installment loans.

Impact of Inflation and Changing Prices

The Consolidated Financial Statements and Notes thereto presented in Part II, Item 8 "Financial Statements and
Supplementary Data" of this Form 10-K have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact on the Bank's performance than do the effects of
general

63

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levels
of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Effect of New Accounting Standards

Note 1, "Summary of Significant Accounting Policies," of the notes to consolidated financial statements of this
Form 10-K discusses new accounting policies adopted by the Company during fiscal 2008. The expected impact of accounting policies recently issued or proposed but not yet required to
be adopted are discussed below. To the extent the adoption of new accounting standards materially affects the Company's financial condition, results of operations, or liquidity, the impacts are
discussed in the applicable sections of this financial review and the notes to consolidated financial statements.

In
September 2006, FASB issued Statement of Financial Accounting Standards No. 157 (SFAS 157), "Fair Value Measurements." SFAS 157 provides a common definition of
fair value and a framework for measuring assets and liabilities at fair values when a particular standard prescribes it. In addition, the Statement expands disclosures about fair value measurements.
As required by SFAS 157, the Company will adopt this new accounting standard effective July 1, 2008. Management does not expect that adoption of SFAS 157 will have a material
impact on our financial statements.

In
February 2007, FASB issued Statement of Financial Accounting Standards No. 159 (SFAS 159), "The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an Amendment of FASB Statement No. 115." SFAS 159 allows companies the choice to measure many financial instruments and certain other items at fair
value. This gives a company the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting
provisions. The Statement is effective July 1, 2008. Management does not expect that adoption of SFAS 159 will have a material impact on our financial statements.

In
December 2007, FASB issued Statement of Financial Accounting Standards No. 141R (SFAS 141R), "Business Combinations." SFAS 141R improves reporting by creating
greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial
statements. SFAS 141R is effective July 1, 2009. Management has reviewed SFAS 141R and does not expect the adoption of this statement to have a material impact on the Company's
consolidated financial condition, results of operations or cash flow.

In
December 2007, FASB issued Statement of Financial Accounting Standards No. 160 (SFAS 160), "Noncontrolling Interests in Consolidated Financial Statementsan
amendment of ARB No. 51." SFAS 160 is effective for the Company beginning July 1, 2009. SFAS 160 improves the relevance, comparability, and transparency of financial
information provided to investors by requiring all entities to report noncontrolling (minority) interest in subsidiaries in the same wayas equity in the consolidated financial statements.
The Company does not currently have any noncontrolling interest in the consolidated financial statements.

In
March 2008, FASB issued Statement of Financial Accounting Standards No. 161 (SFAS 161), "Disclosures about Derivative Instruments and Hedging Activities."
SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects
on an entity's financial position, financial performance, and cash flows. The Company will adopt SFAS 161 effective January 1, 2009. Management has reviewed SFAS 161 and does not
expect the adoption of this statement to have a material impact on the Company's consolidated financial condition, results of operations or cash flow.

In
May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). This statement makes the hierarchy explicitly and directly
applicable to

64

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preparers
of financial statements, a step that recognizes preparers' responsibilities for selecting the accounting principles for their financial statements. SFAS 162 provides for slight
modifications to the current hierarchy in place by adding FASB Staff Positions, Statement 133 Implementation Issues, and EITF D-Topics to it. The Company will adopt SFAS 162
effective November 15, 2008.

In
May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance ContractsAn Interpretation of FASB Statement No. 60" ("SFAS 163"). This
statement requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial
obligation. SFAS 163 also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and
claim liabilities. Expanded disclosures about financial guarantee insurance contracts are also required by this statement. SFAS 163 is effective July 1, 2009. The Company is in the
process of assessing the impact on its results of operations, financial position, and cash flow.

Asset/Liability and Risk Management

Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency
exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. The Bank, like other financial institutions, is subject to interest rate risk to
the extent that its interest-bearing liabilities with short- and medium-term maturities mature or reprice more rapidly than its interest-earning assets. The Company does not currently
engage in trading activities to control interest rate risk although it may in the future, if necessary, to manage interest rate risk. Interest rate swaps may be entered into to modify interest rate
risk. See Note 9 of "Notes to Consolidated Financial Statements" of this Form 10-K for additional information.

As
a continuing part of its financial strategy, the Bank considers methods of managing this asset/liability mismatch consistent with maintaining acceptable levels of net interest income.
In order to properly monitor interest rate risk, the Board of Directors has created an Asset/Liability Committee whose principal responsibilities are to assess the Bank's asset/liability mix and
recommend strategies to the Board that will enhance income while managing the Bank's vulnerability to changes in interest rates.

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

One
approach used to quantify interest rate risk is the net portfolio value ("NPV") analysis. In essence, this analysis calculates the difference between the present value of the
liabilities and the present value of expected cash flows from assets and off-balance sheet contracts. The following table sets forth, at June 30, 2008 and June 30, 2007, an
analysis of the Company's interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve (+ 300 or -100 basis
points, measured in 100 basis point increments). Due to the low prevailing interest rate environment, -200 and -300 NPV was not estimated by the Bank at June 30, 2008.

Even
if interest rates change in the designated amounts, there can be no assurance that the Company's assets and liabilities would perform as set forth below. In addition, a change in
U.S.

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Treasury
rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause significantly different changes to the NPV than indicated below.

June 30, 2008Estimated Increase
(Decrease) in NPVChange in
Interest Rates

Estimated
NPV
AmountAmount

Percent(Dollars in Thousands)Basis Points+300

$
110,881

$
(1,943
)

(2
)%+200


113,956


1,132


1+100


115,324


2,500


2


112,824





-100


105,084


(7,740
)

(7
)


June 30, 2007Estimated Increase
(Decrease) in NPVChange in
Interest Rates

Estimated
NPV
AmountAmount

Percent(Dollars in Thousands)Basis Points+300

$
99,706

$
(7,529
)

(7
)%+200


102,142


(5,093
)

(5
)+100


106,941


(293
)

(0
)


107,234





-100


103,321


(3,913
)

(4
)-200


93,723


(13,511
)

(13
)


Contractual Obligations

The following table sets forth information with respect to the Company's contractual obligations as of June 30, 2008. Operating
lease obligations are primarily related to the lease of certain branch offices, which the Company has committed to as of June 30, 2008.

Payments due by periodLess Than
1 Year

1 to 3 Years

3 to 5 Years

Greater Than
5 Years

TotalDeposits without a stated maturity

$
430,987










$
430,987Certificates of Deposit


220,972


118,479


13,762


37


353,250FHLB and Federal Funds


41,420


59,855


46,500


50,500


198,275Long-Term Debt Obligations











27,837


27,837Operating Lease Obligations


801


1,287


654


2,393


5,135Total Contractual Obligations

$
694,180

$
179,621

$
60,916

$
80,767

$
1,015,484


66

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Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk Management

The Company's net income is largely dependent on its net interest income. Net interest income is susceptible to interest rate risk to
the degree that interest-bearing liabilities with short- and medium-term maturities mature or reprice more rapidly than its interest-earning assets. When interest-bearing liabilities
mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net income.

In
an attempt to manage its exposure to change in interest rates, management monitors the Company's interest rate risk. The Asset/Liability Committee meets periodically to review the
Company's interest rate risk position and profitability, and to recommend adjustments for consideration by executive management. Management also reviews the Bank's securities portfolio, formulates
investment strategies, and oversees the timing and implementation of transactions to assure attainment of the Board's objectives in the most effective manner. In managing market risk and the
asset/liability mix, the Bank has placed its emphasis on developing a portfolio in which, to the extent practicable, assets and liabilities reprice within similar periods. Notwithstanding the
Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income. The Company does not currently engage in
trading activities or use derivative instruments to control interest rate risk although it may in the future, if necessary, to manage interest rate risk.

In
adjusting the Company's asset/liability position, management attempts to manage the Company's interest rate risk while enhancing net interest margins. At times, depending on the level
of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, management may determine to increase the Company's
interest rate risk position somewhat in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to
fluctuations in the difference between long- and short-term interest rates.

Consistent
with the asset/liability management philosophy described above, the Company has taken several steps to manage its interest rate risk. The Company has structured its security
portfolio to shorten the repricing of its interest-earning assets. The Company's mortgage-backed securities and securities available for sale typically have either short or medium terms to maturity or
adjustable interest rates. At June 30, 2008, the Company had investment securities available for sale of $17.8 million with contractual maturities of five years or less.
Variable-rate mortgage-backed securities totaled $63.1 million at June 30, 2008. Mortgage-backed securities amortize and experience prepayments of principal. The Company has
received average cash flows from principal paydowns, maturities, sales and calls of all securities available for sale of $52.0 million annually over the past three fiscal years. The Company
also manages interest rate risk reduction by utilizing non-certificate depositor accounts for certain liquidity purposes. The Board and management believe that such accounts carry a lower
cost than certificate accounts, and that a material portion of such accounts may be more resistant to changes in interest rates than are certificate accounts. At June 30, 2008, the Company had
$78.6 million of savings accounts, $171.7 million of money market accounts and $180.7 million of checking accounts, representing 55.0% of total depositor account balances.

One
approach used to quantify interest rate risk is the NPV analysis. In essence, this analysis calculates the difference between the present value of liabilities and the present value
of expected cash flows from assets and off-balance sheet contracts. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
OperationsAsset/Liability and Risk Management" of this Form 10-K for further discussion regarding the NPV analysis and an analysis of the Company's interest rate risk
as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve.

67

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Item 8.Financial Statements and Supplementary Data

Management's Report on
Internal Control over Financial Reporting

HF Financial Corp.'s (the "Company") management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended). Under the supervision and with the participation of
the Company's management, including its Chairman, President and Chief Executive Officer and its Executive Vice President, Chief Financial Officer and Treasurer, the Company conducted an evaluation of
the effectiveness of its internal control over financial reporting as of June 30, 2008 based on the framework in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of
June 30, 2008 in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.

Pursuant
to temporary rules of the Securities and Exchange Commission, the Company's Annual Report on Form 10-K for the year ended June 30, 2008 does not
contain an attestation
report of the Company's registered public accounting firm regarding the Company's internal control over financial reporting.

/s/CURTIS L. HAGECurtis L. Hage Chairman, President and
Chief Executive Officer

/s/DARREL L. POSEGATEDarrel L. Posegate Executive Vice President,
Chief Financial Officer and Treasurer


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TABLE OF CONTENTS

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S REPORT ON THE FINANCIAL STATEMENTS


70CONSOLIDATED FINANCIAL STATEMENTSStatements of Financial Condition


71Statements of Income


72Statements of Stockholders' Equity


73Statements of Cash Flows


74Notes to Consolidated Financial Statements


76


69

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LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
HF Financial Corp.
Sioux Falls, South Dakota

We
have audited the accompanying consolidated statements of financial condition of HF Financial Corp. as of June 30, 2008 and 2007, and the related consolidated statements
of income, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2008. HF Financial Corp.'s management is responsible for these
consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but
not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such an opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HF Financial Corp. as of
June 30, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2008, in conformity with accounting
principles generally accepted in the United States of America.

LOGO

Sioux
Falls, South Dakota
September 26, 2008

70

---





HF FINANCIAL CORP.        CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION        JUNE 30, 2008 AND 2007        (DOLLARS IN THOUSANDS, except share data)

2008

2007ASSETSCash and cash equivalents

$
21,170

$
22,476Securities available for sale (Note 2)


225,004


142,223Federal Home Loan Bank stock (Note 7)


11,245


5,058Loans held for sale (Note 3)


8,796


8,776Loans and leases receivable (Note 3)


777,777


761,599Accrued interest receivable


7,540


8,495Office properties and equipment, net of accumulated depreciation (Note 5)


14,849


15,830Foreclosed real estate and other properties


643


508Cash value of life insurance


14,050


13,519Servicing rights (Note 4)


11,189


10,871Goodwill, net


4,951


4,951Other assets (Note 10)


6,280


7,148$
1,103,494

$
1,001,454LIABILITIES AND STOCKHOLDERS' EQUITYLiabilitiesDeposits (Note 6)

$
784,237

$
815,864Advances from Federal Home Loan Bank and other borrowings (Note 7)


198,454


68,600Subordinated debentures payable to trusts (Note 8)


27,837


27,837Advances by borrowers for taxes and insurance


10,795


10,337Accrued expenses and other liabilities (Note 14)


17,968


16,546Total liabilities


1,039,291


939,184Stockholders' equity (Notes 12, 13 and 14)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, 6,035,447 and 5,991,200 shares issued at June 30, 2008 and June 30, 2007, respectively


60


60Common stock subscribed for but not issued


95


81Additional paid-in capital


21,905


20,898Retained earnings, substantially restricted


76,041


71,900Accumulated other comprehensive (loss), net of related deferred tax effect (Note 17)


(3,001
)

(1,502
)Less cost of treasury stock, 2,083,455 and 1,977,836 shares at June 30, 2008 and June 30, 2007, respectively


(30,897
)

(29,167
)64,203


62,270$
1,103,494

$
1,001,454


See
Notes to Consolidated Financial Statements

71

---



HF FINANCIAL CORP.        CONSOLIDATED STATEMENTS OF INCOME        YEARS ENDED JUNE 30, 2008, 2007 AND 2006        (DOLLARS IN THOUSANDS, except share
data)

2008

2007

2006Interest, dividend and loan fee income:Loans and leases receivable

$
53,972

$
54,344

$
47,096Investment securities and interest-bearing deposits


9,202


7,530


6,31563,174


61,874


53,411Interest expense:Deposits


24,693


28,505


20,175Advances from Federal Home Loan Bank and other borrowings


8,605


7,735


7,58733,298


36,240


27,762Net interest income


29,876


25,634


25,649Provision for losses on loans and leases


1,994


1,198


5,279Net interest income after provision for losses on loans and leases


27,882


24,436


20,370Noninterest income:Gain on sale of branches, net





2,763


Gain on sale of land, net








3,557Fees on deposits


5,389


5,133


4,538Loan servicing income


2,211


1,803


1,123Gain on sale of loans, net


1,197


923


969Earnings on cash value of life insurance


626


597


570Trust income


966


936


849Commission and insurance income


447


500


531Gain on sale of securities, net


3





3Other


494


541


71111,333


13,196


12,851Noninterest expense:Compensation and employee benefits


19,616


18,379


16,691Occupancy and equipment


3,832


3,797


3,338Check and data processing expense


2,416


2,299


2,165Marketing


1,077


1,541


856Foreclosed real estate and other properties, net


181


101


184Other


3,484


3,488


3,26530,606


29,605


26,499Income before income taxes


8,609


8,027


6,722Income tax expense (Note 10)


2,766


2,644


2,214Net income

$
5,843

$
5,383

$
4,508Basic earnings per share (Note 13):

$
1.47

$
1.35

$
1.15Diluted earnings per share (Note 13):


1.45


1.33


1.13Dividend declared per share


0.43


0.42


0.41


See
Notes to Consolidated Financial Statements

72

---





HF FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2008, 2007 AND 2006
(DOLLARS IN THOUSANDS, except share data)

Common
Stock

Common
Stock
Subscribed

Additional
Paid-in
Capital

Retained
Earnings

Deferred
Compensation

Accumulated
Other
Comprehensive
(Loss)

Treasury
Stock

TotalBalance, June 30, 2005

$
55

$
1,266

$
19,190

$
65,267

$
(2,140
)
$
(836
)
$
(29,167
)
$
53,635Comprehensive incomeNet income











4,508











4,508Net changes in unrealized gain (loss) on securities available for sale, net of deferred taxes

















(1,624
)




(1,624
)Net change in retained interest, net of deferred taxes

















(2
)




(2
)Comprehensive income























2,882Issuance of stock and exercise of stock options (Note 16)


4


(1,266
)

1,878














616Common stock subscribed for but not issued





65


(65
)













Cash dividends paid on common stock











(1,596
)










(1,596
)Reclassify stock-based compensation to additional paid-in capital








(2,140
)




2,140








Amortization of stock-based compensation








521














521Balance, June 30, 2006


59


65


19,384


68,179





(2,462
)

(29,167
)

56,058Comprehensive incomeNet income











5,383











5,383Net changes in unrealized gain (loss) on securities available for sale, net of deferred taxes

















1,058





1,058Comprehensive income























6,441Adjustment to initially apply FASB Statement No. 158, net of tax

















(98
)




(98
)Issuance of stock and exercise of stock options (Note 16)


1


(65
)

1,079














1,015Common stock subscribed for but not issued





81


(81
)













Cash dividends paid on common stock











(1,662
)










(1,662
)Amortization of stock-based compensation








516














516Balance, June 30, 2007


60


81


20,898


71,900





(1,502
)

(29,167
)

62,270Comprehensive incomeNet income











5,843











5,843Net changes in unrealized gain (loss) on securities

















(664
)




(664
)Net unrealized losses on defined benefit plan, net of deferred taxes

















(755
)




(755
)Net unrealized losses on derivatives and hedging activities, net of deferred taxes

















(80
)




(80
)Comprehensive income























4,344Issuance of stock and exercise of stock options (Note 16)





(81
)

630














549Common stock subscribed for but not issued





95


(95
)













Cash dividends paid on common stock











(1,702
)










(1,702
)Purchase of treasury stock




















(1,730
)

(1,730
)Amortization of stock-based compensation








472














472Balance, June 30, 2008

$
60

$
95

$
21,905

$
76,041

$


$
(3,001
)
$
(30,897
)
$
64,203


See Notes to Consolidated Financial Statements

73

---





HF FINANCIAL CORP.        CONSOLIDATED STATEMENTS OF CASH FLOWS        YEARS ENDED JUNE 30, 2008, 2007 AND 2006        (DOLLARS IN THOUSANDS, except
share data)

2008

2007

2006Cash Flows From Operating ActivitiesNet income

$
5,843

$
5,383

$
4,508Adjustments to reconcile net income to net cash provided by (used in) operating activitiesProvision for losses on loans and leases


1,994


1,198


5,279Depreciation


1,633


1,623


1,504Amortization of discounts and premiums on securities and other


1,710


1,817


1,781Stock based compensation


472


628


709Deferred income taxes (credits)


11


(485
)

(557
)Net change in loans held for resale


1,177


(230
)

3,584(Gain) on sale of loans, net


(1,197
)

(923
)

(969
)Realized (gain) on sale of securities, net


(3
)




(3
)(Gain) on sale of land








(3,557
)(Gain) on sale of branches





(2,763
)

Losses and provision-for-losses on sales of foreclosed real estate and other properties, net


58


52


30(Gain) Loss on disposal of office properties and equipment, net


(1
)

(9
)

29Change in other assets and liabilities (Note 20)


2,588


4,017


(660
)Net cash provided by operating activities


14,285


10,308


11,678Cash Flows From Investing ActivitiesNet change in loans outstanding


(19,842
)

(46,699
)

(57,548
)Proceeds from sale of land








4,863Purchase of land held for sale








(1,209
)Proceeds from sale of loans associated with branch sales





4,256


Securities available for saleSales, maturities and repayments


67,302


35,666


53,085Purchases


(151,405
)

(31,048
)

(59,781
)Purchase of Federal Home Loan Bank stock


(9,846
)

(4,172
)

(4,522
)Redemption of Federal Home Loan Bank stock


3,659


4,762


6,574Proceeds from sale of office properties and equipment


1,283


17


3Proceeds from sale of office properties and equipment associated with branch sales





340


Purchase of office properties and equipment


(1,934
)

(3,342
)

(3,170
)Purchase of servicing rights


(1,392
)

(6,140
)

(989
)Proceeds from sale of foreclosed real estate and other properties


701


2,277


715Net cash (used in) investment activities


(111,474
)

(44,083
)

(61,979
)


See
Notes to Consolidated Financial Statements

74

---



HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

YEARS ENDED JUNE 30, 2008, 2007 AND 2006

(DOLLARS IN THOUSANDS, except share data)

2008

2007

2006Cash Flows From Financing ActivitiesNet increase (decrease) in deposit accounts

$
(31,627
)
$
80,425

$
87,786Proceeds of advances from Federal Home Loan Bank and other borrowings


1,926,299


722,111


807,905Payments on advances from Federal Home Loan Bank and other borrowings


(1,796,445
)

(745,131
)

(835,949
)Payment of debt issue costs








(7
)Proceeds from issuance of subordinated debentures


5,000


10,000


Deposit account disbursements associated with branch sales





(33,563
)

Proceeds on core deposit premium





2,763


Redemption of subordinated debentures


(5,000
)

(10,000
)

Increase (decrease) in advances by borrowers


458


3,368


523Purchases of treasury stock


(1,730
)




Proceeds from issuance of common stock


630


903


428Cash dividends paid


(1,702
)

(1,662
)

(1,596
)Net cash provided by financing activities


95,883


29,214


59,090Increase (decrease) in cash and cash equivalents


(1,306
)

(4,561
)

8,789Cash and Cash EquivalentsBeginning


22,476


27,037


18,248Ending

$
21,170

$
22,476

$
27,037


See
Notes to Consolidated Financial Statements

75

---





HF FINANCIAL CORP.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        JUNE 30, 2008 AND 2007        (DOLLARS IN THOUSANDS, Except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of HF Financial Corp. and subsidiaries ("the Company") conform to accounting principles generally accepted in the United States of America and to
general practice within the industry. The following is a description of the more significant of those policies that the Company follows in preparing and presenting its consolidated financial
statements.

Nature of Operations

The Company, a unitary thrift holding company, was formed in November 1991, for the purpose of owning all of the outstanding stock of
Home Federal Bank ("the Bank"). The Company is incorporated under the laws of the State of Delaware and generally is authorized to engage in any activity that is permitted by the Delaware General
Corporation Law. The executive offices of the Company and its direct and indirect subsidiaries are located in Sioux Falls, South Dakota.

The
Bank was founded in 1929 and is a federally chartered stock savings bank headquartered in Sioux Falls, South Dakota. The Bank provides full-service consumer and
commercial business banking, including an array of financial products, to meet the needs of its market place. The Bank attracts deposits from the general public and uses such deposits, together with
borrowings and other funds, to originate one-to-four family residential, commercial business, consumer, multi-family, commercial real estate, construction and agricultural
loans. The Bank's consumer loan portfolio includes, among other things, automobile loans, home equity loans, loans secured by deposit accounts and student loans. The Bank also purchases
mortgage-backed securities and invests in U.S. Government and agency obligations and other permissible investments. The Bank receives loan servicing income on loans serviced for others and commission
income from credit-life insurance on consumer loans. The Bank, through its wholly-owned subsidiaries, offers annuities, mutual funds, life insurance and other financial products and
equipment leasing services.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company, the Company's wholly-owned subsidiaries,
HomeFirst Mortgage Corp. (the Mortgage Corp.), HF Financial Group, Inc. (HF Group), and Home Federal Bank (the Bank) and the Bank's wholly-owned subsidiaries, Hometown Insurors, Inc.
(Hometown), Mid America Capital Services, Inc. (Mid America Capital), Home Federal Securitization Corp. (HFSC), Mid-America Service Corporation and PMD, Inc. All intercompany
balances and transactions have been eliminated in consolidation.

Basis of Financial Statement Presentation and Use of Estimates

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the statement of financial condition and revenues and expenses for the fiscal year. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in the near-term related to the determination of the allowance for loan and lease losses,
self-insurance and servicing rights.

76

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash and Cash Equivalents

For purposes of reporting the statements of cash flows, the Company includes as cash equivalents all cash accounts which are not
subject to withdrawal restrictions or penalties and time deposits with original maturities of 90 days or less.

Trust Assets

Assets of the trust department, other than trust cash on deposit at the Bank, are not included in these consolidated financial
statements because they are not assets of the Bank.

Securities

Management determines the appropriate classification of securities at the date individual securities are acquired and evaluates the
appropriateness of such classifications at each statement of financial condition date.

Securities
available for sale are those debt securities that the Company intends to hold for an indefinite period of time, but may not hold necessarily to maturity, and all equity
securities. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value and unrealized gains or losses
are reported as increases or decreases in other comprehensive income net of the related deferred tax effect.

Declines
in the fair value of securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating
other-than-temporary impairment losses, management considers many factors including (1) the length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, (3) applicable rating(s) by an independent rating agency, and (4) the intent and ability of
the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Premiums
and discounts on securities are amortized over the contractual lives of those securities, except for mortgage-backed securities, for which prepayments are probable and
predictable, which are amortized over the estimated expected repayment terms of the underlying mortgages. The method of amortization results in a constant effective yield on those securities (the
interest method). Interest on debt securities is recognized in income as accrued. Realized gains and losses on the sale of securities are determined using the specific identification method.

Loans Held for Sale

Loans receivable, which the Bank may sell or intends to sell prior to maturity, are carried at the lower of net book value or fair
value on an aggregate basis. Such loans held for sale include loans receivable that management intends to use as part of its asset/liability strategy, or that may be sold in response to changes in
interest rates, changes in prepayment risk or other similar factors.

77

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans and Leases Receivable

Loans receivable are stated at unpaid principal balances, less the allowance for loan losses, and net of deferred loan origination
fees, costs and discounts.

Interest
income on loans is accrued over the term of the loan based upon the outstanding principal amount. Discounts and premiums on loans are amortized to income using the interest
method over the remaining period to contractual maturity, adjusted for prepayments.

Loans
and leases are generally classified as nonaccrual when there are reasonable doubts as to the collectability of principal and/or interest and/or when payment becomes 90 days
past due, except loans which are well secured and in the process of collection. Uncollectible interest on loans and leases that are impaired or contractually past due is charged off based on
management's periodic evaluation. The charge to interest income is equal to all interest previously accrued, and income is subsequently recognized only to the extent cash payments are received until,
in management's judgment, the
borrower's ability to make periodic interest and principal payments is no longer in doubt, in which case the loan is returned to accrual status.

The
Company's leases receivable are classified as direct finance leases. Under the direct financing method of accounting for leases, the total net payments receivable under the lease
contracts and the residual value of the leased equipment, net of unearned income, are recorded as a net investment in direct financing leases and the unearned income is recognized each month on a
basis which approximates the interest method.

The
allowance for loan and lease losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against
the allowance when management believes the uncollectability of a loan balance is confirmed.

The
allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in light of historical
experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A
loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and insignificant payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows

78

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

discounted
at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large
groups of similar balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential
loans for impairment disclosures.

Loan Origination Fees and Related Discounts

Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest
income using the interest method over the contractual life of the loans, adjusted for prepayments.

Commitment
fees and costs relating to commitments, the likelihood of exercise of which is remote, are recognized during the commitment period. If the commitment is subsequently exercised
during the commitment period, the remaining unamortized commitment fee at the time of exercise is recognized over the life of the loan as an adjustment of yield.

Loan Servicing

The cost allocated to servicing rights purchased or retained has been recognized as a separate asset. Servicing rights are initially
measured at fair value and are being amortized in proportion to and over the period of estimated net servicing income. Servicing rights are periodically evaluated for impairment based on the fair
value of those rights. Fair values are estimated using discounted cash flows based on current market rates of interest. For purposes of measuring impairment, the rights are stratified by one or more
predominant risk characteristics of the underlying loans. The Bank stratifies its capitalized servicing rights based on loan type. The Company performs quarterly testing to determine if loan servicing
rights purchased and retained servicing rights are impaired. As of June 30, 2008, and 2007, there was no impairment to loan servicing rights purchased and retained servicing rights.

Goodwill

Goodwill is the difference between the purchase price and the amounts assigned to the net assets acquired and accounted for under the
purchase method of accounting. Prior to July 2002, goodwill was amortized over 10 years. Subsequent to the provisions of the Financial Accounting Standards Board (FASB) Statement
No. 142,Goodwill and Other Intangible Assets, which requires that goodwill no longer be amortized to earnings, but instead be reviewed at least
annually for impairment and the FASB issued Statement No. 147,Acquisitions of Certain Financial Institutions, which provides guidance on the
accounting for the acquisition of a financial institution, the Company no longer amortizes goodwill assets after October 1, 2002.

At
June 30, 2008, and 2007, the Company had $4,951 of goodwill that is not being amortized. The Company performs annual testing to determine if goodwill is impaired. As of
June 30, 2008, and 2007, there is no impairment with respect to goodwill.

79

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreclosed Real Estate and Other Properties

Real estate and other properties acquired through, or in lieu of, loan foreclosure are initially recorded at lower of cost or fair
value less estimated costs to sell at the date of foreclosure. Costs relating to improvement of property are capitalized, whereas costs relating to the holding of property are expensed. Valuations are
periodically performed by management and charge-offs to operations are made if the carrying value of a property exceeds its estimated fair value less estimated costs to sell.

Land
held for sale is carried at the lower of cost, including cost of improvements and amenities incurred subsequent to acquisition, or fair value less cost to sell. Costs relating to
the development and improvement of property are capitalized, whereas costs relating to holding property are expensed. The carrying amount of land held for sale was $1,362 at June 30, 2006, $0
at June 30, 2007, and $0 at June 30, 2008, as the property was sold in June 2007.

Office Properties and Equipment

Land is carried at cost. All other properties and equipment are carried at cost, less accumulated depreciation and amortization.
Buildings and improvements and leasehold improvements are depreciated primarily on the straight-line method over the estimated useful lives of the assets, which are five to fifty years.
Furniture, fixtures, equipment and automobiles are depreciated using both the straight-line and declining balance methods over the estimated useful lives of the assets, which are three to
twelve years.

Income Taxes

Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The impact
of a tax position will be recognized in the financial statements if that position is more-likely-than-not of being sustained upon examination, based on the
technical merits of the position. A tax position meeting the more-likely-than-not threshold is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon settlement. The Company classifies interest and penalties on the underpayment of income taxes, if any, as a component of income tax expense.

Earnings Per Share (EPS)

Basic EPS represents income available to common stockholders divided by the weighted-average number of common shares outstanding during
the period, inclusive of nonvested stock awards. Diluted EPS reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued.

80

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

During
the third quarter of fiscal 2006, the Company declared a 11/10-for-1 stock split of all of the common stock of the Company outstanding,
payable in the form of a 1/10-for-1 stock dividend. The 10% stock dividend was paid on April 24, 2006, to shareholders of record as of April 10,
2006. All per share data and number of common shares outstanding have been retroactively adjusted for all periods presented as a result of the stock split.

Segment Reporting

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated
regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company's reportable segments are "banking" (including leasing activities) and
"other." The "banking" segment is conducted through the Bank and Mid America Capital and the "other" segment is composed of smaller nonreportable segments, the Company and intersegment eliminations.

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

Banking

Other

Total2008Net interest income

$
31,907

$
(2,031
)
$
29,876Provision for losses on loans and leases


(1,994
)




(1,994
)Noninterest income


10,980


353


11,333Intersegment noninterest income


(105
)

(71
)

(176
)Noninterest expense


(29,703
)

(903
)

(30,606
)Intersegment noninterest expense





176


176Income (loss) before income taxes

$
11,085

$
(2,476
)
$
8,609Total assets

$
1,098,592

$
4,902

$
1,103,4942007Net interest income

$
29,057

$
(3,423
)
$
25,634Intersegment interest income


(878
)

878


Provision for losses on loans and leases


(1,198
)




(1,198
)Noninterest income


13,355


(159
)

13,196Intersegment noninterest income


(348
)

348


Noninterest expense


(28,828
)

(777
)

(29,605
)Intersegment noninterest expense


8


(8
)

Income (loss) before income taxes

$
11,168

$
(3,141
)
$
8,027Total assets

$
999,871

$
1,583

$
1,001,454


81

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Banking

Other

Total2006Net interest income

$
28,905

$
(3,256
)
$
25,649Intersegment interest income


(1,144
)

1,144


Provision for losses on loans and leases


(5,279
)




(5,279
)Noninterest income


9,584


3,267


12,851Intersegment noninterest income


(183
)

183


Noninterest expense


(25,857
)

(642
)

(26,499
)Intersegment noninterest expense


6


(6
)

Income (loss) before income taxes

$
6,032

$
690

$
6,722Total assets

$
958,352

$
2,942

$
961,294


Stock-based compensation

The Company adopted SFAS No. 123RShare-Based Paymenteffective as of
July 1, 2005 using the Black-Scholes option-pricing model and the modified prospective method in which compensation cost is recognized for all awards granted subsequent to the Company's
adoption of this statement as well as for the unvested portion of awards outstanding as of the Company's adoption of this statement. See Note 16 for more information on stock option and
incentive plans.

Self-insurance

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

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

The
accrual estimate for pending and incurred but not reported health claims is based upon a pending claims lag report provided by a third party provider. Although management believes
that it uses the best information available to determine the accrual, unforeseen health claims could result in adjustments and net earnings being significantly affected if circumstances differ
substantially from the assumptions used in estimating the accrual. Net healthcare costs are inclusive of health claims expenses

82

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

and
administration fees offset by stop loss and employee reimbursement. The following table is a summary of net healthcare costs by quarter during fiscal years 2008, 2007 and 2006.

2008

2007

2006Quarter ended September 30

$
221

$
436

$
419Quarter ended December 31


409


357


409Quarter ended March 31


328


760


382Quarter ended June 30


524


596


285Net healthcare costs

$
1,482

$
2,149

$
1,495


Interest Rate Contracts and Hedging Activities

The Company uses derivative financial instruments to modify exposures to changes in interest rates and market prices for other
financial instruments. To qualify for and maintain
hedge accounting, the Company must meet formal documentation and effectiveness evaluation requirements both at the hedge's inception and on an ongoing basis. The application of the hedge accounting
policy requires strict adherence to documentation and effectiveness testing requirements, judgment in the assessment of hedge effectiveness, identification of similar hedged item groupings, and
measurement of changes in the fair value of hedged items. If in the future derivative financial instruments used by the Company no longer qualify for hedge accounting, the impact on the consolidated
results of operations and reported earnings could be significant, as discussed below.

The
Company discontinues hedge accounting prospectively when (1) it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged
item (including forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is de-designated as a hedge instrument, because
it is unlikely that a forecasted transaction will occur; or (4) management determines that designation of the derivative as a hedge instrument is no longer appropriate.

When
hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will continue to be carried on the balance sheet at its fair
value, and gains and losses that were accumulated in other comprehensive income will be recognized immediately in earnings. In all other situations in which hedge accounting is discontinued, the
derivative will be carried at its fair value on the balance sheet, with subsequent changes in its fair value recognized in current-period earnings.

Interest
rate swaps utilized by the Company are each accounted for as a cash flow hedge, which hedge the interest rate risk in the cash flows of long-term,
variable-rate subordinated debentures. The cumulative change in fair value of the hedging derivatives, to the extent that it is expected to be offset by the cumulative change in
anticipated interest cash flows from the hedged exposures, will be deferred and reported as a component of other comprehensive income (OCI). Any hedge ineffectiveness will be charged to current-period
earnings.

83

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements

In March 2006, FASB issued SFAS No. 156,Accounting for Servicing of Financial
Asset, which amends SFAS No. 140. SFAS No. 156 requires the recognition of all separately recognized servicing assets and servicing liabilities to be initially
measured at fair value utilizing the amortization method or fair market value method. SFAS 156 is effective the beginning of the first fiscal
year that begins after September 15, 2006. Under the amortization method, an entity shall amortize the value of servicing assets or liabilities in proportion to and over the period of estimated
net servicing income or net servicing loss and assess servicing assets or liabilities for impairment or increased obligation based on fair value at each reporting date. Under the fair value method, an
entity shall measure servicing assets or liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur. The Company adopted
SFAS 156 effective July 1, 2007, and the adoption did not have a material impact on its results of operations, financial position, and liquidity.

In
June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
No. 109, ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The Interpretation requires the impact of a tax position to be recognized in the financial statements if that position is
more-likely-than-not of being sustained upon examination, based on the technical merits of the position. A tax position meeting the
more-likely-than-not threshold is then to be measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon
settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 was
effective for fiscal years beginning after December 15, 2006. The Company adopted the provisions of FIN 48 effective July 1, 2007, resulting in no cumulative effect adjustment to
retained earnings as of the date of adoption and determined that the adoption did not have a material impact on its results of operations, financial position, and liquidity.

In
September 2006, FASB issued Statement of Financial Accounting Standards No. 158 (SFAS 158),Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106 and 132R. SFAS 158 requires recognition of the overfunded or underfunded
status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits and any remaining transition amounts under
SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are
amortized as a component of net periodic cost. Also, the measurement datethe date at which the benefit obligation and plan assets are measuredis required to be the company's
fiscal year-end. As required by SFAS 158, the Company adopted the balance sheet recognition provisions at June 30, 2007, and adopted the year-end measurement date
at June 30, 2008.

84

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 2INVESTMENTS IN SECURITIES

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

June 30, 2008Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
(Losses)

Fair
Value(Dollars in Thousands)Debt securities:U.S. government agencies

$
8,490

$
173

$


$
8,663Federal Home Loan Bank


3,944


87





4,031Municipal bonds


12,319


51


(189
)

12,181Trust preferred securities


12,372





(2,080
)

10,29237,125


311


(2,269
)

35,167Equity securities:FNMA


8








8Federal Ag Mortgage


7


2





9Other Investments


253








253268


2





270Mortgage-backed securities


190,947


558


(1,938
)

189,567$
228,340

$
871

$
(4,207
)
$
225,004




June 30, 2007Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
(Losses)

Fair
Value(Dollars in Thousands)Debt securities:U.S. government agencies

$
12,092

$
21

$
(102
)
$
12,011Federal Home Loan Bank


17,433


12


(122
)

17,323Municipal bonds


8,088





(183
)

7,905Trust preferred securities


11,018


16


(126
)

10,90848,631


49


(533
)

48,147Equity securities:FNMA


8


18





26Federal Ag Mortgage


7


6





13Other Investments


184








184199


24





223Mortgage-backed securities


95,657


5


(1,809
)

93,853$
144,487

$
78

$
(2,342
)
$
142,223


85

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 2INVESTMENTS IN SECURITIES (Continued)

The
following tables present the age of gross unrealized losses and fair value by investment category in accordance with FASB Staff Position (FSP)
No. FAS 115-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments.

June 30, 2008Less than 12 Months

12 Months or More

TotalFair
Value

Gross
Unrealized
(Losses)

Fair
Value

Gross
Unrealized
(Losses)

Fair
Value

Gross
Unrealized
(Losses)(Dollars in Thousands)Debt securities:Municipal bonds

$
5,195

$
(127
)
$
1,250

$
(62
)
$
6,445

$
(189
)Trust preferred securities


8,627


(1,727
)

1,665


(353
)

10,292


(2,080
)13,822


(1,854
)

2,915


(415
)

16,737


(2,269
)Mortgage-backed securities


112,929


(1,208
)

24,758


(730
)

137,687


(1,938
)$
126,751

$
(3,062
)
$
27,673

$
(1,145
)
$
154,424

$
(4,207
)




June 30, 2007Less than 12 Months

12 Months or More

TotalFair
Value

Gross
Unrealized
(Losses)

Fair
Value

Gross
Unrealized
(Losses)

Fair
Value

Gross
Unrealized
(Losses)(Dollars in Thousands)Debt securities:U.S. government agencies

$
1,535

$
(23
)
$
7,954

$
(79
)
$
9,489

$
(102
)Federal Home Loan Bank


7,927


(40
)

5,989


(82
)

13,916


(122
)Municipal bonds


4,878


(73
)

2,816


(110
)

7,694


(183
)Trust preferred securities








1,893


(126
)

1,893


(126
)14,340


(136
)

18,652


(397
)

32,992


(533
)Mortgage-backed securities


28,809


(250
)

59,048


(1,559
)

87,857


(1,809
)$
43,149

$
(386
)
$
77,700

$
(1,956
)
$
120,849

$
(2,342
)


Management
does not believe that any individual unrealized loss as of June 30, 2008, represents an other-than-temporary impairment. The Company has the
ability and intent to hold those investments until a recovery of fair value.

The
unrealized losses reported for mortgage-backed securities relate primarily to securities issued by government agencies such as Federal National Mortgage Association ("FNMA"),
Government National Mortgage Association ("GNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"). These unrealized losses in total are primarily attributable to changes in interest rates and the
contractual cash flows of those investments which are guaranteed by an agency of the U.S. government.

86

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 2INVESTMENTS IN SECURITIES (Continued)

The
unrealized losses reported for trust preferred securities are attributable to rated pooled securities. There have been no rating changes regarding any of these investments during the
fiscal year. Based upon information available at financial statement date, management believes that it is probable that all amounts due according to contractual terms will be collected.

The
amortized cost and fair value of debt securities as of June 30, 2008, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities
because the borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized
Cost

Fair
ValueDue in one year or less

$
230

$
230Due after one year through five years


12,549


12,740Due after five years through ten years


7,984


8,058Due after ten years


16,362


14,13937,125


35,167Mortgage-backed securities


190,947


189,567$
228,072

$
224,734


Equity
securities have been excluded from the maturity table above because they do not have contractual maturities associated with debt securities.

Proceeds
from the sale of securities available for sale in fiscal 2008 were $5,511 and resulted in gross gains of $3. Proceeds from the sale of securities available for sale in fiscal
2007 were $3,542 and resulted in gross gains of $0. Proceeds from the sale of securities available for sale in fiscal 2006 were $14,061 and resulted in gross gains of $3.

At
June 30, 2008, and 2007, securities with a fair value of $208,715 and $128,099, respectively, were pledged as collateral for public deposits, borrowings and other purposes.

87

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 3LOANS AND LEASES RECEIVABLE

Loans and leases receivable at June 30, 2008, and 2007, consist of the following:

2008

2007Loans secured by real estateResidentialOne-to-four family

$
100,589

$
117,235Multi-family


46,118


34,126Commercial


185,038


181,121Agriculture


78,043


48,030Construction and development


8,286


18,674Business, consumer and otherCommercial business


125,118


100,013Automobile


58,807


98,238Junior liens on real estate


81,250


79,113Agriculture


91,934


69,608Equipment financing leases


19,250


22,267Other loans


7,724


7,079Loans on savings accounts


1,580


1,772803,737


777,276Add (less)Undisbursed portion of loans in process


(19,834
)

(10,387
)Deferred loan fees and unamortized discounts and premiums, net


(193
)

582Allowance for loan and lease losses


(5,933
)

(5,872
)$
777,777

$
761,599


Loans
held for sale totaling $8,796 at June 30, 2008, consist of $7,959 of one-to-four family fixed-rate loans, $223 of commercial loans and
$614 of student loans. Loans held for sale totaling $8,776 at June 30, 2007, consist of $8,290 of one-to-four family fixed-rate loans, $223 of commercial
loans and $263 of student loans.

Activity
in the allowance for loan losses included in continuing operations is summarized as follows for the fiscal years ended June 30:

2008

2007

2006Balance, beginning

$
5,872

$
5,657

$
5,076Provision charged to income


1,994


1,198


5,279Charge-offs


(2,245
)

(1,292
)

(5,123
)Recoveries


312


309


425Balance, ending

$
5,933

$
5,872

$
5,657


88

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 3LOANS AND LEASES RECEIVABLE (Continued)

The
following is a summary of information pertaining to impaired loans and nonaccrual loans as of and for the fiscal years ended June 30, 2008, 2007 and 2006:

2008

2007

2006Impaired loans without a valuation allowance

$
514

$
962

$
325Impaired loans with a valuation allowance


316


519


Total impaired loans

$
830

$
1,481

$
325Valuation allowance related to impaired loans

$
130

$
385

$
Nonaccruing loans and leases

$
2,324

$
2,190

$
1,035Accruing loans and leases delinquent more than 90 days


781


1,308


2,330Average investment in impaired loans


885


966


2,604Interest income recognized on impaired loans


17


6


7


No
additional funds are committed to be advanced in connection with impaired loans.

The
Company has granted loans to directors, executive officers or related interests. These loans were made on substantially the same terms, including rates and collateral, as those
prevailing at the time for comparable transactions with other unrelated customers, and do not involve more than a normal risk of collection. The aggregate amount of loans to such related parties was
approximately $4,765 and $3,442 at June 30, 2008 and 2007.

NOTE 4LOAN SERVICING

Mortgage loans serviced for others (primarily the South Dakota Housing Development Authority) are not included in the accompanying consolidated statements of financial condition. The
unpaid principal balances of mortgage loans serviced for others were $1,024,984 and $970,188 at June 30, 2008, and 2007, respectively.

Custodial
balances maintained in connection with mortgage loan servicing, and included in advances by borrowers for taxes and insurance, were approximately $9,758 and $9,210, at
June 30, 2008, and 2007, respectively.

The
carrying values of mortgage and consumer servicing rights were $11,189 and $10,871 at June 30, 2008, and 2007, respectively. The fair values of these rights were $16,629 and
$15,740 at June 30, 2008, and 2007, respectively. The fair values of the servicing rights were estimated as the present value of the expected future cash flows using a discount rate of 10%.
During fiscal years 2008 and 2007, servicing rights approximating $1,634 and $6,341, respectively, were capitalized. Fiscal 2007 servicing rights include the purchase of $4,956 rights. The Company
recognized expense for amortization of the cost of servicing rights in the amount of $1,317, $1,117 and $757 for the fiscal years ended June 30, 2008, 2007 and 2006, respectively.

No
valuation allowances were provided for servicing rights capitalized during the fiscal years ended June 30, 2008, and 2007.

89

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 5OFFICE PROPERTIES AND EQUIPMENT

2008

2007Land

$
1,734

$
1,920Buildings and improvements


18,304


19,025Leasehold improvements


2,201


2,199Furniture, fixtures, equipment and automobile


16,887


15,37439,126


38,518Less accumulated depreciation and amortization


(24,277
)

(22,688
)$
14,849

$
15,830


The
Company leases numerous telephone and office equipment, which require minimum rentals totaling $299 through the year ending June 30, 2012. In addition, the Company has leased
property under various operating lease agreements, which expire at various times. The total rental commitments at June 30, 2008, under the leases are as follows:

2009

$
8012010


7262011


5612012


3742013


280Thereafter


2,393$
5,135


NOTE 6DEPOSITS

Deposits at June 30, 2008, and 2007 consist of the following:

2008

2007Noninterest bearing checking accounts

$
90,598

$
86,679Interest bearing accounts


90,125


87,030Money market accounts


171,689


212,546Savings accounts


78,575


66,235In-market certificates of deposit


325,995


291,858Out-of-market certificates of deposit


27,255


71,516$
784,237

$
815,864


90

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 6DEPOSITS (Continued)

Scheduled
maturities of certificates of deposit are as follows:

Maturing
in fiscal year:

2009

$
220,9722010


101,1432011


17,3362012


7,1982013


6,564Thereafter


37$
353,250


Non-IRA
deposit accounts are insured up to $100 by the Deposit Insurance Fund (DIF) under management of the Federal Deposit Insurance Corporation (FDIC). The DIF was formed
on March 31, 2006, following the merger of the Bank Insurance Fund and the Savings Association Insurance Fund. IRA deposit accounts are insured up to $250 by the DIF under management of the
FDIC. The aggregate amount of jumbo certificates of deposit with a minimum denomination of $100 was approximately $151,517 and $162,953 at June 30, 2008, and 2007, respectively. Deposits at
June 30, 2008, and 2007 include $76,507 and $73,286, respectively, of deposits from one local governmental entity, the majority of which are savings accounts.

NOTE 7ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS

Advances from the Federal Home Loan Bank of Des Moines (FHLB) and other borrowings at June 30, 2008, and 2007, are summarized as follows:

2008

2007Overnight federal funds purchased (with rates ranging from 2.60% to 3.26%)

$
29,920

$
Fixed-rate advances (with rates ranging from 2.02% to 6.36%)


168,355


68,500Other borrowings(1)


179


100$
198,454

$
68,600


---

91

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 7ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS (Continued)

Aggregate
maturities of term FHLB advances and other borrowings, computed based upon contractual maturity date, are as follows:

Maturing
in fiscal year:

2009

$
11,5002010


34,8552011


25,0002012


10,0002013


36,500Thereafter


50,679$
168,534


Prepayment
of convertible, or callable, advances results in a prepayment fee as negotiated between the Bank and the FHLB. Convertible advances without a strike rate are subject to be
called at the FHLB's discretion. Convertible advances tied to LIBOR strike rates may only be called if the three-month LIBOR rate is equal to or greater than the indicated strike rate.

Advances
with the FHLB are secured by stock in the FHLB, which is comprised of membership stock and activity-based stock. The membership stock requirement is based as a percentage of
total assets as of the preceding December 31. At June 30, 2008, and 2007 the Bank held $1,223 and $1,212 in membership stock. The activity-based stock minimum requirement is based on
4.45% of advances outstanding. At June 30, 2008, and 2007 the Bank held $10,022 and $3,846 in activity-based stock.

In
addition, advances with the FHLB are secured by one-to-four family first mortgage loans, multi-family first mortgage loans and investment securities. In order
to provide additional borrowing collateral, commercial real estate first mortgage loans, agricultural real estate first mortgage loans, home equity line of credit loans and home equity second mortgage
loans have also been pledged with the FHLB. At June 30, 2008, the Bank had total collateral with the FHLB of $260,765 of which $62,490 was available for additional borrowing. At June 30,
2007, the Bank had total collateral with the FHLB of $136,877 of which $31,377 was available for additional borrowing.

Advances
with the Federal Reserve Bank are secured by commercial business loans. At June 30, 2008, the Bank had total collateral with the Federal Reserve Bank of $35,233 of which
$35,233 was available for borrowing.

The
Bank currently has a $15,000 unsecured line of federal funds with First Tennessee Bank, NA. On October 22, 2007, the Bank also reaffirmed a $10,000 federal funds accommodation
from Northern Trust. In addition, the Company has a line of credit for $6,000 with First Tennessee Bank, NA for liquidity needs of the Company. There were no funds drawn on any line of credit
at June 30, 2008.

92

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 8SUBORDINATED DEBENTURES PAYABLE TO TRUSTS

On November 28, 2001, the Company issued 10,000 shares totaling $10,000 of Company Obligated Mandatorily Redeemable Preferred Securities of Trust I. Trust I
was established and exists for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the Company. These subordinated debentures constitute the
sole asset of Trust I. The securities provide for cumulative cash distributions calculated at a rate based on six-month LIBOR plus 3.75% adjusted semi-annually. The
Company may, at one or more times, defer interest payments on the capital securities for up to 10 consecutive semi-annual periods, but not beyond December 8, 2031. At the end of the
deferral period, all accumulated and unpaid distributions must be paid. The capital securities must be redeemed on December 8, 2031; however, the Company has the option to shorten the maturity
date to a date not earlier than December 8, 2006. The capital securities have no voting rights, are unsecured, and rank junior in priority of the payment to all of the Company's indebtedness
and senior to the Company's capital stock.

On
December 8, 2006, the Company exercised its option to redeem the 10,000 shares totaling $10,000 of Trust I. Proceeds from Trust V were used to fund this
redemption.

On
July 11, 2002, the Company issued 5,000 shares totaling $5,000 of Company Obligated Mandatorily Redeemable Preferred Securities of Trust II. Trust II was
established and exists for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the Company. These subordinated debentures constitute the
sole asset of Trust II. The securities provide for cumulative cash distributions calculated at a rate based on three-month LIBOR plus 3.65% adjusted quarterly. The Company may, at one or more
times, defer interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond October 7, 2032. The capital securities must be redeemed on
October 7, 2032; however, the Company has the option to shorten the maturity date to
a date not earlier than July 7, 2007. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of the payment to all of the Company's indebtedness and
senior to the Company's capital stock.

On
July 7, 2007, the Company exercised its option to redeem the 5,000 shares totaling $5,000 of Trust II. Proceeds from Trust VI were used to fund this
redemption.

On
December 19, 2002, the Company issued 5,000 shares totaling $5,000 of Company Obligated Mandatorily Redeemable Preferred Securities of Trust III. Trust III
was established and exists for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the Company. These subordinated debentures constitute the
sole asset of Trust III. The securities provide for cumulative cash distributions calculated at a rate based on three-month LIBOR plus 3.35% adjusted quarterly. The Company may, at one or more
times, defer interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond January 7, 2033. At the end of the deferral period, all accumulated
and unpaid distributions must be paid. The capital securities must be redeemed on January 7, 2033; however, the Company has the option to shorten the maturity date to a date not earlier than
January 7, 2008. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of the payment to all of the Company's indebtedness and senior to the
Company's capital stock.

93

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 8SUBORDINATED DEBENTURES PAYABLE TO TRUSTS (Continued)

On
September 25, 2003, the Company issued 7,000 shares totaling $7,000 of Company Obligated Mandatorily Redeemable Preferred Securities of Trust IV. Trust IV
was established and exists for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the Company. These subordinated debentures constitute the
sole asset of Trust IV. The securities provide for cumulative cash distributions calculated at a rate based on three-month LIBOR plus 3.10% adjusted quarterly. The Company may, at one or more
times, defer interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond October 8, 2033. At the end of the deferral period, all accumulated
and unpaid distributions must be paid. The capital securities must be redeemed on October 8, 2033; however, the Company has the option to shorten the maturity date to a date not earlier than
October 8, 2008. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of the payment to all of the Company's indebtedness and senior to the
Company's capital stock.

On
December 7, 2006, the Company issued 10,000 shares totaling $10,000 of Company Obligated Mandatorily Redeemable Preferred Securities of Trust V. Trust V
was established and exists for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the Company. These subordinated debentures constitute the
sole asset of Trust V. The securities provide for cumulative cash distributions calculated at a rate based on three-month LIBOR plus 1.83%, fixed for five years at 6.61%; thereafter, adjusted
quarterly. The Company may, at one or more times, defer
interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond March 1, 2037. At the end of the deferral period, all accumulated and unpaid
distributions must be paid. The capital securities must be redeemed on March 1, 2037; however, the Company has the option to shorten the maturity date to a date not earlier than March 1,
2012. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of the payment to all of the Company's indebtedness and senior to the Company's capital stock.

On
July 5, 2007, the Company issued 5,000 shares totaling $5,000 of Company Obligated Mandatorily Redeemable Preferred Securities of Trust VI. Trust VI was
established and exists for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the Company. These subordinated debentures constitute the
sole asset of Trust VI. The securities provide for cumulative cash distributions calculated at a rate based on three-month LIBOR plus 1.65% adjusted quarterly. The Company may, at one or more
times, defer interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond October 1, 2037. At the end of the deferral period, all accumulated
and unpaid distributions must be paid. The capital securities must be redeemed on October 1, 2037; however, the Company has the option to shorten the maturity date to a date not earlier than
October 1, 2012. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of the payment to all of the Company's indebtedness and senior to the
Company's capital stock.

NOTE 9INTEREST RATE CONTRACTS

Interest rate swap contracts are entered into primarily as an asset/liability management strategy of the Company to modify interest rate risk. The primary risk associated with all swaps
is the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contract. The

94

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 9INTEREST RATE CONTRACTS (Continued)

Company
is exposed to losses if the counterparty fails to make its payments under a contract in which the Company is in a receiving status. The Company minimizes its risk by monitoring the credit
standing of the counterparty. The Company anticipates the counterparty will be able to fully satisfy its obligations under the remaining agreements.

During
the first quarter of fiscal 2008, the Company entered into an interest rate swap agreement with a $5,000 notional amount to convert the variable-rate Trust
Preferred VI security into a fixed-rate instrument for a term of five years at a fixed rate of 6.69%. This rate swap is designated as a cash flow hedge. The fair value of the
derivative was a $218 loss at June 30, 2008.

During
the fourth quarter of fiscal 2008, the Company entered into an interest rate swap agreement with a $7,000 notional amount to convert the variable-rate Trust
Preferred IV security into a fixed-rate instrument for a term of three years at a fixed rate of 6.19%. This rate swap is designated as a cash flow hedge. The fair value of the
derivative was a $97 gain at June 30, 2008.

No
gain or loss was recognized in earnings in fiscal 2008 related to these interest rate swaps. No deferred net losses on interest rate swaps in other comprehensive loss as of
June 30, 2008 are expected to be reclassified into earnings during the next twelve months.

NOTE 10INCOME TAX MATTERS

The Company and subsidiaries file a consolidated federal income tax return on a fiscal year basis in the U.S. federal jurisdiction and various states. The Company is no
longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2004. The Bank is allowed bad debt deductions based
on actual charge-offs.

The
consolidated provision for income taxes from continuing operations consists of the following for the years ended June 30, 2008, 2007 and 2006:

2008

2007

2006CurrentFederal

$
2,163

$
2,516

$
2,475State


592


613


296Deferred expense


11


(485
)

(557
)$
2,766

$
2,644

$
2,214


95

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 10INCOME TAX MATTERS (Continued)

Income
tax expense is different from that calculated at the statutory federal income tax rate. The reasons for this difference in tax expense are as follows:

2008

2007

2006Computed "expected" tax expense

$
3,013

$
2,810

$
2,352Increase (decrease) in income taxes resulting fromTax exempt income


(385
)

(353
)

(237
)State taxes, net of federal benefit


369


392


165Increase in cash surrender value of life insurance


(186
)

(177
)

(169
)Stock options


8


32


(19
)Benefit of income taxed at lower rates


(64
)

(58
)

(52
)Change in valuation allowance





(1
)

(3
)Other, net


11


(1
)

177$
2,766

$
2,644

$
2,214


The
components of the net deferred tax asset (liability) as of June 30, 2008, and 2007 are as follows:

2008

2007Deferred tax assetsAllowance for loan and lease losses

$
2,008

$
1,986Accrued expenses


253


360Net unrealized loss on securities available for sale


1,268


860Pension cost


523


60Other


193


4124,245


3,678Less valuation allowance


(1
)

(1
)4,244


3,677Deferred tax liabilitiesProperty and equipment


718


1,155Mortgage servicing rights


501


388Other assets


176


208Other


51


291,446


1,780$
2,798

$
1,897


Retained
earnings at June 30, 2008, and 2007, include approximately $4,805 related to the pre-1987 allowance for loan losses for which no deferred federal income tax
liability has been recognized. These amounts represent an allocation of income to bad debt deductions for tax purposes only. If the Bank no longer qualifies as a bank, or in the event of a liquidation
of the Bank, income would be created for

96

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 10INCOME TAX MATTERS (Continued)

tax
purposes only, which would be subject to the then current corporate income tax rate. The unrecorded deferred income tax liability on the above amount for financial statement purposes was
approximately $1,634.

The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48") effective July 1, 2007. Implementation
resulted in no cumulative effect adjustment to retained earnings as of the date of adoption. The Company had no unrecognized tax benefits as of June 30, 2008. The Company recognized no interest
and penalties on the underpayment of income taxes during the year ended June 30, 2008 and had no accrued interest and penalties on the balance sheet as of June 30, 2008. The Company has
no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase with the next twelve months.

NOTE 11REGULATORY CAPITAL

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatoryand possibly additional discretionaryactions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.

Quantitative
measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and
Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to adjusted total assets (as defined). Management
believes, as of June 30, 2008, and 2007, that the Bank meets all capital adequacy requirements to which it is subject.

As
of June 30, 2008, the Office of Thrift Supervision (OTS) categorized the Bank as "well capitalized" under the regulatory framework. To be categorized as well capitalized, the
Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I (core) capital ratios as set forth in the table. There are no conditions or events
since that notification that management believes have unfavorably changed the Bank's category.

97

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 11REGULATORY CAPITAL (Continued)

The following table summarizes the Bank's compliance with its regulatory capital requirements at June 30, 2008, and 2007:

Actual

Requirement

To Be Well
Capitalized Under
Prompt Corrective
Action ProvisionsAmount

Percent

Amount

Percent

Amount

PercentAs of June 30, 2008Tier I (core) capital (to adjusted total assets)

$
85,623


7.78
%
$
44,027


4.00
%
$
55,034


5.00
%Total risk-based capital (to risk-weighted assets)


91,417


10.83
%

67,519


8.00
%

84,398


10.00
%Tangible capital (to tangible assets)


85,623


7.78
%

16,510


1.50
%

N/A


N/ATier I (core) capital (to risk-weighted assets)


85,623


10.15
%

N/A


N/A


50,639


6.00
%As of June 30, 2007Tier I (core) capital (to adjusted total assets)

$
82,824


8.31
%
$
39,895


4.00
%
$
49,869


5.00
%Total risk-based capital (to risk-weighted assets)


88,252


11.05
%

63,933


8.00
%

79,916


10.00
%Tangible capital (to tangible assets)


82,824


8.31
%

14,961


1.50
%

N/A


N/ATier I (core) capital (to risk-weighted assets)


82,824


10.37
%

N/A


N/A


47,950


6.00
%


NOTE 12STOCKHOLDERS' EQUITY

The Company currently has in effect a publicly announced stock buy-back program in which up to 10% of the common stock of the Company outstanding on May 1, 2008, may
be acquired through April 30, 2009. As of June 30, 2008, the Company has repurchased 6,527 shares of common stock pursuant to this current program. Pursuant to a series of stock
buy-back programs initiated by the Company since 1996, the Company has purchased an aggregate of 2,083,455 shares of common stock through June 30, 2008. As of June 30, 2008,
the maximum number of shares that may yet be purchased under the current program was 388,794 shares.

The
Company has authorized 50,000 shares of Preferred Stock, designated as "Series A Junior Participating Preferred Stock" with a stated value of $1.00 per share. Outstanding
shares of the Junior Preferred Stock are entitled to cumulative dividends. Such shares have voting rights of 100 votes per share and a preference in liquidation. The shares are not redeemable after
issuance.

The
Company also has preferred share purchase rights (Rights). Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred Stock at a price of $65 per one-hundredth of a preferred share, subject to the complete terms as stated in the Rights Agreement. The Rights
become exercisable immediately after the earlier of (i) ten business days following a public announcement that a person or group has acquired beneficial

98

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 12STOCKHOLDERS' EQUITY (Continued)

ownership
of 20% or more of the outstanding common shares of the Company (subject to certain exclusions), (ii) ten business days following the commencement or announcement of an intention to
make a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 20% or more of such outstanding common shares. The Rights expired on
October 22, 2006, and were not renewed by the Company.

Under
current regulations, the Bank is not permitted to pay dividends on its stock if its regulatory capital would reduce below (i) the amount required for the liquidation account
established to provide a limited priority claim to the assets of the Bank to qualifying depositors (Eligible Account Holders) at March 31, 1992, who continue to maintain deposits at the Bank
after its conversion from a federal mutual savings and loan association to a federal stock savings bank pursuant to its Plan of Conversion adopted August 21, 1991, or (ii) the Bank's
regulatory capital requirements. Capital distributions are limited to the greater of 100% of net income for the year to date plus 50% of the amount of which the lesser of the institution's tangible
core or risk-based capital exceeds its capital requirement for such capital commitment, as measured at the beginning of the calendar year or up to 75% of net income over the most recent
four quarter period. Subsequent to June 30, 2008, the Bank sent written notification to the OTS of its intention to pay dividends for each quarter in the year ending June 30, 2009, to
the Company, while maintaining its capital requirements.

On
July 28, 2008, the Board of Directors declared a $0.1125 per share dividend payable on August 15, 2008, to shareholders of record as of August 8, 2008. This cash
dividend has not been reflected in the consolidated financial statements.

NOTE 13EARNINGS PER SHARE

A reconciliation of the income and common stock share amounts used in the calculation of basic and diluted EPS for the fiscal years ended June 30, 2008, 2007 and 2006, follow:

2008

2007

2006Net income

$
5,843

$
5,383

$
4,508Basic EPS:Weighted average number of common shares outstanding


3,969,988


3,978,571


3,914,952Earnings per common share

$
1.47

$
1.35

$
1.15Diluted EPS:Weighted average number of common shares outstanding


3,969,988


3,978,571


3,914,952Common share equivalentsstock options/Stock Appreciation Rights (SARs) under employee compensation plans


53,486


78,155


85,126Weighted average number of common shares and common share equivalents


4,023,474


4,056,726


4,000,078Earnings per common share

$
1.45

$
1.33

$
1.13


99

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 13EARNINGS PER SHARE (Continued)

During
the third quarter of fiscal 2006, the Company declared a 11/10-for-1 stock split of all of the common stock of the Company outstanding,
payable in the form of a 1/10-for-1 stock dividend. The 10% stock dividend was paid on April 24, 2006, to shareholders of record as of April 10,
2006. All per share data and number of common shares outstanding have been retroactively adjusted for all periods presented as a result of the stock split.

Options
outstanding of approximately 16,100 shares of common stock at a weighted average share price of $17.27 during the fiscal year ended June 30, 2008, were not included in the
computation of diluted earnings per share because the exercise price of those instruments exceeded the average market price of the common shares during the year. All options outstanding were included
in the computation for the year ended June 30, 2007. Options outstanding of approximately 30,800 shares of common stock at a weighted average share price of $17.27 during the fiscal year ended
June 30, 2006, were not included in the computation of diluted earnings per share because the exercise price of those instruments exceeded the average market price of the common shares during
the year.

NOTE 14DEFINED BENEFIT PLAN

The Company has a noncontributory (cash balance) defined benefit pension plan covering all
employees of the Company and its wholly-owned subsidiaries who have attained the age of 21 and have completed 1,000 hours in a plan year. The benefits are based on 6% of each eligible
participant's annual compensation, plus income earned in the accounts at a rate determined annually based on 30-year treasury note rates. The Company's funding policy is to make the
minimum annual required contribution plus such amounts as the Company may determine to be appropriate from time to time. One hundred percent vesting occurs after five years with a retirement age of
the later of age 65 or 5 years of participation.

Statement
of Financial Accounting Standards No. 158 (SFAS 158) was issued in September 2006 entitledEmployers' Accounting for Defined Benefit
Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106 and 132R.SFAS 158 requires recognition of the overfunded or
underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits and any remaining transition amounts
under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until
they are amortized as a component of net periodic cost. Also, the measurement datethe date at which the benefit obligation and plan assets are measuredis required to be the
company's fiscal year-end. As required by SFAS 158, the Company adopted the balance sheet recognition provisions at June 30, 2007. Effective July 1, 2007, the Company
adopted the requirement to recognize changes in the plan's funded status in the year in which the changes occur in other comprehensive income.

100

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 14DEFINED BENEFIT PLAN (Continued)

The
incremental effect of applying the balance sheet recognition provisions of SFAS 158 at June30, 2007, on the following balance sheet items is as follows:

Before

SFAS 158
Adjustment

AfterPrepaid Expenses and Other Assets

$
4,453

$
(158
)
$
4,295Deferred Income Taxes


1,955


60


2,015Total Assets


1,001,552


(98
)

1,001,454Accumulated Other Comprehensive Income (Loss)


(1,404
)

(98
)

(1,502
)Total Stockholder's Equity


62,368


(98
)

62,270


Information
relative to the components of net periodic benefit cost measured as of June 30, 2008 and April 30, 2007 for the Company's defined benefit plan is presented
below.

2008

2007Changes in benefit obligationsBenefit obligations, beginning

$
5,606

$
5,353Service cost


447


466Interest cost


437


391Benefits paid


(504
)

(579
)Assumption changes


365


Actuarial (gain) loss


(57
)

(25
)Benefit obligations, ending

$
6,294

$
5,606Changes in plan assetsFair value of plan assets, beginning

$
5,899

$
5,387Actual return (loss) on plan assets


(423
)

470Company contributions


532


621Benefits paid


(504
)

(579
)Fair value of plan assets, ending

$
5,504

$
5,899Funded status at end of year

$
(790
)
$
293Accumulated benefit obligation

$
5,295

$
4,714


101

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 14DEFINED BENEFIT PLAN (Continued)

Amounts
recognized in accumulated other comprehensive income (pre tax) for the years ended June 30, 2008 and 2007, consist of the following:

Projected benefit obligation

$
(6,294
)
$
(5,606
)Fair value of assets


5,504


5,899Unrecognized transitional asset





Unrecognized prior service cost





Prepaid pension cost


(586
)

(451
)Acuumulated other comprehensive income (loss)

$
(1,376
)
$
(158
)


The
net actuarial loss and net prior service cost for the defined benefit plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2009
is $62.

The
components of net periodic benefit cost for the fiscal years ended June 30, consist of the following:

2008

2007

2006Service cost

$
447

$
466

$
466Interest cost


437


391


365Expected return on plan assets


(487
)

(436
)

(373
)Amortization of prior losses








Amortization of transition asset








11Total costs recognized in expense

$
397

$
421

$
469


The
weighted-average assumptions used to determine benefit obligations at June 30, are as follows:

2008

2007Discount ratepre-retirement


7.50
%

7.50
%Discount ratepost-retirement


4.52
%

4.82
%Rate of compensation increase


4.00
%

4.00
%


The
weighted-average assumptions used to determine net periodic benefit cost for fiscal years ended June 30, are as follows:

2008

2007Discount ratepre-retirement


7.50
%

7.50
%Discount ratepost-retirement


4.82
%

4.58
%Rate of compensation increase


4.00
%

4.00
%Expected long-term return on plan assets


8.00
%

8.00
%


The
overall expected long-term rate of return on assets is based on economic forecasts and projected asset allocation.

102

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 14DEFINED BENEFIT PLAN (Continued)

The
Company's pension plan weighted-average asset allocations by asset category are as follows:

2008Investment Category

Market
Value

Unrealized
Gain/(Loss)

Actual Asset
Mix as a % of
Market Value

Target Asset
Mix as a % of
Market ValueEquities

$
3,512

$
90


63.8
%

65.0
%Fixed


1,991


7


36.2
%

30.0
%Cash and cash equivalents


1





0.0
%

5.0
%Total pension plan assets

$
5,504

$
97


100.0
%

100.0
%




2007Investment Category

Market
Value

Unrealized
Gain/(Loss)

Actual Asset
Mix as a % of
Market Value

Target Asset
Mix as a % of
Market ValueEquities

$
4,131

$
851


70.0
%

65.0
%Fixed


1,746


246


29.6
%

30.0
%Cash and cash equivalents


22


(248
)

0.4
%

5.0
%Total pension plan assets

$
5,899

$
849


100.0
%

100.0
%


The
objective of the pension plan investment policy for equities is to pursue a growth strategy that results in capital appreciation. The objective of the pension plan investment policy
for fixed rate instruments and cash equivalents is to ensure safety of principal and interest.

The
Company expects to contribute $600 to its pension plan in fiscal 2009. The minimum required contribution is $0.

Estimated
Future Benefit Payments: The following benefit payments which reflect expected future service, as appropriate, are expected to be paid during the years ended June 30:

2009

$
4652010


1,0892011


3812012


6192013


327Years 2014 - 2018


2,881


NOTE 15RETIREMENT SAVINGS PLAN

The Company has a retirement savings plan covering all employees of the Company who have attained age 21 and completed one expected year of service during which they worked at
least 1,000 hours. The plan is intended to be a qualified profit sharing plan with a cash or deferred arrangement pursuant to IRS Code Section 401(k) and regulations issued there
under. The plan allows voluntary contributions by eligible employees, and also allows discretionary contributions by the

103

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 15RETIREMENT SAVINGS PLAN (Continued)

Company
as determined annually by the Board of Directors. The total compensation cost charged to expense related to the plan was $335, $286 and $265, for 2008, 2007 and 2006, respectively.

NOTE 16STOCK-BASED COMPENSATION PLANS

During fiscal 2003, the Company established the 2002 Stock Option and Incentive Plan (2002 Option Plan). Under the 2002 Option Plan, awards for an aggregate amount of 907,500 common
shares may be granted to directors and employees of the Bank. Options granted under the Option Plan may be either options that qualify as Incentive Stock Options, as defined in the Code, or options
that do not qualify. Options granted may have a maximum term of 10 years. The 2002 Option Plan also provides for the award of stock appreciation rights, limited stock appreciation rights and
nonvested stock.

The
Company has a long-term incentive plan, which provides for the grant of nonvested stock awards and for stock appreciation rights ("SARs") settled in stock under the 2002
Option Plan if the Company achieves certain performance levels. For fiscal years 2008, 2007 and 2006, the Company met a performance level in the plan and, accordingly, for fiscal 2008 nonvested stock
with a value of $97 and SARs with a value of $97 will be issued in fiscal 2009. During fiscal years 2008 and 2007, 5,146 and 4,078 shares, respectively of nonvested stock were issued and 29,204 and
20,953 SARs were issued in fiscal 2008 and 2007 respectively, under the 2002 Option Plan. The nonvested shares and SARs vest 25% in each of the first through fourth anniversaries of the date of grant.
The issuance value of the nonvested shares was $83 and $65 for 2008 and 2007, respectively, and is being amortized over the vesting period of four years with the unamortized balance included in
additional paid in capital in the consolidated statements of financial condition. During fiscal years 2008, 2007 and 2006, $391, $388 and $388 respectively, were recorded as amortization expense. The
issuance value of the 2008 and 2007 SARs was $83 and $65 and each issuance is being amortized over the vesting period of four years. During fiscal year 2008 and 2007, $30 and $11 was recorded as
amortization expense.

In
connection with meeting a performance level of the long-term incentive plan, 6,584 shares of nonvested stock and 47,051 SARs will be issued in fiscal 2009 under the plan.
Both the nonvested shares and SARs issued in fiscal 2009 will have a four-year vesting period in which 25% of the stock vests in each of the first through fourth anniversaries of the date
of grant.

During
fiscal 2004, the Company created a pool of 12,100 nonvested shares for grants under the 2002 Option Plan (2002 Pool). The key provisions of the 2002 Pool include: outright grant
of shares with restrictions as to sale, transfer, and pledging; during the restriction period, the grantee receives
dividends and has voting rights related to the shares awarded; and all nonvested shares are forfeited upon termination. During fiscal years 2008 and 2007, 2,718 and 1,747 nonvested shares,
respectively, were awarded under the Pool. The issuance value of these nonvested shares was $42 and $31 in 2008 and 2007, respectively, and is being amortized over their vesting periods with the
unamortized balance included in additional paid in capital in the consolidated balance sheet. During fiscal years 2008, 2007 and 2006, $28, $30 and $37, respectively, were recorded as amortization
expense.

In
association with the 2002 Option Plan, awards of nonvested shares of the Company's common stock are made to outside directors of the Company. Each outside director is entitled to all
voting,

104

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 16STOCK-BASED COMPENSATION PLANS (Continued)

dividend
and distribution rights during the vesting period. During fiscal year 2008, 11,301 shares of nonvested stock were awarded. The nonvested shares vest on the first anniversary of the date of
grant. During fiscal year 2008, $138 was recorded as amortization expense.

The
fair value of each incentive stock option and each stock appreciation right grant is estimated at the grant date using the Black-Scholes option pricing model. The following
assumptions were used for grants in fiscal years 2008, 2007 and 2006:

2008

2007

2006Expected volatility


22.00
%

23.00
%

24.00
%Expected dividend yield


2.61
%

2.63
%

2.75
%Risk-free interest rate


3.94
%

4.61
%

4.09
%Expected term (in years)


4


4


7


Stock
option activity for the fiscal year ended June 30, are as follows:

2008Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
ValueBeginning Balance


245,129

$
12.49Granted





Forfeited


(5,608
)

17.27Exercised


(35,967
)

11.82Ending Balance


203,554

$
12.48


4.26

$
793Vested and exercisable at June 30


203,554

$
12.48


4.26

$
793


Stock
appreciation rights activity for the fiscal year ended June 30, are as follows:

2008SARs

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
ValueBeginning Balance


19,372

$
16.00Granted


29,204


16.10Forfeited


(3,534
)

16.06Exercised


(420
)

16.00Ending Balance


44,622

$
16.06


8.82

$
11Vested and exercisable at June 30


4,414

$
16.00


8.03

$
1


105

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 16STOCK-BASED COMPENSATION PLANS (Continued)

The
Company applied a forfeiture rate of 10.00% when calculating the amount of options and stock appreciation rights expected to vest at June 30, 2008. This rate is based upon
historical activity and will be revised if necessary in subsequent periods if actual forfeitures differ from these estimates. The weighted-average grant date fair value of stock appreciation rights
granted during the fiscal years 2008 and 2007 was $2.84 and $3.11. The weighted-average grant date fair value of options granted during the fiscal year 2006 was $3.83. The total intrinsic value of
options exercised during the fiscal years 2008, 2007 and 2006, was $155, $269 and $194 respectively. During fiscal years 2008 and 2007, $53 and $101 respectively, were recorded as amortization
expense. As of June 30, 2008, there was $103 of total unrecognized compensation cost related to nonvested SARs awards. The cost is expected to be recognized over a weighted-average period of
33 months for SARs awards. Cash received from the exercise of options and SARs for the fiscal years 2008, 2007 and 2006, was $432, $787 and $386 respectively. The tax benefit realized for the
tax deductions from cashless option exercises totaled $7, $61 and $41 for the fiscal years 2008, 2007 and 2006, respectively. The company generally uses treasury shares to satisfy stock option
exercises.

Nonvested
share activity for the fiscal years ended June 30, follows:

2008

2007

2006Shares

Weighted
Average
Grant Date
Fair Value

Shares

Weighted
Average
Grant Date
Fair Value

Shares

Weighted
Average
Grant Date
Fair ValueNonvested Balance, beginning


144,711

$
16.11


158,177

$
15.75


91,906

$
13.46Granted


19,165


16.62


11,866


16.78


85,572


17.42Vested


(31,236
)

14.51


(17,890
)

13.83


(15,955
)

11.48Forfeited


(10,894
)

16.44


(7,442
)

15.11


(3,346
)

15.85Nonvested Balance, ending


121,746

$
16.57


144,711

$
16.11


158,177

$
15.75


Pretax
compensation expense recognized for nonvested shares for the fiscal years 2008, 2007 and 2006, was $419, $418 and $425 respectively. The tax benefit for the fiscal years 2008,
2007 and 2006 was $159, $159 and $162 respectively. As of June 30, 2008, there was $1,027 of total unrecognized compensation cost related to nonvested shares granted under the Plan. That cost
is expected to be recognized over a weighted-average period of 22 months. The total fair value of shares vested during the fiscal years 2008, 2007 and 2006 was $453, $247 and $183 respectively.

The
Company had a Director Restricted Stock Plan which provided that awards of nonvested shares of the Company's common stock be made to outside directors of the Company. The plan was
designed to allow for payment of the annual retainer fee in shares of the Company's common stock. Each outside director is entitled to all voting, dividend and distribution rights during the
restriction period. The effective date of the plan was July 1, 1997. The plan had 90,750 shares allocated to it and was in effect for a period of ten years. During fiscal years 2007 and 2006,
6,041 and 4,824 shares were awarded and $103 and $96 of expense was incurred under the plan, respectively, as the annual retainer for the
Company's Board of Directors. The Director Restricted Stock Plan expired on December 31, 2006. At June 30, 2008, there was no unrecognized compensation expense related to this plan.

106

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 17OTHER COMPREHENSIVE LOSS

The components of other comprehensive loss and the related tax effects were as follows:

2008

2007

2006Net income

$
5,843

$
5,383

$
4,508Other comprehensive income (loss), net of tax:Securities available for sale:Net unrealized gains (losses)


(1,069
)

1,707


(2,617
)Reclassification adjustment for net gains realized in net income


(3
)




(3
)Income tax benefit (expense)


408


(649
)

996Other comprehensive income (loss) on securities available for sale


(664
)

1,058


(1,624
)Defined benefit plan:Net unrealized (loss)


(1,218
)




Income tax benefit


463





Other comprehensive (loss) on defined benefit plan


(755
)




Derivatives and hedging activities:Net unrealized (losses)


(121
)




Income tax benefit


41





Other comprehensive (loss) on derivatives and hedging activities


(80
)




Retained interest:Net unrealized (loss)








(3
)Income tax benefit








1Other comprehensive (loss) on retained interest








(2
)Total other comprehensive income (loss)


(1,499
)

1,058


(1,626
)Comprehensive income

$
4,344

$
6,441

$
2,882


Cumulative
other comprehensive (loss) balances were:

2008

2007

2006Unrealized loss on securities available for sale net of related tax effect of $1,268, $860 and $1,509

$
(2,068
)
$
(1,404
)
$
(2,462
)Unrealized loss on defined benefit plan net of related tax effect of $523 and $60


(853
)

(98
)

Unrealized loss on derivitives and hedging activities net of related tax effect of $41


(80
)




$
(3,001
)
$
(1,502
)
$
(2,462
)


107

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 18FINANCIAL INSTRUMENTS

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest-rate
risk in excess of amounts recognized in the consolidated statements of financial condition. The contract or notional amounts of those instruments reflect the extent of the Bank's involvement in
particular classes of financial instruments.

The
Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and
financial guarantees written is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.

Unless
noted otherwise, the Bank does not require collateral or other security to support financial instruments with credit risk.

The
following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash
and cash equivalentsThe carrying amounts reported in the statements of financial condition for cash and cash equivalents approximate their fair values.

Securities
available for saleFair values for securities available for sale are based on quoted market prices, except for stock in the Federal Home Loan Bank for which fair value is
assumed to equal cost.

Loans
and leases receivableThe fair values for loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms and
credit quality. Leases are stated at cost which equals fair value.

Accrued
interest receivableThe carrying value of accrued interest receivable approximates its fair value.

Servicing
rightsFair values are estimated using discounted cash flows based on current market rates of interest.

Off-statement-of-financial-condition
instrumentsFair values for the Company's off-statement-of-financial-condition
instruments (unused lines of credit and letters of credit), which are based upon fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and
counterparties' credit standing, are not significant.

DepositsThe
fair values for deposits with no defined maturities equal their carrying amounts, which represent the amount payable on demand. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on a comparably termed wholesale funding alternative
(i.e., FHLB borrowings).

Advances
from Federal Home Loan Bank and other borrowingsThe carrying amounts reported for variable rate advances approximate their fair values. Fair values for fixed-rate
advances and other

108

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 18FINANCIAL INSTRUMENTS (Continued)

borrowings
are estimated using a discounted cash flow calculation that applies interest rates currently being offered on advances and borrowings with corresponding maturity dates.

Subordinated
debentures payable to trustsThe carrying amounts for subordinated debentures payable to trusts approximate their fair values.

Accrued
interest payable and advances by borrowers for taxes and insuranceThe carrying values of accrued interest payable and advances by borrowers for taxes and insurance approximate
their fair values.

Estimated
fair values of the Company's financial instruments are as follows at June 30:

2008

2007Carrying
Amount

Fair
Value

Carrying
Amount

Fair
ValueFinancial assetsCash and cash equivalents

$
21,170

$
21,170

$
22,476

$
22,476Securities available for sale


225,004


225,004


142,223


142,223Federal Home Loan Bank stock


11,245


11,245


5,058


5,058Loans and leases receivable


786,573


790,420


770,375


757,337Accrued interest receivable


7,540


7,540


8,495


8,495Servicing rights


11,189


16,629


10,871


15,740Financial liabilitiesDeposits


784,237


786,170


815,864


813,985Advances from Federal Home Loan Bank and other borrowings


198,454


199,886


68,600


67,570Subordinated debentures payable to trusts


27,837


27,837


27,837


27,837Accrued interest payable and advances by borrowers for taxes and insurance


16,804


16,804


15,989


15,989


NOTE 19COMMITMENTS, CONTINGENCIES AND CREDIT RISK

The Bank originates first mortgage, consumer and other loans primarily in eastern South Dakota and holds residential and commercial real estate loans which were purchased from other
originators of loans located throughout the United States. Collateral for substantially all consumer loans are security agreements and/or Uniform Commercial Code (UCC) filings on the purchased asset.
Unused lines of credit amounted to $83,254 and $73,851 at June 30, 2008, and 2007, respectively. Unused letters of credit amounted to $3,318 and $7,861 at June 30, 2008, and 2007,
respectively. The lines of credit and letters of credit are collateralized in substantially the same manner as loans receivable.

The
Bank had outstanding commitments to originate or purchase loans of $40,447 and to sell loans of approximately $11,901 at June 30, 2008. The portion of commitments to originate
or purchase fixed rate loans totaled $29,533 with a range in interest rates of 4.95% to 7.49%. No losses are expected to be sustained in the fulfillment of any of these commitments.

109

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 19COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Continued)

The
Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, based upon consultation with legal counsel, the
ultimate disposition of these matters will not have a materially adverse effect on the Company's consolidated financial position.

NOTE 20CASH FLOW INFORMATION

Changes in other assets and liabilities for the years ended June 30, consist of:

2008

2007

2006(Increase) decrease in accrued interest receivable

$
955

$
(1,615
)
$
(1,793
)Earnings on cash value of life insurance


(531
)

(506
)

(483
)Increase (decrease) in net deferred loan fees and other assets


742


(600
)

884Increase (decrease) in accrued expenses and other liabilities


1,422


6,738


732$
2,588

$
4,017

$
(660
)Supplemental Disclosure of Cash Flows InformationCash payments for interest

$
32,940

$
34,848

$
26,540Cash payments for income and franchise taxes


3,836


1,914


3,861Supplemental Disclosure of Noncash Investing and Financing ActivitiesForeclosed real estate and other properties acquired in settlement of loans

$
135

$
481

$
989Loans receivable reclassified as held for sale








223Office property reclassified as held for sale








153


110

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 21FINANCIAL INFORMATION OF HF FINANCIAL CORP. (PARENT ONLY)

The Company's condensed balance sheets as of June 30, 2008, and 2007 and related condensed statements of income and cash flows for each of the years in the three-year
period ended June 30, 2008, are as follows:

Condensed Statement of Financial Condition

2008

2007AssetsCash primarily with the Bank

$
3,295

$
2,727Investments in subsidiaries


87,672


86,292Securities available for sale


250


181Other assets


1,300


1,483$
92,517

$
90,683LiabilitiesSubordinated debentures payable to trusts

$
27,837

$
27,837Accrued expenses and other liabilities


477


576Stockholders' equity


64,203


62,270$
92,517

$
90,683


Condensed Statements of Income

2008

2007

2006Dividends from subsidiaries

$
5,206

$
2,950

$
1,500Interest and other income


109


129


3,697Expenses


(2,628
)

(3,245
)

(2,669
)Income tax benefit


819


1,034


(389
)Equity in undistributed income of subsidiaries


2,337


4,515


2,369Net income

$
5,843

$
5,383

$
4,508


111

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 21FINANCIAL INFORMATION OF HF FINANCIAL CORP. (PARENT ONLY) (Continued)

Condensed Statements of Cash Flows

2008

2007

2006Cash Flows From Operating ActivitiesNet income

$
5,843

$
5,383

$
4,508Adjustments to reconcile net income to net cash provided by (used in) operating activitiesAmortization


141


317


34(Gain) on sale of land








(3,557
)Equity in (earnings) of subsidiaries


(7,543
)

(7,465
)

(3,869
)Cash dividends received from subsidiaries


5,206


2,950


1,500Increase (decrease) in other liabilities


(99
)

362


(886
)Other, net


(109
)

(21
)

(281
)Net cash provided by (used in) operating activities


3,439


1,526


(2,551
)Cash Flows From Investing ActivitiesPurchase of securities available for sale


(69
)

(116
)

(28
)Proceeds from sale of land








4,863Capital contribution to the Bank








(950
)Net cash provided by (used in) investment activities


(69
)

(116
)

3,885Cash Flows From Financing ActivitiesPurchase of treasury stock


(1,730
)




Cash dividends paid


(1,702
)

(1,662
)

(1,596
)Proceeds from issuance of common stock


630


904


2,052Proceeds from issuance of subordinated debentures


5,000


10,000


Redemption of subordinated debentures


(5,000
)

(10,000
)

Payments of other borrowings








(705
)Payments of debt issue costs





(6
)

(7
)Net cash provided by (used in) financing activities


(2,802
)

(764
)

(256
)Increase (decrease) in cash


568


646


1,078Cash at beginning of period


2,727


2,081


1,003Cash at end of period

$
3,295

$
2,727

$
2,081


112

---



HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS, Except share data)

NOTE 22QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
QuarterFiscal Year 2008Total interest income

$
15,985

$
16,085

$
15,542

$
15,562Net interest income


6,668


6,996


7,695


8,517Provision for losses on loans and leases


325


295


551


823Net income


1,348


1,251


1,623


1,621Basic earnings per share

$
0.34

$
0.32

$
0.41

$
0.41Diluted earnings per share


0.33


0.31


0.40


0.40Fiscal Year 2007Total interest income

$
15,078

$
15,663

$
15,360

$
15,773Net interest income


6,418


6,060


6,403


6,753Provision for losses on loans and leases


291


461


34


412Net income


1,097


2,111


1,034


1,141Basic earnings per share

$
0.28

$
0.53

$
0.26

$
0.28Diluted earnings per share


0.27


0.52


0.25


0.27


113

---





Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

Not applicable.

Item 9A.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, 2008, an evaluation was performed by the Company's management, including the Company's Chairman, President and
Chief Executive Officer and the Company's Executive Vice President, Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Company's Chairman, President and Chief Executive
Officer and the Company's
Executive Vice President, Chief Financial Officer and Treasurer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2008, to provide reasonable
assurance that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.

Management's Report on Internal Control over Financial Reporting

Management's report on internal control over financial reporting is included in Part II, Item 8 "Financial Statements and
Supplementary Data," and is furnished herein.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company's internal control over financial reporting that occurred during the fourth quarter ended
June 30, 2008, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Item 9B.Other Information

None.

PART III

Item 10.Directors, Executive Officers and Corporate Governance

Directors

Information regarding Directors of the Company is incorporated by reference from the discussion under the heading "Information with
Respect to Nominees and Continuing Directors" in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held in 2008, a copy of which will be filed not later than 120 days
after June 30, 2008 (the "2008 Proxy Statement").

Executive Officers

Information regarding the executive officers of the Company is contained in Part I, Item 1 "Business" of this
Form 10-K pursuant to Instruction 3 to Item 401(b) of Regulation S-K, and is incorporated by reference herein.

Compliance with Section 16(a) of the Exchange Act

Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by
reference from the discussion under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 2008 Proxy Statement.

114

---



Code of Ethics

Information regarding the Company's Code of Conduct and Ethics is incorporated by reference from the discussion under the heading "Code
of Conduct and Ethics" in the Company's 2008 Proxy Statement.

Director Nominations

Information regarding material changes, if any, to the procedures by which the Company's stockholders may recommend nominees to the
Company's Board of Directors is incorporated by reference from the discussion under the heading "Director Nominations" in the Company's 2008 Proxy Statement.

Audit Committee and Audit Committee Financial Expert

Information regarding the Company's Audit Committee and Audit Committee Financial Expert, is incorporated by reference from the
discussion under the heading "Meetings of the Board of Directors, Compensation of Directors, Committees of the Board of Directors and Independent Directors" in the Company's 2008 Proxy Statement.

Item 11.Executive Compensation

Information concerning executive compensation and other related disclosures required by this Item are incorporated by reference from
the discussion under the heading "Compensation, Discussion and Analysis," "Compensation Committee Report," "Executive Compensation," "Director Compensation" and "Personnel, Compensation And Benefits
Committee Interlocks and Insider Participation" in the Company's 2008 Proxy Statement.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information on the securities authorized for issuance under the Company's equity compensation plans is contained in Part II,
Item 5 "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" of this Form 10-K, and is incorporated by reference
herein.

Information
concerning security ownership of certain beneficial owners and management is incorporated by reference from the discussion under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's 2008 Proxy Statement.

Item 13.Certain Relationships and Related Transactions, and Director Independence

Information concerning transactions with related persons and the review, approval or ratification thereof is incorporated by reference
from the discussion under the heading "Certain Transactions" and "Policy on Review and Approval of Transactions with Related Persons" in the Company's 2008 Proxy Statement.

Information
concerning director independence is incorporated by reference from the discussion under the heading "Meetings of the Board of Directors, Compensation of Directors, Committees
of the Board of Directors and Independent Directors" in the Company's 2008 Proxy Statement.

115

---





Item 14.Principal Accountant Fees and Services

Information concerning the fees for professional services rendered by the Company's registered public accounting firm is incorporated
by reference from the discussion under the heading "Report of the Audit Committee" in the Company's 2008 Proxy Statement.

Information
concerning the pre-approval policies and procedures of the Company's Audit Committee is incorporated by reference from the discussion under the heading "Audit
Committee Pre-Approval Policies" in the Company's 2008 Proxy Statement.

PART IV

Item 15.Exhibits and Financial Statement Schedules



Exhibit No.

Identification of Exhibit3.1

Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 from the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2007).3.2

By-Laws (incorporated herein by reference to Exhibit 3.2 from the Company's Current Report on Form 8-K dated December 6, 2007, and filed with the SEC on December 7, 2007).10.1

Guarantee Agreement dated July 11, 2002, by and between HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.1 from the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002).10.2

Indenture Agreement dated July 11, 2002, by and between HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.2 from the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002).10.3

Guarantee Agreement dated December 19, 2002, by and between HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.1 from the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 2002).10.4

Indenture Agreement dated December 19, 2002, by and between HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.2 from the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 2002).


116

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Exhibit No.

Identification of Exhibit10.5

Guarantee Agreement dated September 25, 2003, by and between HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.1 from the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2003).10.6

Indenture Agreement dated September 25, 2003, by and between HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.2 from the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003).10.7

Guarantee Agreement dated December 7, 2006, by and between HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.1 from the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 2006).10.8

Indenture Agreement dated December 7, 2006, by and between HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.2 from the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 2006).10.9

Letter Agreement dated June 3, 2003, between HF Financial Corp. and First Tennessee Bank, NA (incorporated herein by reference to Exhibit 10.20 from the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2003).10.10*

Letter Agreement dated June 26, 2008, between HF Financial Corp. and First Tennessee Bank, NA.10.11#

HF Financial Corp. 1991 Stock Option and Incentive Plan (incorporated herein by reference to the exhibits from the Company's Annual Report on Form 10-K405 for the fiscal year ended June 30, 1993).10.12#

Amendment to the HF Financial Corp. 1991 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.6 from the Company's Annual Report on Form 10-K405 for the fiscal year ended June 30, 1997).10.13#

HF Financial Corp. 1996 Director Restricted Stock Plan (incorporated herein by reference to Exhibit 10.7 from the Company's Annual Report on Form 10-K405 for the fiscal year ended June 30, 1997).10.14#

HF Financial Corp. 2002 Stock Option and Incentive Plan (incorporated herein by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A, filed with the SEC on October 15, 2002).10.15#

Form of HF Financial Corp. 2002 Stock Option and Incentive Plan Stock Appreciation Rights Agreement (incorporated herein by reference to Exhibit 10.1 from the Company's Current Report on Form 8-K dated September 13, 2006, and filed
with the SEC on September 19, 2006).10.16#

Form of HF Financial Corp. 2002 Stock Option and Incentive Plan Stock Option Agreement (incorporated herein by reference to Exhibit 10.1 from the Company's Definitive Proxy Statement on Schedule 14A filed with the SEC on October 6,
2006).10.17#

Home Federal Bank Short-Term Incentive Plan, as amended and restated effective July 2, 2007 (incorporated herein by reference to Exhibit 10.5 from the Company's Current Report on Form 8-K dated July 2, 2007, and filed with the SEC
on July 9, 2007).10.18#

Home Federal Bank Fourth Amended and Restated Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.6 from the Company's Current Report on Form 8-K dated July 2, 2007, and filed with the SEC on July 9,
2007).


117

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Exhibit No.

Identification of Exhibit10.19#

Employment Agreement by and between Home Federal Bank and Curtis L. Hage (incorporated herein by reference to Exhibit 10.1 from the Company's Current Report on Form 8-K dated July 2, 2007, and filed
with the SEC on July 9, 2007).10.20#

Change-in-Control Agreement by and between Home Federal Bank and Curtis L. Hage (incorporated herein by reference to Exhibit 10.3 from the Company's Current Report on Form 8-K dated July 2, 2007, and filed with the SEC on
July 9, 2007).10.21#

Form of Employment Agreement by and between Home Federal Bank and each of Darrel L. Posegate, David A. Brown, and Natalie A. Solberg (incorporated herein by reference to Exhibit 10.2 from the Company's Current Report on
Form 8-K dated July 2, 2007, and filed with the SEC on July 9, 2007).10.22#

Form of Change-in-Control Agreement by and between Home Federal Bank and each of Darrel L. Posegate, David A. Brown and Natalie A. Solberg (incorporated herein by reference to Exhibit 10.4 from the Company's Current Report on
Form 8-K dated July 2, 2007, and filed with the SEC on July 9, 2007).10.23#

Form of Employment Agreement by and between Home Federal Bank and each of Brent R. Olthoff, Mary F. Hitzemann, and Michael Westberg (incorporated herein by reference to Exhibit 10.2 from the Company's Current Report on Form 8-K
dated July 2, 2007, and filed with the SEC on July 9, 2007).10.24#

Form of Change-in-Control Agreement by and between Home Federal Bank and each of Brent R. Olthoff, Mary F. Hitzemann, and Michael Westberg (incorporated herein by reference to Exhibit 10.4 from the Company's Current Report on Form 8-K
dated July 2, 2007, and filed with the SEC on July 9, 2007).10.25#

Form of Employment Agreement by and between Home Federal Bank and Jon M. Gadberry (incorporated herein by reference to Exhibit 10.2 from the Company's Current Report on Form 8-K dated July 2, 2007 and filed with the SEC on
July 9, 2007).10.26#

Form of Change-in-Control Agreement by and between Home Federal Bank and Jon M. Gadberry (incorporated herein by reference to Exhibit 10.4 from the Company's Current Report on Form 8-K dated July 2, 2007 and filed with the SEC on
July 9, 2007).21.1*

Subsidiaries of Registrant.23.1*

Consent of Independent Registered Accounting Firm.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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|   |  |                                                                              
|-- |  | -----------------------------------------------------------------------------
|*  |  | Filed herewith.                                                              
|** |  | Furnished herewith.                                                          
|#  |  | Management contract or compensatory plan or arrangement required to be filed.

118

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

HF FINANCIAL CORP.Date: September 26,
2008

By

/s/CURTIS L. HAGE Curtis L. Hage, Chairman, President and
Chief Executive Officer
(Duly Authorized Representative)


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.

|                                                                                                                            |  |                                                                                                                                                     
|--------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|/s/CURTIS L. HAGECurtis L. Hage, Chairman, President and Chief Executive Officer(Principal Executive and Operating Officer) |  | /s/DARREL L. POSEGATEDarrel L. Posegate, Executive Vice President, Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
|Date: September 26, 2008                                                                                                    |  | Date: September 26, 2008                                                                                                                            
|/s/THOMAS L. VAN WYHEThomas L. Van Wyhe,Director                                                                            |  | /s/ROBERT L. HANSONRobert L. Hanson,Director                                                                                                        
|Date: September 26, 2008                                                                                                    |  | Date: September 26, 2008                                                                                                                            
|/s/CURTIS J. BERNARDCurtis J. Bernard,Director                                                                              |  | /s/WILLIAM G. PEDERSONWilliam G. Pederson,Director                                                                                                  
|Date: September 26, 2008                                                                                                    |  | Date: September 26, 2008                                                                                                                            
|/s/CHARLES T. DAYCharles T. Day,Director                                                                                    |  | /s/CHRISTINE E. HAMILTONChristine E. Hamilton,Director                                                                                              
|Date: September 26, 2008                                                                                                    |  | Date: September 26, 2008                                                                                                                            

119

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Index of Attached Exhibits

| |       |  |                                                                                                                                           
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|
| | 10.10 |  | Letter Agreement dated June 26, 2008, between HF Financial Corp. and First Tennessee Bank, NA                                             
| | 21.1  |  | Subsidiaries of Registrant                                                                                                                
| | 23.1  |  | Consent of Independent Registered Public Accounting Firm                                                                                  
| | 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

120

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