**UNITEDSTATES**SECURITIES ANDEXCHANGE COMMISSION

**Washington,D.C. 20549**

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**FORM 10-K**

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

**For the Fiscal Year Ended June 30, 2007**

**Commission File Number 0-19972**

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**HFFINANCIAL CORP.**

| Incorporated in        |   | I.R.S. Employer                |
|------------------------|--------|--------------------------------|
| the State of  Delaware |   | Identification  No. 46-0418532 |

 

**225 South Main Avenue,Sioux Falls, SD 57104**

**(605)333-7556**

Securities Registered Pursuant toSection 12(b) of the Act:

**None**

Securities Registered Pursuant toSection 12(g) of the Act:

**CommonStock, par value $.01 per share**

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.

YES o   NO x

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or 15(d) of the Act.

YES o   NO x

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

YES x   NO o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

| Large accelerated  filer  o |   | Accelerated filer  o |   | Non-accelerated  filer  x |
|---------------------------------------|--------|--------------------------------|--------|-------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).

YES o   NO x

As of September 24,2007, there were 3,964,542 issued and outstanding shares of the registrant’scommon stock.

The aggregate market valueof the common equity held by non-affiliates of the registrant, computed byreference to the average of the bid and asked price of such common equity as ofDecember 30, 2006, the last business day of the registrant’s most recentlycompleted second fiscal quarter, was $68.7 million. (The exclusion from suchamount of the market value of the common equity owned by any person shall notbe deemed an admission by the registrant that such person is an affiliate ofthe registrant.)

**DOCUMENTS INCORPORATED BYREFERENCE**

Part III of Annual Report on Form 10-K—Portionsof the Proxy Statement for 2007 Annual Meeting of Stockholders.

 

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**Annual Report on Form 10-K**

**Tableof Contents**
|            | ** ** | ** **                                                                                                               | ** ** | **Page  Number** |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|------------------|
| ** ** |       | **PART I**                                                                                                          |       |             |   |
| Item 1.    |       | Business                                                                                                                 |       | 1                |   |
| Item 1A.   |       | Risk Factors                                                                                                             |       | 33               |   |
| Item 1B.   |       | Unresolved Staff Comments                                                                                                |       | 37               |   |
| Item 2.    |       | Properties                                                                                                               |       | 38               |   |
| Item 3.    |       | Legal  Proceedings                                                                                                       |       | 38               |   |
| Item 4.    |       | Submission  of Matters to a Vote of Security Holders                                                                     |       | 38               |   |
| ** ** | ** ** | **PART II**                                                                                                         | ** ** | ** **       | ** ** |
| Item 5.    |       | Market  for Registrant’s Common Equity, Related Stockholder Matters and  Issuer Purchases of Equity Securities |       | 39               |   |
| Item 6.    |       | Selected  Financial Data                                                                                                 |       | 41               |   |
| Item 7.    |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              |       | 45               |   |
| Item 7A.   |       | Quantitative  and Qualitative Disclosures About Market Risk                                                              |       | 65               |   |
| Item 8.    |       | Financial  Statements and Supplementary Data                                                                             |       | 67               |   |
| Item 9.    |       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                                    |       | 108              |   |
| Item 9A.   |       | Controls  and Procedures                                                                                                 |       | 108              |   |
| Item 9B.   |       | Other  Information                                                                                                       |       | 108              |   |
| ** ** | ** ** | **PART III**                                                                                                        | ** ** | ** **       | ** ** |
| Item 10.   |       | Directors,  Executive Officers and Corporate Governance                                                                  |       | 108              |   |
| Item 11.   |       | Executive  Compensation                                                                                                  |       | 109              |   |
| Item 12.   |       | Security  Ownership of Certain Beneficial Owners and Management and  Related Stockholder Matters                    |       | 109              |   |
| Item 13.   |       | Certain  Relationships and Related Transactions, and Director Independence                                               |       | 109              |   |
| Item 14.   |       | Principal  Accounting Fees and Services                                                                                  |       | 109              |   |
| ** ** | ** ** | **PART IV**                                                                                                         | ** ** | ** **       | ** ** |
| Item 15.   |       | Exhibits  and Financial Statement Schedules                                                                              |       | 110              |   |

 

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**Forward-LookingStatements**

This Annual Reporton Form 10-K (“Form 10-K”) and other reports issued by HFFinancial Corp. (the “Company”), including reports filed with the Securitiesand Exchange Commission (the “SEC”), contain “forward-looking statements” thatdeal with future results, expectations, plans and performance. In addition, theCompany’s management may make forward-looking statements orally to the media,securities analysts, investors or others. These forward-looking statementsmight include one or more of the following:

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

·       Descriptionsof plans or objectives of management for future operations, products orservices, transactions, investments and use of subordinated debentures payableto trusts.

·       Forecastsof future economic performance.

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

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

Forward-looking statements about the Company’sexpected financial results and other plans are subject to certain risks,uncertainties and assumptions. These include, but are not limited to, the risksdiscussed in Part I, Item 1A “Risk Factors” in this Form 10-Kand the following: possible legislative changes and adverse economic, businessand competitive conditions and developments (such as shrinking interest marginsand continued short-term rate environments); deposit outflows; reduced demandfor financial services and loan products; changes in accounting policies orguidelines, or in monetary and fiscal policies of the federal government;changes in credit and other risks posed by the Company’s loan and leaseportfolios; the ability or inability of the Company to manage interest rate andother risks; unexpected or continuing claims against the Company’s self-insuredhealth plan; the Company’s use of trust preferred securities; the ability orinability of the Company to successfully enter into a definitive agreement forand close anticipated transactions; technological, computer-related oroperational difficulties; adverse changes in securities markets; results oflitigation; or other significant uncertainties.

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

References in thisForm 10-K to “we,” “our,” “us” and other similar references are tothe Company, unless otherwise expressly stated or the context requiresotherwise.

**PART I**

**Item 1.**                        *Business*

Thissection should be read in conjunction with the following parts of thisForm 10-K: Part II, Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” Part II, 

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Item 7A, “Quantitative and Qualitative DisclosuresAbout Market Risk” and Part II, Item 8, “Financial Statements andSupplementary Data.”

**The Company**

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

The executive offices ofthe Company and its direct and indirect subsidiaries are located at 225 SouthMain Avenue, Sioux Falls, South Dakota, 57104. The Company’s telephone numberis (605) 333-7556.

**Website andAvailable Information**

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

The Company makesavailable, free of charge, its Form 10-K, its quarterly reports onForm 10-Q, its current reports on Form 8-K and amendmentsto such reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), as soon as reasonably practicable after such forms are filed with orfurnished to the SEC. Copies of these documents are available to stockholdersupon request addressed to the Secretary of the Company at 225 South MainAvenue, Sioux Falls, South Dakota, 57104.

**The Bank**

The Bank was founded in 1929 and is a federallychartered stock savings bank headquartered in Sioux Falls, South Dakota. TheBank provides full-service consumer and commercial business banking, includingan array of financial products, to meet the needs of its market place. The Bankattracts deposits from the general public and uses such deposits, together withborrowings 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 portfolioincludes, among other things, automobile loans, home equity loans, loanssecured by deposit accounts and student loans. The Bank also purchasesmortgage-backed securities and invests in U.S. Government and agencyobligations and other permissible investments. The Bank does not hold any non-investmentgrade bonds (i.e., “junk bonds”). The Bank receives loan servicing income onloans serviced for others and commission income from credit life insurance onconsumer loans. The Bank, through its wholly-owned subsidiaries, offersannuities, mutual funds, life insurance and other financial products andequipment leasing services.

The Bank’s deposits areinsured up to applicable limits by the Deposit Insurance Fund (“DIF”), which isadministered by the Federal Deposit Insurance Corporation (“FDIC”), and theBank is subject to primary regulation and examination by the Office of ThriftSupervision (“OTS”).

**Segments**

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

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(includingleasing activities) and “other.” The “banking” segment is conducted through theBank and Mid America Capital Services, Inc. (“Mid America Capital”)and the “other” segment is composed of smaller nonreportable segments, theCompany and inter-segment eliminations. For financial information by segmentsee Note 1 of “Notes to Consolidated Financial Statements,” which is includedin Part II, Item 8, “Financial Statements and Supplementary Data” ofthis Form 10-K.

**SubsidiaryActivities**

In addition to the Bank, the Company had six otherwholly-owned subsidiaries as of June 30, 2007: HF FinancialGroup, Inc. (“HF Group”), HF Financial Capital Trust II (“Trust II”), HFFinancial Capital Trust III (“Trust III”), HF Financial Capital Trust IV(“Trust IV”), HF Financial Capital Trust V (“Trust V”) and HomeFirstMortgage Corp. (the “Mortgage Corp.”).

In August 2002, the Companyformed HF Group, a South Dakota corporation, to market software tofacilitate employee benefits administration, payroll processing and managementand governmental reporting. HF Group has an approved line of credit with theCompany of $100,000, with no funds advanced as of June 30, 2007.Intercompany interest income and interest expense are eliminated in thepreparation of consolidated financial statements.

In July 2002, the Company formed Trust II, aDelaware corporation, for the sole purpose of issuing trust preferredsecurities and investing the proceeds in subordinated debentures of theCompany. These subordinated debentures constitute the sole asset of Trust II.

In December 2002, the Company formed Trust III, aDelaware corporation, for the sole purpose of issuing trust preferredsecurities and investing the proceeds in subordinated debentures of theCompany. These subordinated debentures constitute the sole asset of Trust III.

In September 2003, the Company formed Trust IV, aDelaware corporation, for the sole purpose of issuing trust preferredsecurities and investing the proceeds in subordinated debentures of theCompany. These subordinated debentures constitute the sole asset of Trust IV.

In December 2006, the Company formed Trust V, aDelaware corporation, for the sole purpose of issuing trust preferredsecurities and investing the proceeds in subordinated debentures of theCompany. These subordinated debentures constitute the sole asset of Trust V.

The Mortgage Corp., a South Dakota corporation, waspreviously engaged in the business of originating one- to four-familyresidential mortgage loans, which were sold into the secondary market. TheMortgage Corp. had no activity during fiscal 2007.

As a federally chartered thrift institution, the Bankis permitted by OTS regulations to invest up to 2.00% of its assets in thestock of, or loans to, service corporation subsidiaries. The Bank may invest anadditional 1.00% of its assets in service corporations where such additionalfunds are used for inner-city or community development purposes. The Bankcurrently has less than 1.00% of its assets in investments in its subsidiaryservice corporations as defined by the OTS. In addition to investments inservice corporations, the Bank is permitted to invest an unlimited amount inoperating subsidiaries engaged solely in activities in which the Bank mayengage directly.

The Bank has five wholly-owned subsidiaries, HometownInsurors, Inc. (“Hometown”), Mid America Capital, Home FederalSecuritization Corp. (“HFSC”), Mid-America Service Corporation (“Mid-America”)and PMD, Inc. (“PMD”).

Hometown, a South Dakota corporation, providesfinancial and insurance products to customers of the Bank and members of thegeneral public in the Bank’s market area. Insurance products offered byHometown primarily include annuities and life insurance products. OnAugust 8, 2003, the Company sold the property and casualty insurance bookof business of Hometown to a third party for total proceeds of 

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$375,000. The salesagreement included a “covenant not to compete” clause, prohibiting Hometownfrom directly or indirectly selling property or casualty insurance for threeyears in the state of South Dakota. This covenant expired as of August 8,2006. The transaction was effective as of July 31, 2003 and had animmaterial impact on the Company’s financial position and results ofoperations. Hometown obtains its funding via a line of credit from the Bank.Banking regulations do not limit the amount of funding provided to an operatingsubsidiary. As of June 30, 2007, the Bank had advanced no funds on anapproved line of credit of $100,000. Intercompany interest income and interestexpense are eliminated in the preparation of consolidated financial statements.

Mid America Capital, a SouthDakota corporation, specializes in equipment finance leasing. MidAmerica Capital obtains its funding through a line of credit from the Bank.Banking regulations do not limit the amount of funding provided to an operatingsubsidiary. As of June 30, 2007, Mid America Capital had advanced $18.2million on an approved line of credit of $35.0 million with the Bank.Intercompany interest income and interest expense are eliminated in thepreparation of consolidated financial statements.

HFSC, a Delaware corporation, existed for the solepurpose of buying motor vehicle installment loans from the Bank to besecuritized. HFSC had no activity during fiscal 2007. See “Consumer Lending—*Other Consumer Lending*” and “Off-Balance Sheet FinancingArrangements” of this Form 10-K for more information on theautomobile securitization.

Mid-America, a South Dakota corporation, in the pastprovided residential appraisal services to the Bank and other lenders in theBank’s market. Mid-America had no activity during fiscal 2007.

PMD, a South Dakotacorporation, in the past was engaged in the business of buying, selling andmanaging repossessed real estate properties. PMD had no activity during fiscal2007.

**Market Area**

Based on total assets at June 30, 2007, the Bankis the largest savings association headquartered in South Dakota. The Bank hasa total of 33 banking centers in its market area and one internet branchlocated at www.homefederal.com*.*The Bank’sprimary market area includes communities located in eastern and central SouthDakota, including the cities of Sioux Falls, Brandon, Pierre, Freeman, DellRapids, Hartford, Canton, Parker, Lennox, Mitchell, Aberdeen, Brookings, DakotaDunes, Colman, Crooks, Watertown, Yankton and Harrisburg. The Bank also has abranch in Marshall, Minnesota, which serves customers located in southwesternMinnesota, and its banking center located in Dakota Dunes, South Dakota whichserves customers located in northwestern Iowa. The Bank’s primary market areafeatures a variety of agri-business, banking, financial services, health careand light manufacturing firms. The internet branch allows access to customersbeyond traditional geographical areas.

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

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

**Lending Activities**

The Bank originates avariety of loans including business banking loans, including commercial andagricultural loans; mortgage lending, including one- to four-family residentialmortgages; and consumer loans, including loans for automobile purchases, homeequity and home improvement loans and student loans.

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**Business Banking**

*CommercialBusiness Lending.*   In order to serve the needs ofthe local business community and improve the interest rate sensitivity andyield of its assets, the Bank originates adjustable- and fixed-rate commercialloans. Interest rates on commercial business loans adjust or float with adesignated national index plus a specified margin. The Bank’s commercialbusiness lending activities encompass loans with a variety of purposes andsecurity, including loans to finance accounts receivable, inventory andequipment and business expansion within the Bank’s market area. The Bankoriginates commercial business loans directly and through programs sponsored bythe Small Business Administration (“SBA”) of which a portion of such loans arealso guaranteed in part by the SBA. The Bank generally originates commercialbusiness loans for its portfolio and retains the servicing with respect to suchloans. In the future, the Bank anticipates continued expansion and emphasis ofits commercial business lending, subject to market conditions and the HomeOwners’ Loan Act (“HOLA”) restrictions. See “Regulation—*Business Activities*” below for HOLArestrictions.

Commercial business loans typically are made on thebasis of the borrower’s ability to make repayment from the cash flow of theborrower’s business. As a result, the availability of funds for the repaymentof commercial business loans may be substantially dependent on the success ofthe business itself (which, in turn, may be dependent upon the general economicenvironment). The Bank’s commercial business loans are occasionally secured bythe assets of the business, such as accounts receivable, equipment andinventory. However, the collateral securing the loans may depreciate over time,may be difficult to appraise and may fluctuate in value based on the success ofthe business. Whenever possible, the Bank’s commercial business loans includepersonal guarantees of the borrowers. In addition, the loan officer may, on occasion,perform on-site visits, obtain financial statements and perform a financialreview of the loan.

*Multi-Familyand Commercial Real Estate Lending.*   The Bankengages in multi-family and commercial real estate lending primarily inSouth Dakota and the adjoining Midwestern states. These lending activities mayinclude existing property or new construction development or purchased loans.

Loans secured by multi-family and commercialreal estate properties are generally larger and involve a greater degree ofcredit risk than one- to four-family residential mortgage loans.Because payments on loans secured by multi-family and commercial realestate properties are often dependent on the successful operation or managementof the properties, repayment of such loans may be subject to adverse conditionsin the real estate market or the economy. If the cash flow from the project isreduced (for example, if leases are not obtained or renewed), the borrower’sability to repay the loan may be impaired. In addition, loans secured byproperty outside of the Bank’s primary market area may contain a higher degreeof risk due to the fact that the Bank may not be as familiar with marketconditions where such property is located. The Bank does not have a materialconcentration of multi-family or commercial real estate loans outside of SouthDakota and the adjoining Midwestern states.

The Bank presently originates adjustable-rate,short-term balloon payment, fixed-rate multi-family and commercial real estateloans. The Bank’s multi-family and commercial real estate loan portfoliois secured primarily by apartment buildings and owner occupied and non-owneroccupied commercial real estate. The terms of such loans are negotiated on acase-by-case basis. Commercial real estate loans generally have terms that donot exceed 25 years. The Bank has a variety of rate adjustment features, callprovisions and other terms in its multi-family and commercial real estateloan portfolio. Generally, the loans are made in amounts up to 80.00% of theappraised value of the collateral property and with debt service coverageratios of 115.00% or higher. The debt service coverage is the ratio of net cashfrom operations before payment of debt service. However, these percentages mayvary depending on the type of security and the guarantor. Such loans providefor a negotiated margin over a designated national index. The Bank analyzes thefinancial condition of the borrower, the borrower’s credit history, theborrower’s 

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prior record for producingsufficient income from similar loans, references and the reliability andpredictability 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 theloan or the relationship with the borrower, the Bank may decide to sellparticipations in the loan. The sale of participation interests in a loan arenecessitated by the amount of the loan or the limitation of loans-to-oneborrower. See “Regulation—*Loans-to-OneBorrower*” for a discussion of the loans-to-one borrower regulations.In return for servicing these loans for the participants, the Bank generally receivesa fee of 0.25% to 0.38%. Also, income is received at loan closing from loanfees and discount points. Appraisals on properties securing multi-familyand commercial real estate loans originated by the Bank are performed byappraisers approved pursuant to the Bank’s appraisal policy.

The HOLA includes a provision that limits the Bank’snon-residential real estate lending to no more than four times its totalcapital. This maximum limitation, which at June 30, 2007 was $345.0million, has not materially limited the Bank’s lending practices.

Under HOLA, the maximum amount which the Bank may lendto any one borrower is 15.00% of the Bank’s unimpaired capital and surplus or$13.1 million at June 30, 2007. Loans in an amount equal to an additional10.00% of unimpaired capital and surplus may be made to the same borrower ifsuch loans are fully secured by readily marketable collateral. The Bank mayrequest a waiver from the OTS to exceed the 15.00% loans-to-one borrowerlimitation on a case-by-case basis. See “Regulation—*Loans-to-One Borrower*” for more information and a discussionof the loans-to-one borrower regulations.

*Constructionand Development Lending.*   The Bank makesconstruction loans to individuals for the construction of their residences aswell as to builders and, to a lesser extent, developers, for the constructionof one- to four-family residences and condominiums and thedevelopment of one- to four-family lots in the Bank’s primarymarket area.

Construction loans to individuals for their residencesare structured to be converted to mortgage loans at the end of the constructionphase, which typically runs six to 12 months. These construction loans haverates and terms which match the one- to four-family residentialmortgage loans offered by the Bank. Residential construction loans aregenerally underwritten pursuant to the same guidelines used for originatingresidential mortgage loans.

The Bank also makes loans to developers for thepurpose of developing one- to four-family lots. These loanstypically have terms of one year and carry floating interest rates based on anational designated index. Loan commitment and partial release fees arecharged. These loans generally provide for the payment of interest and loanfees from loan proceeds. The principal balance of these loans is typically paiddown as lots are sold. Builder construction and development loans are obtainedprincipally through continued business from developers and builders who havepreviously borrowed from the Bank, as well as broker referrals and directsolicitations of developers and builders. The application process includes asubmission to the Bank of plans, specifications and costs of the project to beconstructed or developed. These items are used as a basis to determine theappraised value of the subject property. Loans are based on the lesser ofcurrent appraised value and/or the cost of construction (land plus building).

The Bank makes loans for the construction of multi-familyresidential 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 amaximum loan-to-value ratio of 80.00% and land development loans aregenerally originated with a maximum loan-to-value ratio of 60.00%,based upon an independent appraisal. Because of the uncertainties inherent inestimating development and construction costs and the market for the projectupon completion, it is relatively difficult to evaluate accurately the 

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total loan funds requiredto complete a project, the related loan-to-value ratios and thelikelihood of ultimate success of the project. Construction and developmentloans to borrowers other than owner occupants also involve many of the samerisks discussed above regarding multi-family and commercial real estateloans and tend to be more sensitive to general economic conditions than manyother types of loans.

Prior to making a commitment to fund a constructionloan, 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. TheBank’s construction loan policy provides for the inspection of properties byindependent in-house and outside inspectors at the commencement ofconstruction and prior to disbursement of funds during the term of theconstruction loan.

*AgriculturalLoans.**  *In orderto serve the needs of the local agricultural community and improve the interestrate sensitivity and yield of its assets, the Bank originates agriculturalloans through its agricultural division. The agricultural division offers loansto its customers such as: (1) operating loans which are used to fundoperating expenses, which typically have a one year term and are indexed to thenational prime rate; (2) term loans on machinery, equipment and breedingstock that may have a term up to seven years and require annual payments;(3) agricultural farmland term loans which are used to fund land purchasesor refinances; (4) specialized livestock loans to fund facilities andequipment for confinement enterprises; and (5) loans to fund ethanol plantdevelopment. Agriculture real estate loans typically will have personalguarantees of the borrowers, a first lien on the real estate, interest ratesadjustable to the national prime rate or Treasury Note rates, and annual,quarterly or monthly payments. Operating and term loans are secured by farmchattels (crops, livestock, machinery, etc.), which are the operating assets ofthe borrower. The Bank also originates agricultural loans directly and throughprograms sponsored by the Farmers Service Agency (“FSA”) of which a portion ofsuch loans are also guaranteed in part by the FSA.

Loan customers arerequired to supply current financial statements, tax returns for the past threeto five years, and cash flow projections which are updated on an annual basis.In addition, on major loans, the loan officer will perform an annual farmvisit, 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 generatedby the Bank’s marketing efforts, its present customers, walk-in customersand referrals from real estate brokers and builders. The Bank has focused itslending efforts primarily on the origination of loans secured by firstmortgages 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-familyresidential mortgage loans in amounts up to 95.00% of the appraised value ofthe collateral property provided that private mortgage insurance is obtained inan 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 theinitial three to five years, which then converts to a one-year ARM loanfor the remainder of the life of the loan. These loans provide for an annualcap and a lifetime cap at a set percent over the fully-indexed rate.

The Bank also offers certain new products to meet therecent needs of consumers. Currently, the Bank offers 100% financing, interestonly mortgages, 80/20 mortgages and reverse mortgages. All of these mortgageproducts are sold in the secondary market and must meet the secondary marketstandards.

The Bank also offers a 30-year balloon loan,which is sold on the secondary market and has a fixed-rate for the firstseven years of the loan. At the end of the seven-year period, the loanconverts to a 23-year fixed-rate loan at the then current marketrate provided that the borrower qualifies at the new rate. If the borrowerfails to qualify at the new rate, the loan becomes payable in full.

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To meet the needs of the Bank’s borrowers andfinancial needs of the communities it serves, the Bank has developed twodistinct types of loan programs. The Integrity Mortgage Program is a limiteddocumentation program that is generally available to the upper credit customer.The Olympic Plus Program is a program for individuals that do not meet secondarymarket standards but are eligible for private mortgage insurance. The programunderwriting guidelines match those as established by the private mortgageinsurance company. Borrowers may choose from either an ARM or balloon productas a financing option.

The Bank also offers fixed-rate 10- to 30-yearmortgage loans that conform to secondary market standards. Interest ratescharged on these fixed-rate loans are competitively priced on a dailybasis according to market conditions. Residential loans generally do notinclude prepayment penalties.

The Bank also originates fixed-rate one-to four-family residential mortgage loans through the South DakotaHousing Development Authority (“SDHDA”) program. These loans generally haveterms not to exceed 30 years and are insured by the Federal HousingAdministration (“FHA”), Veterans Administration (“VA”), Rural Development orprivate mortgage insurance. The Bank receives an origination fee of 1.00% ofthe loan amount from the borrower and a servicing fee of generally 0.38% fromthe SDHDA for these services. The Bank is the largest servicer of loans for theSDHDA. At June 30, 2007, the Bank serviced $868.0 million of mortgageloans for the SDHDA. See Note 5 of “Notes to Consolidated FinancialStatements,” which is included in Part II, Item 8, “Financial Statementsand Supplementary Data” in this Form 10-K for information on loanservicing.

In underwriting one- to four-familyresidential mortgage loans, the Bank evaluates both the borrower’s ability tomake monthly payments and the value of the property securing the loan. Theproperty that secures the real estate loans made by the Bank is appraised by anappraiser approved under the Bank’s appraisal policy. The Bank requiresborrowers to obtain title, fire and casualty insurance in an amount not lessthan the amount of the loan. Real estate loans originated by the Bank contain a“due-on-sale” clause allowing the Bank to declare the unpaidprincipal balance due and payable upon the sale of the collateral property.

In February 2005, theBank introduced QuickClickTMOnline Mortgage Solutions, a service that allowscustomers to check rates, research loan options and complete mortgageapplications via the Bank’s website. This service is currently available tobranch locations in South Dakota and Minnesota.

**Consumer Lending**

*OtherConsumer Lending.*   The Bank’s managementconsiders its consumer loan products to be an important component of itslending strategy. Specifically, consumer loans generally have shorter terms tomaturity and carry higher rates of interest than one- to four-familyresidential mortgage loans. In addition, the Bank’s management believes thatthe offering of consumer loan products helps to expand and create stronger tiesto its existing customer base by increasing the number of customerrelationships and providing cross-marketing opportunities.

The Bank purchases automobile conditional salescontracts from selected dealers within its market area, as well as originatingautomobile loans directly. The growth in indirect lending has providedsecuritization opportunities in the capital markets. On January 31, 2003,the Bank sold approximately $40.1 million principal of indirect and $9.9million principal of direct automobile receivables in a securitizationtransaction. The proceeds were used in part to continue to service the demandof the Bank’s dealer network. The Bank had the option to execute a cleanup callwhen the total outstanding balance was at 10.0% or less of the original poolbalance, or $5.0 million. On November 9, 2005, the Bank exercised its optionto execute the cleanup call by purchasing the outstanding principal balances ofthe securitized motor vehicle installment loans.

8

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

The student loans originated by the Bank areguaranteed as to principal and interest by the South Dakota Education AssistanceCorporation. The Bank sells such student loans with servicing rights releasedapproximately 120 days after funds have been disbursed to the student. The Bankreceives a market premium on the sale of the loan amount.

Consumer loan terms vary according to the type ofcollateral, length of contract and creditworthiness of the borrower. The Bankoffers both open- and closed-end credit. Overdraft lending isextended through lines of credit that are tied to a checking account. Thecredit lines generally bear interest at 18.00% and are generally limited to nomore than $2,000. Loans secured by deposit accounts at the Bank are currentlyoriginated for up to 90.00% of the account balance (although historically theBank has loaned up to 100.00% of the account balance), with a hold placed onthe account restricting the withdrawal of the account balance. The interestrate on such loans is typically equal to 2.00% above the contract rate.

The underwriting standards employed by the Bank forconsumer loans include an application, a determination of the applicant’spayment history on other debts, and an assessment of the ability to meetexisting obligations and payments on the proposed loan. Althoughcreditworthiness of the applicant is a primary consideration, the underwritingprocess also includes a comparison of the value of the security, if any, inrelation to the proposed loan amount.

Consumer loans may entailgreater credit risk than residential mortgage loans, particularly in the caseof consumer loans which are unsecured or are secured by rapidly depreciableassets, such as automobiles or boats. In such cases, any repossessed collateralfor a defaulted consumer loan may not provide an adequate source of repaymentof the outstanding loan balance as a result of the greater likelihood ofdamage, loss or depreciation. In addition, consumer loan collections aredependent on the borrower’s continuing financial stability, thus are morelikely to be affected by adverse personal circumstances. Furthermore, theapplication of various federal and state laws, including bankruptcy andinsolvency laws, may limit the amount which can be recovered on such loans.

**Leasing Activities**

*General.**  *Through its wholly-owned subsidiary, Mid AmericaCapital, the Bank originates commercial and municipal leases. These productshave a fixed interest rate for the duration of the lease with terms typicallyranging from 24 – 60 months. The leases generally are 100.00% financed withonly the first or first and last months’ payments due at lease inception. As aresult of the 100.00% financing and fixed interest rate, the yield on leases ishigher than similar type lending products.

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

*CommercialLeases.**  *In orderto support the Bank and its customers and to improve the yield of its assets,Mid America Capital originates commercial leases to customers primarily in theupper Midwest. Mid America Capital offers three types of commercial leases:capital, tax and Terminal Rental Adjustment Clause (“TRAC”) leases. TRAC leasesare generally for medium- to heavy-duty titled equipment, such as semi-tractorsand trailers and medium- to heavy-duty trucks. Leases may be structured with acontracted residual of as little as $1.00 up to 20.00-25.00% of theequipment cost. Leases encompass a wide variety of equipment for a variety ofcommercial uses. The customer base tends to be small- to medium-sizedbusinesses that view leasing as another financing option that augments theiroverall operation. Repayment terms tend to be monthly in nature.

9

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As with commercial loans, commercial leases typicallyare made on the basis of the borrower’s ability to make repayment from the cashflow of their business. As a result, the availability of funds for therepayment of commercial leases may be substantially dependent on the success ofthe business itself. The collateral securing the leases will generallydepreciate over time, may be difficult to appraise and may fluctuate in valuebased on the success of the business.

*MunicipalLeases.**  *The Bankand Mid America Capital also originate leases to municipal entities such ascities, counties, and public schools. The lessee must be a politicalsubdivision of the state in order to qualify as a municipal lease. Because theinterest income earned on this type of lease is exempt from federal incometaxes, the rate offered to the municipality is usually substantially lower thana 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 tolevy and collect taxes. Assuming the municipality has a bond rating, that bondrating, together with audited financial statements, are the basis for thelease. On larger leases, bond ratings and financial statements will be reviewedannually.

10

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*Loan and Lease PortfolioComposition.*   The following table sets forthinformation concerning the composition of the Company’s loan and leaseportfolio from continuing operations in dollar amounts and in percentages(before deductions for the undisbursed portion of loans in process, deferredfees and discounts and allowance for losses) as of the dates indicated.

|                                               | ** ** | **At June 30,**            | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                    | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | ** **                           | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                                    | ** ** | **Amount**                           | ** ** | **of Total** | ** ** | **Amount** | ** ** | **of Total** | ** ** | **Amount** | ** ** | **of Total** | ** ** | **Amount** | ** ** | **of Total** | ** ** | **Amount** | ** ** | **of Total** | ** ** |
| ** **                                    | ** ** | **(Dollars in Thousands)** | ** ** |
| One- to four-family(1)                        |       | $                                    | 125,525    |   | 15.97 | % | $ | 108,342 |   | 14.57 | % | $ | 106,832 |   | 15.46 | % | $ | 104,492 |   | 15.80 | % | $ | 100,065 |   | 16.18 | % |
| Multi-family                                  |       | 34,126                               |       | 4.34 |   | 34,161 |   | 4.59 |   | 34,241 |   | 4.95 |   | 42,721 |   | 6.46 |   | 49,364 |   | 7.98 |   |
| Commercial real estate and  business(2)       |       | 281,357                              |       | 35.79 |   | 248,060 |   | 33.35 |   | 223,812 |   | 32.39 |   | 213,696 |   | 32.32 |   | 206,975 |   | 33.46 |   |
| Agricultural real estate                      |       | 48,030                               |       | 6.11 |   | 31,484 |   | 4.23 |   | 23,954 |   | 3.47 |   | 20,449 |   | 3.09 |   | 18,002 |   | 2.91 |   |
| Construction and development                  |       | 18,674                               |       | 2.38 |   | 33,596 |   | 4.52 |   | 15,454 |   | 2.24 |   | 15,044 |   | 2.28 |   | 9,083 |   | 1.47 |   |
| Equipment finance leases(2)                   |       | 22,267                               |       | 2.83 |   | 29,343 |   | 3.95 |   | 33,090 |   | 4.79 |   | 26,942 |   | 4.07 |   | 23,016 |   | 3.72 |   |
| Agricultural business                         |       | 69,608                               |       | 8.86 |   | 57,985 |   | 7.80 |   | 50,088 |   | 7.25 |   | 42,953 |   | 6.50 |   | 40,109 |   | 6.48 |   |
| Consumer Loans:                               |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Automobile                                    |       | 98,238                               |       | 12.50 |   | 106,900 |   | 14.37 |   | 108,621 |   | 15.72 |   | 101,669 |   | 15.38 |   | 74,066 |   | 11.98 |   |
| Deposit account                               |       | 1,772                                |       | 0.23 |   | 1,553 |   | 0.21 |   | 1,253 |   | 0.18 |   | 1,489 |   | 0.22 |   | 1,463 |   | 0.24 |   |
| Student(3)                                    |       | 263                                  |       | 0.03 |   | 420 |   | 0.06 |   | 400 |   | 0.06 |   | 324 |   | 0.05 |   | 7,745 |   | 1.25 |   |
| Junior liens on  mortgages                    |       | 79,113                               |       | 10.06 |   | 84,898 |   | 11.42 |   | 87,243 |   | 12.63 |   | 85,684 |   | 12.96 |   | 81,064 |   | 13.11 |   |
| Other(4)                                      |       | 7,079                                |       | 0.90 |   | 6,932 |   | 0.93 |   | 5,968 |   | 0.86 |   | 5,748 |   | 0.87 |   | 7,503 |   | 1.22 |   |
| Total consumer loans                          |       | 186,465                              |       | 23.72 |   | 200,703 |   | 26.99 |   | 203,485 |   | 29.45 |   | 194,914 |   | 29.48 |   | 171,841 |   | 27.80 |   |
| Total gross loans and leases                  |       | $                                    | 786,052    |   | 100.00 | % | $ | 743,674 |   | 100.00 | % | $ | 690,956 |   | 100.00 | % | $ | 661,211 |   | 100.00 | % | $ | 618,455 |   | 100.00 | % |
|                                          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Less:*                                       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Undisbursed portion of loans  in process |       | (10,387                              | )          |   |   | (9,674 | ) |   |   | (6,350 | ) |   |   | (7,338 | ) |   |   | (3,576 | ) |   |   |
| Deferred fees and  discounts                  |       | 582                                  |       |   |   | 883 |   |   |   | 1,289 |   |   |   | 1,029 |   |   |   | 364 |   |   |   |
| Allowance for losses                          |       | (5,872                               | )          |   |   | (5,657 | ) |   |   | (5,076 | ) |   |   | (3,605 | ) |   |   | (3,842 | ) |   |   |
| Total loans and leases receivable, net        |       | $                                    | 770,375    |   |   |   | $ | 729,226 |   |   |   | $ | 680,819 |   |   |   | $ | 651,297 |   |   |   | $ | 611,401 |   |   |   |

----

(1)          Includes one- tofour-family loans held for sale.

(2)          Includes tax-exemptloans and leases.

(3)          Includes mobile homeloans.

(4)          Includes student loansheld for sale.

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Thefollowing table sets forth the composition of the Company’s loan and leaseportfolio from continuing operations by fixed- and adjustable-rate in dollaramounts and in percentages (before deductions for the undisbursed portion ofloans in process, deferred fees and discounts and allowance for losses) as ofthe dates indicated. Variable loans are tied to various indices including primerate and the treasury yield curve and have reset dates ranging from daily toseveral years.

|                                                   | ** ** | **At June 30,**            | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                        | ** ** | ** **                           | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                                        | ** ** | **Amount**                           | ** ** | **of Total** | ** ** | **Amount** | ** ** | **of Total** | ** ** | **Amount** | ** ** | **of Total** | ** ** | **Amount** | ** ** | **of Total** | ** ** | **Amount** | ** ** | **of Total** | ** ** |
| ** **                                        | ** ** | **(Dollars in Thousands)** | ** ** |
| *Fixed-Rate Loans and Leases:*     | ** ** | ** **                           | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
| One- to  four-family(1)                           |       | $ 89,086                        |       |   | 11.33 | % |   | $ 70,341 |   |   | 9.46 | % |   | $ 65,605 |   |   | 9.49 | % |   | $ 70,895 |   |   | 10.72 | % |   | $ 72,472 |   |   | 11.72 | % |   |
| Multi-family, commercial &  construction |       | 121,046                              |       |   | 15.40 |   |   | 115,939 |   |   | 15.59 |   |   | 70,121 |   |   | 10.14 |   |   | 70,696 |   |   | 10.69 |   |   | 65,070 |   |   | 10.52 |   |   |
| Agricultural real  estate                         |       | 13,591                               |       |   | 1.73 |   |   | 9,495 |   |   | 1.28 |   |   | 4,096 |   |   | 0.59 |   |   | 2,609 |   |   | 0.39 |   |   | 4,760 |   |   | 0.77 |   |   |
| Consumer(3)                                       |       | 146,686                              |       |   | 18.66 |   |   | 151,354 |   |   | 20.35 |   |   | 141,942 |   |   | 20.54 |   |   | 133,012 |   |   | 20.12 |   |   | 110,037 |   |   | 17.79 |   |   |
| Agricultural  business                            |       | 14,007                               |       |   | 1.78 |   |   | 6,673 |   |   | 0.90 |   |   | 6,759 |   |   | 0.98 |   |   | 3,905 |   |   | 0.59 |   |   | 5,285 |   |   | 0.85 |   |   |
| Equipment finance leases(2)                       |       | 22,267                               |       |   | 2.83 |   |   | 29,343 |   |   | 3.95 |   |   | 33,090 |   |   | 4.79 |   |   | 26,942 |   |   | 4.07 |   |   | 23,016 |   |   | 3.72 |   |   |
| Total fixed-rate  loans and leases                |       | 406,683                              |       |   | 51.73 |   |   | 383,145 |   |   | 51.53 |   |   | 321,613 |   |   | 46.53 |   |   | 308,059 |   |   | 46.58 |   |   | 280,640 |   |   | 45.37 |   |   |
| *Adjustable-Rate Loans:*                          | ** ** | ** **                           | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
| One- to  four-family(1)                           |       | 36,439                               |       |   | 4.64 | % |   | 38,001 |   |   | 5.11 | % |   | 41,227 |   |   | 5.97 | % |   | 33,597 |   |   | 5.08 | % |   | 27,593 |   |   | 4.46 | % |   |
| Multi-family, commercial &  construction |       | 213,111                              |       |   | 27.12 |   |   | 199,878 |   |   | 26.87 |   |   | 203,386 |   |   | 29.44 |   |   | 200,765 |   |   | 30.36 |   |   | 200,352 |   |   | 32.40 |   |   |
| Agricultural real  estate                         |       | 34,439                               |       |   | 4.38 |   |   | 47,770 |   |   | 6.42 |   |   | 19,858 |   |   | 2.87 |   |   | 17,840 |   |   | 2.70 |   |   | 13,242 |   |   | 2.14 |   |   |
| Consumer(3)(4)                                    |       | 39,779                               |       |   | 5.06 |   |   | 49,349 |   |   | 6.64 |   |   | 61,543 |   |   | 8.92 |   |   | 61,902 |   |   | 9.37 |   |   | 61,804 |   |   | 10.00 |   |   |
| Agricultural  business                            |       | 55,601                               |       |   | 7.07 |   |   | 25,531 |   |   | 3.43 |   |   | 43,329 |   |   | 6.27 |   |   | 39,048 |   |   | 5.91 |   |   | 34,824 |   |   | 5.63 |   |   |
| Total adjustable-rate loans                       |       | 379,369                              |       |   | 48.27 |   |   | 360,529 |   |   | 48.47 |   |   | 369,343 |   |   | 53.47 |   |   | 353,152 |   |   | 53.42 |   |   | 337,815 |   |   | 54.63 |   |   |
| Total loans and  leases                           |       | 786,052                              |       |   | 100.00 | % |   | 743,674 |   |   | 100.00 | % |   | 690,956 |   |   | 100.00 | % |   | 661,211 |   |   | 100.00 | % |   | 618,455 |   |   | 100.00 | % |   |
|                                              |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Less:*                                           | ** ** | ** **                           | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
| Undisbursed  portion of loans in  process         |       | (10,387                              | )          |   |   |   |   | (9,674 | ) |   |   |   |   | (6,350 | ) |   |   |   |   | (7,338 | ) |   |   |   |   | (3,576 | ) |   |   |   |   |
| Deferred fees and discounts                       |       | 582                                  |       |   |   |   |   | 883 |   |   |   |   |   | 1,289 |   |   |   |   |   | 1,029 |   |   |   |   |   | 364 |   |   |   |   |   |
| Allowance for loan  and lease losses              |       | (5,872                               | )          |   |   |   |   | (5,657 | ) |   |   |   |   | (5,076 | ) |   |   |   |   | (3,605 | ) |   |   |   |   | (3,842 | ) |   |   |   |   |
| Total loans and leases receivable,  net           |       | $ 770,375                       |       |   |   |   |   | $ 729,226 |   |   |   |   |   | $ 680,819 |   |   |   |   |   | $ 651,297 |   |   |   |   |   | $ 611,401 |   |   |   |   |   |

----

(1)           Includes one- to four-family loans heldfor sale.

(2)           Includes tax-exempt loans and leases.

(3)           Includes mobile home loans.

(4)           Includes student loans held for sale.

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Thefollowing schedule illustrates the scheduled principal contractual repaymentsof the Company’s loan and lease portfolio at June 30, 2007. Mortgageswhich have adjustable or renegotiable interest rates are shown as maturing atthe contractual maturity date. The schedule does not reflect the effects ofpossible prepayments or enforcement of due-on-sale clauses.

| ** **             | ** ** | **Real Estate**                 | ** ** | **Non-Real Estate** | ** ** |
|------------------------|------------|--------------------------------------|------------|--------------------------|------------|
| ** **             | ** ** | **One- to Four-**          | ** ** | **Multi-**               | ** ** | ** ** | ** ** | ** ** | ** ** | **Construction &** | ** ** | ** ** | ** ** | **Commercial** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Family(1)**                        | ** ** | **Family**               | ** ** | **Commerical** | ** ** | **Agricultural** | ** ** | **Development** | ** ** | **Consumer(2)** | ** ** | **Business(3)** | ** ** | **Agricultural** | ** ** | **Total** | ** ** |
| ** **             | ** ** | **(Dollars in Thousands)** | ** ** |
| Due in 1 year or  less |       |                                 | $          | 4,411                    |       |   | $ | 2,334 |   |   | $ | 34,541 |   |   |   | $ | 10,040 |   |   |   | $ | 7,092 |   |   |   | $ | 49,478 |   |   |   | $ | 79,053 |   |   |   | $ | 55,723 |   |   | $ | 242,672 |   |
| After 1 to 5 years     |       |                                 | 30,800     |                     |       | 11,946 |   |   | 49,723 |   |   |   | 10,589 |   |   |   | 521 |   |   |   | 118,824 |   |   |   | 30,265 |   |   |   | 10,887 |   |   | 263,555 |   |
| Greater than  5 years  |       |                                 | 90,314     |                     |       | 19,846 |   |   | 96,857 |   |   |   | 27,401 |   |   |   | 11,061 |   |   |   | 18,163 |   |   |   | 13,185 |   |   |   | 2,998 |   |   | 279,825 |   |
| Total                  |       |                                 | $          | 125,525                  |       |   | $ | 34,126 |   |   | $ | 181,121 |   |   |   | $ | 48,030 |   |   |   | $ | 18,674 |   |   |   | $ | 186,465 |   |   |   | $ | 122,503 |   |   |   | $ | 69,608 |   |   | $ | 786,052 |   |

----

(1)                Includes one- to four-family loans held for sale.

(2)                Includes demand loans, loans having no stated maturity,student loans held for sale and overdraft loans.

(3)                Includes equipment finance leases and tax-exempt leases.

Scheduled contractual principal repayments of loans donot reflect the actual life of such assets. The average life of loans issubstantially less than their average contractual terms because of prepayments.In addition, due-on-sale clauses on loans generally give the Bank the right todeclare a conventional loan immediately due and payable in the event, amongother things, that the borrower sells the real property subject to the mortgageand the loan is not repaid. The average life of mortgage loans tends toincrease when current mortgage loan rates are substantially higher than rateson existing mortgage loans and decrease when rates on existing mortgages aresubstantially higher than current mortgage loan rates. The Company’s 2006Annual Report on Form 10-K schedule for payments due within 1 year or lesstotaled $197.2 million.

Thefollowing table sets forth the composition of the Company’s deferred fees anddiscounts on loans as of the dates indicated.

| ** **                                                    | ** ** | **At June 30,**            | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                    | ** ** | **(Dollars in Thousands)** | ** ** |
| One-to  four-family                                           |       | $                                    | (691       | ) | $ | (616 | ) | $ | (576 | ) | $ | (561 | ) | $ | (510 | ) |
| Multi-family,  commercial real estate & construction |       | (276                                 | )          | (348 | ) | (278 | ) | (334 | ) | (407 | ) |
| Consumer                                                      |       | 103                                  |       | 113 |   | 122 |   | 113 |   | 65 |   |
| Agricultural                                                  |       | (44                                  | )          | (32 | ) | (32 | ) | (32 | ) | (16 | ) |
| Equipment finance  leases                                     |       | 40                                   |       | 63 |   | 80 |   | 77 |   | 54 |   |
| Commercial  business                                          |       | 14                                   |       | 5 |   | (15 | ) | (125 | ) | (164 | ) |
| Dealer reserve                                                |       | 1,436                                |       | 1,698 |   | 1,988 |   | 1,891 |   | 1,342 |   |
| Total deferred  fees and discounts                            |       | $                                    | 582        |   | $ | 883 |   | $ | 1,289 |   | $ | 1,029 |   | $ | 364 |   |

 

Deferredfees and discounts on loans and leases have trended to a lesser net deferredcost position. In fiscal 2007, the net deferred fees and discounts on loans andleases decreased by $301,000. This decrease was primarily due to a $262,000decrease in dealer reserve, as a result of lower dollar volume of originatedindirect automobile loans.

13

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**Potential ProblemLoans**

*NonperformingAssets.**  *See “AssetQuality” under Part II, Item 7 “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of this Form 10-K fordiscussion.

*ClassifiedAssets.*   Federal regulations provide for theclassification of loans, leases and other assets, such as debt and equitysecurities considered by the OTS to be of lesser quality, as “substandard,” “doubtful”or “loss.” An asset is considered “substandard” if it is inadequately protectedby the current net worth and paying capacity of the obligor or of thecollateral pledged, if any. “Substandard” assets include those characterized bythe “distinct possibility” that the Company will sustain “some loss” if thedeficiencies are not corrected. Assets classified as “doubtful” have all of theweaknesses inherent in those classified “substandard,” with the addedcharacteristic that the weaknesses present make “collection or liquidation infull,” on the basis of currently existing facts, conditions, and values, “highlyquestionable and improbable.” Assets classified as “loss” are those considered “uncollectible”and of such little value that their continuance as assets without theestablishment of a specific loss reserve is not warranted. Assets which do notcurrently expose the Company to sufficient risk to warrant classification inone of the aforementioned categories, but possess weaknesses, are required tobe 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 to100.00% of that portion of the asset so classified or to charge-off suchamount. The Company’s determination as to the classification of its assets andthe amount of its valuation allowances is subject to review by the Bank’sRegional Director at the regional OTS office, who may order the establishmentof additional general or specific loss allowances.

In connection with the filing of its periodic reportswith the OTS and in accordance with its classification of assets policy, theCompany regularly reviews problem loans and leases in its portfolio todetermine whether any loans or leases require classification in accordance withapplicable regulations. On the basis of management’s monthly review of itsassets, at June 30, 2007, the Company had designated $21.0 million ofits assets as special mention and $5.4 million of its assets as classified. Otherpotential problem loans are included in criticized and classified assets. See “AssetQuality” under Part II, Item 7 “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of this Form 10-K forfurther discussion.

*Allowance for Loan andLease Losses.*   See “Application of CriticalAccounting Policies” and “Asset Quality” under Part II, Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” ofthis Form 10-K for discussion.

**InvestmentActivities**

The Bank is required under OTS regulation to maintaina sufficient amount of liquid assets. Liquidity may increase or decreasedepending upon the availability of funds and comparative yields on investmentsin relation to the return on loans.

Federally chartered savings institutions have theauthority to invest in various types of liquid assets, including United StatesTreasury obligations, securities of various federal agencies, certaincertificates of deposit of insured banks and savings institutions, certainbankers’ acceptances, repurchase agreements and federal funds. Subject tovarious restrictions, federally chartered savings institutions may also investtheir assets in commercial paper, investment grade corporate debt securitiesand mutual funds whose assets conform to the investments that a federallychartered savings institution is otherwise authorized to make directly.

14

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Generally, the investment policy of the Bank is toinvest funds among various categories of investments and maturities based uponthe Bank’s asset/liability management policies, investment quality andmarketability, liquidity needs and performance objectives.

At June 30, 2007, the Company’s investments inmortgage-backed securities totaled $93.9 million, or 9.37% of its total assets.As of such date, the Bank also had a $5.1 million investment in the stock ofthe Federal Home Loan Bank of Des Moines (“FHLB” or “FHLB of Des Moines”) inorder to satisfy the FHLB of Des Moines’ requirement for membership.

Thecomposition and maturities of the investment securities portfolio, excludingequity securities, are indicated in the following table.

| ** **                                  | ** ** | **At June 30, 2007**  | ** **   |
|---------------------------------------------|------------|--------------------------------------|--------------|
| ** **                                  | ** ** | ** **                           | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Total Investment** | ** ** |
| ** **                                  | ** ** | **Less Than 1 Year**  | ** **   | **1 to 5 Years** | ** ** | **5 to 10 Years** | ** ** | **Over 10 Years** | ** ** | **Securities** | ** ** |
| ** **                                  | ** ** | ** **                           | ** **   | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **Amortized**                        | ** **   | **Average** | ** ** | **Amortized** | ** ** | **Average** | ** ** | **Amortized** | ** ** | **Average** | ** ** | **Amortized** | ** ** | **Average** | ** ** | **Amortized** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **Cost**                             | ** **   | **Yield** | ** ** | **Cost** | ** ** | **Yield** | ** ** | **Cost** | ** ** | **Yield** | ** ** | **Cost** | ** ** | **Yield** | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| ** **                                  | ** ** | **(Dollars in Thousands)** | ** **   |
| U.S. government agencies & corporations |       |                                 | $ 1,000 |   |   |   | 5.00 | % |   |   | $ 8,591 |   |   |   | 4.80 | % |   |   | $ 2,501 |   |   |   | 5.85 | % |   |   | — |   |   |   | — |   |   |   | $ 12,092 |   |   |   | $ 12,011 |   |   |
| Federal Home Loan Bank                      |       |                                 | —       |   |   |   | — |   |   |   | 16,496 |   |   |   | 4.91 |   |   |   | 937 |   |   |   | 5.50 |   |   |   | — |   |   |   | — |   |   |   | 17,433 |   |   |   | 17,323 |   |   |
| Municipal bonds                             |       |                                 | 285          |   |   |   | 2.54 |   |   |   | 1,350 |   |   |   | 3.52 |   |   |   | 3,177 |   |   |   | 3.91 |   |   |   | 3,276 |   |   |   | 3.96 |   |   |   | 8,088 |   |   |   | 7,905 |   |   |
| Preferred term  securities                  |       |                                 | —       |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 11,018 |   |   |   | 6.94 |   |   |   | 11,018 |   |   |   | 10,908 |   |   |
| Mortgage-backed securities                  |       |                                 | —       |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 30,342 |   |   |   | 5.16 |   |   |   | 65,315 |   |   |   | 5.30 |   |   |   | 95,657 |   |   |   | 93,853 |   |   |
| Total investment  securities                |       |                                 | $ 1,285 |   |   |   |   |   |   |   | $ 26,437 |   |   |   |   |   |   |   | $ 36,957 |   |   |   |   |   |   |   | $ 79,609 |   |   |   |   |   |   |   | $ 144,288 |   |   |   | $ 142,000 |   |   |

 

The effective maturities for the Bank’smortgage-backed securities is much shorter due to the combination ofprepayments and the variable nature of $42.7 million of mortgage-backedsecurities. The variable or hybrid (fixed for a period of time and thenvariable thereafter) structure gives the Bank flexibility in risk management ofthe balance sheet.

The Company’s investment securities portfolio did notcontain non-investment grade bonds (i.e., “junk bonds”) or othercorporate debt securities.

The Bank’s investmentsecurity portfolio is managed in accordance with a written investment policyadopted by the Board of Directors. Investments may be made by the Bank’sofficers within specified limits and approved in advance by the Board ofDirectors for transactions over these limits. At the present time, the Bankdoes not have any investments that are held for trading purposes. At June 30,2007, the Company had $142.2 million of securities available for sale,including mortgage-backed securities of $93.9 million. See Note 3 of “Notes toConsolidated Financial Statements,” which is included in Part II, Item 8 “FinancialStatements and Supplementary Data” of this Form 10-K for furtherinformation on the Company’s investment portfolio.

**Sources of Funds**

*General.*   TheCompany’s primary sources of funds are earnings, in-market deposits, FHLBadvances and other borrowings, amortization and repayments of loan principal,mortgage-backed securities and callable agency securities. Secondarysources 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 ofDes Moines, and may be used on a short-term basis to compensate forseasonal reductions in deposits or deposit inflows at less than projectedlevels, and may be used on a longer-term basis to support expandedlending activities. The Bank has 

15

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established collateral atthe Federal Reserve Bank (“FRB”) as a contingent source of funding. See Note 8of the “Notes to Consolidated Financial Statements,” which is included in Part II,Item 8 “Financial Statements and Supplementary Data” of this Form 10-Kfor further detail of the Company’s borrowings.

*Deposits.*   TheBank offers a variety of deposit accounts having a wide range of interest ratesand terms. The Bank’s deposits consist of statement savings accounts, checkingaccounts, money market and certificate accounts ranging in terms from 30 daysto five years. The Bank primarily solicits deposits from its market area. TheBank relies primarily on customer service, competitive pricing policies andadvertising to attract and retain these deposits. Based on liquidity needs, theBank may, from time to time, acquire out-of-market deposits.

The flow of deposits is influenced by general economicconditions, changes in money market and prevailing interest rates andcompetition.

The variety of deposit accounts offered by the Bankhas allowed it to be competitive in obtaining funds and to respond withflexibility to changes in consumer demand. In recent years, the Bank has becomemore susceptible to short-term fluctuations in deposit flows as customershave become more interest rate conscious. The Bank manages the pricing of itsdeposits in keeping with its asset/liability management and profitabilityobjectives. Based on its experience, the Bank believes that its savings, moneymarket, and checking accounts are stable sources of deposits. However, theability of the Bank to attract and maintain certificates of deposit, and therates paid on these deposits, has been and will continue to be significantlyaffected by market conditions.

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

| ** **                                                                                                                  | ** ** | **At June 30,**            | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                                  | ** ** | ** **                           | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** |
| ** **                                                                                                                  | ** ** | **Amount**                           | ** ** | **Total** | ** ** | **Amount** | ** ** | **Total** | ** ** | **Amount** | ** ** | **Total** | ** ** |
| ** **                                                                                                                  | ** ** | **(Dollars in Thousands)** | ** ** |
| *Transaction Accounts:*                                                                                                     |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest  bearing accounts                                                                                               |       | $                                    | 86,679     |   |   | 10.62 | % |   | $ | 84,757 |   |   | 11.02 | % |   | $ | 85,705 |   |   | 12.58 | % |   |
| Interest bearing  accounts weighted average rates of 1.97%, 0.95% and 0.52% at June 30,  2007, 2006 and 2005           |       | 87,030                               |       |   | 10.67 |   |   | 54,862 |   |   | 7.14 |   |   | 50,120 |   |   | 7.36 |   |   |
| Savings accounts  weighted average rates of 3.26%, 3.40% and 1.93% at June 30, 2007, 2006  and 2005                    |       | 66,235                               |       |   | 8.12 |   |   | 76,695 |   |   | 9.97 |   |   | 63,235 |   |   | 9.28 |   |   |
| Money market  accounts(1) weighted average rates of 3.84%, 3.89% and 2.80% at  June 30, 2007, 2006 and 2005       |       | 212,546                              |       |   | 26.05 |   |   | 232,471 |   |   | 30.23 |   |   | 209,116 |   |   | 30.7 |   |   |
| Total transaction accounts                                                                                                  |       | 452,490                              |       |   | 55.46 |   |   | 448,785 |   |   | 58.36 |   |   | 408,176 |   |   | 59.92 |   |   |
| *In-Market  Certificates of Deposit:*                                                                                       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 0.00 - 3.99%                                                                                                                |       | 45,387                               |       |   | 5.56 |   |   | 124,302 |   |   | 16.16 |   |   | 216,461 |   |   | 31.78 |   |   |
| 4.00 - 4.99%                                                                                                                |       | 78,457                               |       |   | 9.62 |   |   | 104,320 |   |   | 13.57 |   |   | 19,356 |   |   | 2.84 |   |   |
| 5.00 - 5.99%                                                                                                                |       | 167,710                              |       |   | 20.56 |   |   | 34,135 |   |   | 4.44 |   |   | 7,322 |   |   | 1.07 |   |   |
| 6.00 - 6.99%                                                                                                                |       | 304                                  |       |   | 0.04 |   |   | 7 |   |   | 0.00 |   |   | 1,605 |   |   | 0.24 |   |   |
| 7.00 - 7.99%                                                                                                                |       | —                               |       |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   |
| Total in-market  certificates of deposit                                                                                    |       | 291,858                              |       |   | 35.78 |   |   | 262,764 |   |   | 34.17 |   |   | 244,744 |   |   | 35.93 |   |   |
| Out-of-market certificates of deposit weighted  average rate of 5.10%, 4.69% and 3.09% at June 30, 2007, 2006 and 2005 |       | 71,516                               |       |   | 8.76 |   |   | 57,453 |   |   | 7.47 |   |   | 28,296 |   |   | 4.15 |   |   |
| Total certificates of deposit                                                                                               |       | 363,374                              |       |   | 44.54 |   |   | 320,217 |   |   | 41.64 |   |   | 273,040 |   |   | 40.08 |   |   |
| Total deposits                                                                                                              |       | $                                    | 815,864    |   |   | 100.00 | % |   | $ | 769,002 |   |   | 100.00 | % |   | $ | 681,216 |   |   | 100.00 | % |   |

 

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(1)          Includes out-of-marketmoney market accounts in the amount of $1.9 million at June 30, 2005.

There were no out-of-market money market accounts atJune 30, 2007 and 2006, respectively.

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Thefollowing table sets forth the amount of the Company’s certificates of depositand other deposits by time remaining until maturity as of June 30, 2007.

| ** **                                     | ** ** | **Maturity**                         | ** ** | ** **           | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **3 Months**                    | ** ** | **3 to 6** | ** ** | **6 to 12** | ** ** | **Over** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **or Less**                     | ** ** | **Months**           | ** ** | **Months** | ** ** | **12 Months** | ** ** | **Total** | ** ** |
| ** **                                     | ** ** | **(Dollars in Thousands)** | ** ** |
| Certificates of  deposit less than $100,000(1) |       | $                                    | 48,623     |                 | $          | 39,044 |   | $ | 65,468 |   |   | $ | 35,795 |   |   | $ | 188,930 |   |
| Certificates of deposit of $100,000 or more    |       | 18,254                               |       | 12,755               |       | 21,993 |   |   | 7,866 |   |   | 60,868 |   |
| Out-of-market certificates of deposit(2)       |       | 61,133                               |       | 10,185               |       | 99 |   |   | 99 |   |   | 71,516 |   |
| Public funds(3)(4)                             |       | 23,900                               |       | 15,838               |       | 1,880 |   |   | 442 |   |   | 42,060 |   |
| Total  certificates of deposit                 |       | $                                    | 151,910    |                 | $          | 77,822 |   | $ | 89,440 |   |   | $ | 44,202 |   |   | $ | 363,374 |   |

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(1)          Includes funds from theCertificate of Deposit Account Registry Service (“CDARS”) certificate ofdeposit program of $10.2 million.

(2)          Includes certificates ofdeposit of $100,000 or greater of $65.6 million.

(3)          Includes certificates ofdeposit from governmental and other public entities, excluding out-of-marketcertificates of deposit.

(4)          Includes certificates ofdeposit of $100,000 or greater of $39.8 million.

The Bank solicits certificates of deposit of $100,000or greater from various state, county and local government units which carryrates which are negotiated at the time of deposit. See Note 7 of “Notes toConsolidated Financial Statements,” which is included in Part II, Item 8 “FinancialStatements and Supplementary Data” of this Form 10-K. Deposits at June 30,2007 and 2006 included $73.3 million and $68.9 million, respectively, ofdeposits from one local governmental entity, the majority of which are savingsaccounts.

*Borrowings.*   Althoughdeposits are the Bank’s primary source of funds, the Bank’s policy has been toutilize borrowings when they are a less costly source of funds or can beinvested at a positive rate of return.

The Bank’s borrowings consist primarily of advancesfrom the FHLB of Des Moines upon the security of its capital stock of the FHLBof Des Moines and certain pledgable loans, including but not limited to, itsmortgage related loans, mortgage-backed securities and U.S. Governmentand other agency securities. Such advances can be made pursuant to severaldifferent credit programs, each of which has its own interest rate and range ofmaturities. At June 30, 2007, the Bank’s FHLB advances totaled $68.5million, representing 7.3% of total Company liabilities. See Note 8 of “Notesto Consolidated Financial Statements,” which is included in Part II, Item8 “Financial Statements and Supplementary Data” of this Form 10-Kfor further detail of the Company’s borrowings.

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

| ** **                    | ** ** | **Years Ended June 30,** | ** ** |
|-------------------------------|------------|-----------------------------------------|------------|
| ** **                    | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(Dollars in Thousands)**    | ** ** |
| *Maximum  Month-End Balance:* |       |                                    |       |   |   |   |   |
| FHLB and FRB  advances        |       | $                                       | 131,975    |   | $ | 152,369 |   | $ | 140,590 |   |
| Other borrowings              |       | 100                                     |       | 700 |   | 760 |   |
| *Average Balance:*            |       |                                    |       |   |   |   |   |
| FHLB and FRB  advances        |       | $                                       | 106,150    |   | $ | 119,408 |   | $ | 110,398 |   |
| Other borrowings              |       | 2                                       |       | 287 |   | 934 |   |

 

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Thefollowing table sets forth certain information as to the Bank’s FHLB and FRBadvances and other borrowings of the Company at the dates indicated.

| ** **                                                | ** ** | **June 30,**                    | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(Dollars in Thousands)** | ** ** |
| FHLB and FRB advances                                     |       | $                                    | 68,500     |   | $ | 91,620 |   | $ | 118,959 |   |
| Other borrowings                                          |       | 100                                  |       | — |   | 705 |   |
| Total borrowings                                          |       | $                                    | 68,600     |   | $ | 91,620 |   | $ | 119,664 |   |
| Weighted average  interest rate of FHLB and FRB  advances |       | 4.78                                 | %          | 4.51 | % | 4.13 | % |

 

**Competition**

The banking business is highly competitive and theBank experiences competition in each of its markets from many other financialinstitutions, many of which are larger and may have significantly greaterfinancial and other resources. Specifically, the Bank competes with commercialbanks, 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, nationaland international financial institutions, that operate offices in our primarymarket areas and elsewhere. Many of these competitors are also well-establishedfinancial institutions.

Competitors that are notdepository institutions are generally not subject to the extensive regulationsthat apply to the Bank. The Bank competes with these institutions both inattracting deposits and in making loans. The Bank competes for deposits byoffering a variety of deposit accounts at competitive rates, convenientbusiness hours and convenient branch locations with inter-branch deposit andwithdrawal privileges at each. The Bank competes for loans on the basis ofquality of service, interest rates, loan fees and loan type. In addition, theBank must attract its customer base from other existing financial institutionsand from new residents. In new markets that the Bank may enter, the Bank willalso compete against well-established community banks that have developedrelationships within the community.

**Employees**

At June 30, 2007, theBank had a total of 315 full-time equivalent employees (“FTEs”) including5 FTEs of the Bank’s subsidiary corporations. The Bank’s employees are notrepresented by any collective bargaining group. Management considers itsrelations with its employees to be good.

**Regulation**

*General.*   TheBank is a federally chartered thrift institution, the deposits of which arefederally insured by the DIF. Accordingly, the Bank is subject to broad federalregulation and oversight extending to all its operations, by its primaryfederal regulator, the OTS, and by its deposit insurer, the FDIC. The Bank is amember of the FHLB of Des Moines and is subject to certain limited regulationby the Federal Reserve Board. As the unitary thrift holding company of theBank, the Company is also subject to federal regulation and oversight by theOTS. The purpose of the regulation of the Company, like other depositoryinstitution holding companies, is to protect subsidiary institutions wheredeposits are federally insured.

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

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*Regulationof Federal Savings Associations.*   The OTS hasextensive authority over the operations of federal savings associations, suchas the Bank. This regulation and supervision establishes a comprehensiveframework of activities in which a federal savings association can engage andis intended primarily for the protection of the DIF and depositors. Theregulatory structure also gives the regulatory authorities extensive discretionin connection with their supervisory and enforcement activities and examinationpolicies, including policies with respect to the classification of assets andthe establishment of adequate loan loss reserves for regulatory purposes. Anychange in such laws and regulations or interpretations thereof, whether by theOTS, the FDIC or through legislation, could have a material adverse impact onthe Company and the Bank and their operations and stockholders.

The Bank is required to file periodic reports with theOTS and is subject to periodic examinations primarily by the OTS and to alesser extent by the FDIC. The last examination of the Bank by the OTSconcluded on March 28, 2007.

*Assessments.**  *The OTS has established a schedulefor the assessment of fees upon all savings associations to fund the operationsof the OTS. The general assessment, paid on a semiannual basis, is computed bytotaling three components: the Bank’s total assets, supervisory condition, andcomplexity of operations. The Bank’s OTS assessment (standard assessment) forthe fiscal year ended June 30, 2007, was approximately $214,638.

*Enforcement.**  *The OTS has primary enforcementresponsibility over savings associations, including the Bank. This enforcementauthority includes, among other things, the ability to assess civil moneypenalties, to issue cease and desist orders and to remove directors andofficers. In general, these enforcement actions may be initiated in response toviolations of laws and regulations and to unsafe or unsound practices. Underthe Federal Deposit Insurance Act, the FDIC has the authority to recommend tothe Director of the OTS that enforcement action be taken with respect to aparticular savings association. If action is not taken by the OTS, the FDIC maytake action under certain circumstances.

*Safetyand Soundness Standards.**  *Under federal law, the OTS has adopted a set ofguidelines prescribing safety and soundness standards. The guidelines establishgeneral standards relating to internal controls, information systems, internalaudit systems, loan documentation, credit underwriting, interest rate exposure,asset growth, asset quality, earnings and compensation, fees and benefits. Ingeneral, the guidelines require, among other things, appropriate systems andpractices to identify and manage the risks and exposures specified in theguidelines. The guidelines prohibit excessive compensation as an unsafe andunsound practice and describe compensation as excessive when the amounts paidare unreasonable or disproportionate to the services performed by an executiveofficer, employee, director or principal stockholder.

In addition, the OTS adopted regulations thatauthorize, but do not require, the OTS to order an institution that has beengiven notice by the OTS that it is not satisfying any of such safety andsoundness standards to submit a compliance plan. If, after being so notified,an institution fails to submit an acceptable compliance plan or fails in any materialrespect to implement an accepted compliance plan, the OTS must issue an orderdirecting action to correct the deficiency and may issue an order directingcorrective actions and other actions of the types to which an undercapitalizedassociation is subject under the “prompt corrective action” provisions offederal law. If an institution fails to comply with such an order, the OTS mayseek to enforce such order in judicial proceedings and to impose civil moneypenalties.

*Prompt CorrectiveRegulatory Action.**  *Underthe OTS prompt corrective action regulations, the OTS is required to takecertain, and is authorized to take other, supervisory actions againstundercapitalized savings banks. For this purpose, a savings bank is placed inone of the following five categories based on the association’s capital:

·       well-capitalized;

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·       adequatelycapitalized;

·       undercapitalized;

·       significantlyundercapitalized; or

·       criticallyundercapitalized.

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

An undercapitalizedbank is required to file a capital restoration plan within 45 days of the datethe bank receives notices that it is within any of the three undercapitalizedcategories, and the plan must be guaranteed by any parent holding company. Theaggregate liability of a parent holding company is limited to the lesser of:

·       anamount equal to five percent of the bank’s total assets at the time it became “undercapitalized;”and

·       theamount that is necessary (or would have been necessary) to bring the bank intocompliance with all capital standards applicable with respect to such bank asof the time it fails to comply with the plan.

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

At June 30, 2007, the Bank met the criteria forbeing considered “well-capitalized.”

*BusinessActivities.**  *Theactivities of federal savings banks are governed by federal laws andregulations. These laws and regulations delineate the nature and extent of theactivities in which federal savings associations may engage. In particular,many types of lending authority for federal savings associations are limited toa specified percentage of the institution’s capital or assets.

*Loanand Investment Powers.**  *TheBank derives its lending and investment powers from the HOLA, and theregulations of the OTS thereunder. Under these laws and regulations, the Bankmay invest in mortgage loans secured by residential and commercial real estate,commercial and consumer loans, certain types of debt securities and certainother assets. The Bank may also establish service corporations that may engagein activities not otherwise permissible for the Bank, including certain realestate equity investments and securities and insurance brokerage activities. Theseinvestment powers are subject to various limitations, including (a) a prohibitionagainst the acquisition of any corporate debt security that is not rated in oneof the four highest rating categories; (b) a limit of 400.00% of anassociation’s capital on the aggregate amount of loans secured bynon-residential real estate property; (c) a limit of 20.00% of anassociation’s assets on the aggregate amount of commercial and agriculturalloans and leases with the amount of commercial loans in excess of 10.00% ofassets being limited to small business loans; (d) a limit of 35.00% of anassociation’s assets on the aggregate amount of consumer loans and acquisitionsof certain debt securities, with amounts in excess of 30.00% of assets beinglimited to loans made directly to the original obligor and where no third-partyfinder or referral fees were paid; (e) a limit of 5.00% of assets onnon-conforming loans (loans in excess of the specific limitations of the HOLA);and (f) a limit of the 

21

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greater of 5.00% of assetsor an association’s capital on certain construction loans made for the purposeof financing what is or is expected to become residential property. Inaddition, the HOLA and the OTS regulations provide that a federal savingsassociation may invest up to 10.00% of its assets in tangible personal propertyfor leasing purposes. At June 30, 2007, the Bank met the 10.00% leasinglimitation with 2.23% of total Bank assets. Such general leases, however, donot have to be aggregated with the institution’s loans for purposes of the HOLA’sinvestment and lending limitations. At June 30, 2007, the Bank met the20.00% limitation with 15.31% of total Bank assets.

*Loans-To-OneBorrower.*   Under the HOLA, the Bank is generallysubject to the same limits on loans-to-one borrower as are imposed on nationalbanks. With specified exceptions, the Bank may not make a loan or extend creditto a single or related group of borrowers in excess of 15.00% of theassociation’s unimpaired capital and surplus. Additional amounts may be loaned,not in excess of 10.00% of unimpaired capital and surplus, if such loans orextensions of credit are fully secured by readily-marketable collateral. At June 30,2007, the Bank’s lending limit under this restriction was $13.1 million.

*Insuranceof Accounts and Regulation by the FDIC.*   The Bankis a member of, and pays deposit insurance assessments to, the DIF, which isadministered by the FDIC. Savings deposits are generally insured up to $100,000per insured member (as defined by law and regulation) by the FDIC and suchinsurance is backed by the full faith and credit of the United States Government. Effective April 1, 2006, throughthe Federal Deposit Insurance Reform Act of 2005, the maximum insurancecoverage for self-directed retirement plan deposits only, increased from$100,000 to $250,000. All other deposit coverage remains at $100,000. Asinsurer, the FDIC imposes deposit insurance premiums and is authorized toconduct examinations of and to require reporting by FDIC-insuredinstitutions. It also may prohibit any FDIC-insured institution fromengaging in any activity the FDIC determines by regulation or order to pose aserious risk to the DIF. The FDIC also has the authority to initiateenforcement actions against savings associations, after giving the OTS anopportunity to take such action, and may terminate the deposit insuranceif it determines that the institution has engaged or is engaging in unsafe orunsound practices, or is in an unsafe or unsound condition.

The DIF was formed on March 31, 2006, followingthe merger of the Bank Insurance Fund and the Savings Association InsuranceFund in accordance with the Federal Deposit Insurance Reform Act of 2005 (the “DepositInsurance Fund Act”). In addition to merging the insurance funds, the DepositInsurance Fund Act established a statutory minimum and maximum designatedreserve ratio for the DIF and granted the FDIC greater flexibility inestablishing the required reserve ratio. In its regulations implementing theDeposit Insurance Fund Act, the FDIC has set the current annual designatedreserve ratio for the DIF at 1.25%.

In order to maintain the DIF, member institutions areassessed an insurance premium. The amount of each institution’s premium iscurrently based on the balance of insured deposits and the degree of risk theinstitution poses to the DIF. Under the assessment system, the FDIC assigns aninstitution to one of nine risk categories using a two-step process based firston capital ratios (the capital group assignment) and then on other relevantinformation (the supervisory subgroup assignment). Each risk category isassigned an assessment rate. Assessment rates currently range from 0.00% ofdeposits for an institution in the highest category (i.e., well-capitalized andfinancially sound, with no more than a few minor weaknesses) to 0.43% ofdeposits for an institution in the lowest category (i.e., undercapitalized andsubstantial supervisory concerns). The FDIC is authorized to raise theassessment rates as necessary to maintain the DIF. The Bank’s assessment rateat June 30, 2007 was 5.63%. Any increase in insurance assessments couldhave an adverse effect on the earnings of insured institutions, including theBank.

The Federal Deposit Insurance Reform Act of 2005allows “eligible insured depository institutions” to share a one-timeassessment credit pool of approximately $4.7 billion. To be eligible, aninstitution must have been in existence on December 31, 1996 and have paida deposit insurance assessment prior to that 

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date, or be a “successor”to such an institution. The Bank’s assessment credit is $660,270, which will beapplied to reduce future deposit insurance assessments.

In addition, all FDIC-insured institutions arerequired to pay assessments to the FDIC at an annual rate of approximately0.0124% of insured deposits to fund interest payments on bonds issued by theFinancing Corporation (“FICO”), an agency of the federal government establishedin 1987 to recapitalize the predecessor to the DIF. These assessments, whichare adjusted quarterly, will continue until the FICO bonds mature in 2017through 2019.

The Bank’s assessment rate for the fiscal year ending June 30,2007, ranged from 0.00 to 5.63 basis points and the premium paid for thisperiod was $93,000, all of which was paid towards the FICO bonds. The FDIC hasauthority to increase insurance assessments. A significant increase in DIFinsurance premiums would have an adverse effect on the operating expenses andresults of operations of the Bank. Management cannot predict what the insuranceassessment rate will be in the future.

Under federal law, insurance of deposits may beterminated by the FDIC upon a finding that the institution has engaged inunsafe or unsound practices, is in an unsafe or unsound condition to continueoperations or has violated any applicable law, regulation, rule, order orcondition imposed by the FDIC or the OTS. The management of the Bank does notknow of any practice, condition or violation that might lead to termination ofdeposit insurance.

*Regulatory CapitalRequirements.*   OTSregulations require the Bank to meet three minimum capital standards:

·       Atangible capital ratio requirement of 1.50%;

·       Aleverage (core capital) ratio requirement of 4.00% (3.00% if a savingsassociation has been assigned the highest composite rating); and

·       Arisk-based capital ratio requirement of 8.00%.

Inassessing an institution’s capital adequacy, the OTS takes into considerationnot only these numeric factors but also qualitative factors as well, and hasthe authority to establish higher capital requirements for individualinstitutions where necessary. The Bank, as a matter of prudent management,targets as its goal the maintenance of capital ratios which exceed theseminimum requirements and that are consistent with the Bank’s risk profile. At June 30,2007, the Bank exceeded each of its capital requirements as shown in thefollowing table:

| ** **               | ** ** | ** **                           | ** ** | **Percent of** | ** ** |
|--------------------------|------------|--------------------------------------|------------|---------------------|------------|
| ** **               | ** ** | ** **                           | ** ** | **Applicable**      | ** ** |
| ** **               | ** ** | **Amount(2)**                        | ** ** | **Assets(1)**       | ** ** |
| ** **               | ** ** | **(Dollars in Thousands)** | ** ** |
| GAAP Capital             |       |                                 | $          | 86,273              |       |   |   | 8.61 | % |   |
| Tier 1 (core) capital    |       |                                 | $          | 82,824              |       |   |   | 8.31 | % |   |
| Required                 |       |                                 | 39,887     |                |       |   | 4.00 |   |   |
| Excess over  requirement |       |                                 | $          | 42,937              |       |   |   | 4.31 | % |   |
| Risk-based capital       |       |                                 | $          | 88,252              |       |   |   | 11.05 | % |   |
| Required                 |       |                                 | 63,919     |                |       |   | 8.00 |   |   |
| Excess over requirement  |       |                                 | $          | 24,333              |       |   |   | 3.05 | % |   |

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(1)          Tier I (core) capitalfigures are determined as a percentage of total adjusted assets; risk based capitalfigures are determined as a percentage of risk-weighted assets.

(2)          The Bank’s investment inits subsidiaries is included for purposes of calculating regulatory capital.

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

The OTS continues to monitor the interest rate risk ofindividual 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 anentity’s assets and liabilities and, therefore, hypothetically represents thevalue of an institution’s net worth. The OTS has also used this NPV analysis aspart of its evaluation of certain applications or notices submitted by savingsbanks. The OTS, through its general oversight of the safety and soundness ofsavings associations, retains the right to impose minimum capital requirementson individual institutions to the extent the institution is not in compliancewith certain written guidelines established by the OTS regarding NPV analysis. TheOTS has not imposed any such requirements on the Bank.

*Limitationson Dividends and Other Capital Distributions.*   TheOTS imposes various restrictions or requirements on the Bank’s ability to makecapital distributions, including cash dividends. A savings institution that isthe subsidiary of a savings and loan holding company must file a notice withthe OTS at least 30 days before making a capital distribution. The Bank mustfile an application for prior approval if the total amount of its capitaldistributions, including the proposed distribution, for the applicable calendaryear would exceed an amount equal to the Bank’s net income for that year plusretained net income for the previous two years.

The OTS maydisapprove of a notice or application if:

·       theBank would be undercapitalized following the distribution;

·       theproposed capital distribution raises safety and soundness concerns; or

·       thecapital distribution would violate a prohibition contained in any statute,regulation or agreement between the Bank and the OTS or the FDIC, or acondition imposed on the Bank in an OTS-approved application or notice.

During the fiscal year ended June 30, 2007, theBank paid cash dividends to the Company totaling $3.0 million.

*Liquidity.*   Allsavings associations, including the Bank, are required to maintain a sufficientamount of liquid assets to ensure its safe and sound operation. For adiscussion of what the Bank includes in liquid assets, see Part II, Item 7“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” of this Form 10-K.

*Branching.**  *Subject to certain limitations, theHOLA and the OTS regulations permit federally chartered savings associations toestablish branches in any state of the United States. The authority toestablish such branches is available (a) in states that expresslyauthorize branches of savings associations located in another state or (b) toan association that qualifies as a “domestic building and loan association”under the Internal Revenue Code of 1986, as amended, which imposesqualification requirements similar to those for a “qualified thrift lender”under the HOLA. See the section below entitled “*QualifiedThrift Lender Test*.” This authority under the HOLA and the OTS regulationspreempts any state law purporting to regulate branching by federal savingsassociations.

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*CommunityReinvestment.**  *Underthe Community Reinvestment Act (the “CRA”), as implemented by the OTSregulations, the Bank has a continuing and affirmative obligation consistentwith its safe and sound operation to help meet the credit needs of its entirecommunity, including low and moderate income neighborhoods. The CRA does notestablish specific lending requirements or programs for financial institutionsnor does it limit an institution’s discretion to develop the types of productsand services that it believes are best suited to its particular community. TheCRA requires the OTS, in connection with its examination of a savingsassociation, to assess the Bank’s record of meeting the credit needs of itscommunity and to take such record into account in its evaluation of certainapplications by the Bank. The CRA also requires all institutions to make publicdisclosure of their CRA ratings. The Bank received an “Outstanding” CRA ratingin the OTS evaluation, which was completed on June 14, 2005.

The CRA regulations rate an institution based on itsactual performance in meeting community needs. In particular, the rating systemfocuses on three tests: (a) a lending test, to evaluate the institution’srecord of making loans in its assessment areas; (b) an investment test, toevaluate the institution’s record of investing in community developmentprojects, affordable housing, and programs benefiting low or moderate incomeindividuals and businesses; and (c) a service test, to evaluate theinstitution’s delivery of services through its branches, ATMs and otheroffices.

*QualifiedThrift Lender (“QTL”) Test.**  *Under the HOLA, the Bank must comply with thequalified thrift lender, or “QTL” test. Under the QTL test, the Bank isrequired to maintain at lease 65.00% of its “portfolio assets” (total assetsless (a) specified liquid assets up to 20.00% of total assets, (b) intangibles,including goodwill, and (c) the value of property used to conductbusiness) in certain “qualified thrift investments” (primarily residentialmortgages and related investments, including certain mortgage-backedsecurities, credit card loans, student loans and small business loans) in atleast nine months of the most recent 12 month period. The Bank may also satisfythe QTL test by qualifying as a “domestic building and loan association” asdefined in the Internal Revenue Code of 1986, as amended.

At June 30, 2007, the Bank held 65.77% of itsportfolio assets in qualified thrift investments and had more than 65.00% ofits portfolio assets in qualified thrift investments for 10 of the 12 monthsduring the fiscal year ended June 30, 2007, and thus qualified under theQTL test. The Bank has met the QTL test since its inception.

A savings bank that fails the QTL test and is unableto demonstrate a reasonable likelihood of meeting it in the future may berequired 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 anational bank. In addition, if the institution does not requalify under the QTLtest within three years after failing the test, the institution would beprohibited from engaging in any activity not permissible for a national bankand may have to repay any outstanding advances from the Federal Home Loan Bankas promptly as possible.

*Transactionswith Affiliates.*   The Bank’sauthority to engage in transactions with its “affiliates” is limited by the OTSregulations, Sections 22(g), 22(h) 23A and 23B of the Federal Reserve Act(the “FRA”) and Regulation W issued by the Federal Reserve Board, as well asadditional limitations adopted by the Director of the OTS. OTS regulationsregarding transactions with affiliates conform to Regulation W. Theseprovisions, among other things, prohibit or limit a savings bank from extendingcredit to, or entering into certain transactions with, its affiliates andprincipal stockholders, directors and executive officers.

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In addition, the OTS regulations include additionalrestrictions on savings banks under Section 11 of the HOLA, includingprovisions prohibiting a savings bank from making a loan to an affiliate thatis engaged in non-bank holding company activities and provisions prohibiting asavings association from purchasing or investing in securities issued by anaffiliate that is not a subsidiary. OTS regulations also include certainspecific exemptions from these prohibitions. The FRB and the OTS require eachdepository institution that is subject to Sections 23A and 23B to implementpolicies and procedures to ensure compliance with Regulation W and the OTSregulations 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 officersof issuers (as defined in Sarbanes-Oxley). The prohibition, however, does notapply to mortgages advanced by an insured depository institution, such as theBank, that are subject to the insider lending restrictions of Section 22(h) ofthe FRA.

*RealEstate Lending Standards.**  *The OTS and the other federal banking agenciesadopted regulations to prescribe standards for extensions of credit that (a) aresecured by real estate or (b) are made for the purpose of financing theconstruction of improvements on real estate. The OTS regulations require theBank to establish and maintain written internal real estate lending standardsthat are consistent with safe and sound banking practices and appropriate tothe size of the association and the nature and scope of its real estate lendingactivities. The standards also must be consistent with accompanying OTSguidelines, which include loan-to-value ratios for the different types of realestate loans. The Bank is also permitted to make a limited amount of loans thatdo not conform to the proposed loan-to-value limitations so long as suchexceptions are reviewed and justified appropriately. The guidelines also list anumber of lending situations in which exceptions to the loan-to-value standardsare justified.

*NontraditionalMortgage Products.*   The federal banking agenciesrecently published final guidance for institutions that originate or servicenontraditional or alternative mortgage products, defined to include allresidential mortgage loan products that allow borrowers to defer repayment onprincipal or interest, such as interest-only mortgages and payment optionadjustable-rate mortgages. No portion of the Bank’s adjustable rate residentialmortgage loans consist of interest-only or payment option mortgage loans.

Recognizing that alternative mortgage products exposeinstitutions to increased risks as compared to traditional loans where paymentsamortize or reduce the principal amount, the guidance required increasedscrutiny for alternative mortgage products. Institutions that originate or servicealternative mortgages should have (a) strong risk management practicesthat include maintenance of capital levels and allowance for loan lossescommensurate with the risk; (b) prudent lending policies and underwritingstandards that address a borrower’s repayment capacity; and (c) programsand practices designed to ensure that consumers receive clear and balancedinformation to assist in making informed decisions about mortgage products. Theguidance also recommends heightened controls and safeguards when an institutioncombines an alternative mortgage product with features that compound risk, suchas a simultaneous second-lien or the use of reduced documentation to evaluate aloan application.

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

*PrivacyRegulations.**  *Underthe OTS regulations adopted pursuant to the Gramm-Leach-Bliley Act of 1999, theBank is required to adopt procedures to protect customers’ “nonpublic personalinformation.” The regulations generally require that the Bank disclose itsprivacy policy, including identifying with whom it shares a customer’s “nonpublicpersonal information,” to customers at the time of establishing the customerrelationship and annually thereafter. In addition, the Bank is required toprovide its customers with the ability to “opt-out” of having it share theirpersonal information with unaffiliated third parties and not to discloseaccount numbers or access codes to nonaffiliated third parties for marketingpurposes. The Bank currently has a privacy protection policy in place, whichhas been reviewed, for compliance with the regulations.

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*Protectionof Customer Information.*   In addition to certainstate laws governing protection of customer information, the Bank is subject tofederal regulatory guidelines establishing standards for safeguarding customerinformation. These regulations implement certain provisions of the Gramm-Leach-BlileyAct. The guidelines describe the agencies’ expectations for the creation,implementation and maintenance of an information security program, which wouldinclude administrative, technical and physical safeguards appropriate to thesize and complexity of the institution and the nature and scope of itsactivities. The standards set forth in the guidelines are intended to ensurethe security and confidentiality of customer records and information, protectagainst any anticipated threats or hazards to the security or integrity of suchrecords and protect against unauthorized access to or use of such records orinformation that could result in substantial harm or inconvenience to anycustomer. Federal guidelines also impose certain customer disclosures and otheractions in the event of unauthorized access to customer information.

*TrustActivities Regulation.**  *The Bank derives its trustpowers from Section 5(n) of the HOLA and the regulations and policiesof the OTS. Under these laws, regulations and policies, the trust activities offederal savings banks are governed by both federal and state laws. Generally, thescope of trust activities that the Bank can provide will be governed by thelaws of the states in which the Bank is “located” (as such term is definedunder the regulations of the OTS), while other aspects of the trust operationsof the Bank are governed by federal laws and regulations. If the trustactivities of a federal savings bank are located in more than one state,however, then the scope of fiduciary services the federal savings bank canprovide will vary depending on the laws of each state.

The Bank, through its trustdepartment, acts as trustee, personal representative, administrator, guardian,custodian, record keeper, agent, registrar, advisor and manager for variousaccounts. As of June 30, 2007, the trust department of the Bank maintainedapproximately $126.4 million in assets under management.

*FederalReserve System.*   Under FRB regulations, the Bankis required to maintain noninterest-earning reserves against its transactionaccounts. The first $8.5 million of otherwise reservable balances are exemptedfrom the reserve requirements. FRB regulations generally require that reservesof 3.00% must be maintained against aggregate transaction account balances over$8.5 million and up to $45.8 million. Transaction account balances over $45.8million are subject to a reserve requirement of $1.119 million plus 10% of theamount over $45.8 million. The Bank is in compliance with these reserverequirements at June 30, 2007. Because required reserves must bemaintained in the form of either vault cash, a noninterest bearing account at aFRB, or a pass-through account as defined by the FRB, the effect of thisreserve requirement is to reduce the Bank’s interest-earning assets to theextent that the requirement exceeds vault cash.

*FederalHome Loan Bank System.*   The Bank is a member ofthe FHLB of Des Moines, which is one of 12 regional FHLBs that administers thehome financing credit function of savings associations. Each FHLB serves as areserve or central bank for its members within its assigned region. It isfunded primarily from proceeds derived from the sale of consolidated obligationsof the FHLB System. It makes loans to members (i.e., advances) in accordancewith policies and procedures established by the board of directors of the FHLB.These policies and procedures are subject to the regulation and oversight ofthe Federal Housing Finance Board. All advances from the FHLB are required tobe 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 sharesof capital stock in the FHLB of Des Moines equal to 0.12% of the total assetsof the Bank at December 31 annually. The Bank is also required to ownactivity-based stock, which is based on 4.45% of the Bank’s outstandingadvances. These percentages are subject to change at the discretion of the FHLBBoard of Directors.

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At June 30, 2007, the Bank had $5.1 million inFHLB stock, which was in compliance with this requirement. The Bank receivesdividends on its FHLB stock, subject to approval by the FHLB. For the fiscalyear ended June 30, 2007, dividends paid by the FHLB of Des Moines to theBank totaled approximately $321,000, which constitutes a $139,000 increase inthe amount of dividends received in fiscal 2006.

*USAPatriot Act.*   The Bank is subject to the USAPatriot Act, which gives the federal government new powers to address terroristthreats through enhanced domestic security measures, expanded surveillancepowers, increased information sharing, and broadened anti-money launderingrequirements. By way of amendments to the Bank Secrecy Act, Title III of theUSA Patriot Act takes measures intended to encourage information-sharing amongbank regulatory agencies and law enforcement bodies. Further, certainprovisions of Title III of the USA Patriot Act impose affirmative obligationson a broad range of financial institutions, including banks, thrifts, brokers,dealers, credit unions, money transfer agents and parties registered under theCommodity Exchange Act.

Among otherrequirements, Title III of the USA Patriot Act imposes the followingrequirements with respect to financial institutions:

·       Pursuantto Section 352, *all*financial institutions must establish anti-money laundering programs thatinclude, at minimum: (a) internal policies, procedures, and controls, (b) specificdesignation of an anti-money laundering compliance officer, (c) ongoingemployee training programs, and (d) an independent audit function to testthe anti-money laundering program.

·       Pursuantto Section 326, on May 9, 2003, the OTS, in conjunction with otherbank regulators, issued Joint Final Rules that provide for minimumstandards with respect to customer identification and verification. These rules requireeach financial institution to implement a written customer identificationprogram appropriate for its size, location and type of business that includescertain minimum requirements.

·       Section 312requires financial institutions that establish, maintain, administer or manageprivate banking accounts or correspondent accounts in the United States fornon-United States persons or their representatives (including foreignindividuals visiting the United States) to establish appropriate, specific and,where necessary, enhanced due diligence policies, procedures and controlsdesigned to detect and report money laundering.

·       Financialinstitutions are prohibited from establishing, maintaining, administering ormanaging correspondent accounts for foreign shell banks (foreign banks that donot have a physical presence in any country), and will be subject to certainrecordkeeping obligations with respect to correspondent accounts of foreignbanks.

·       Bankregulators are directed to consider a holding company’s effectiveness incombating money laundering when ruling on FRA and Bank Merger Act applications.

*TheSarbanes-Oxley Act.*   As a public company, we aresubject to the Sarbanes-Oxley Act, which implements a broad range of corporategovernance and accounting measures for public companies designed to promotehonesty and transparency in corporate America and to better protect investorsfrom corporate wrongdoing.

The Sarbanes-OxleyAct’s principal legislation and the derivative rulemaking promulgated by theSEC include:

·       thecreation of an independent accounting oversight board;

·       auditorindependence provisions which restrict non-audit services that accountants mayprovide to their audit clients;

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·       additionalcorporate governance and responsibility measures, including the requirementthat the chief executive officer and chief financial officer certify financialstatements;

·       arequirement that companies establish and maintain a system of internal controlover financial reporting and that a company’s management provide an annualreport regarding its assessment of the effectiveness of such internal controlover financial reporting to the company’s independent accountants and that suchaccountants provide an attestation report with respect to management’sassessment of the effectiveness of the company’s internal control overfinancial reporting;

·       forfeitureof bonuses or other incentive-based compensation and profits from the sale ofan issuer’s securities by directors and senior officers in the twelve monthperiod following initial publication of any financial statements that laterrequire restatement;

·       anincrease in the oversight of, and enhancement of certain requirements relatingto audit committees of public companies and how they interact with the company’sindependent auditors;

·       arequirement that audit committee members must be independent and are absolutelybarred from accepting consulting, advisory or other compensatory fees from theissuer;

·       arequirement that companies disclose whether at least one member of the auditcommittee is an “audit committee financial expert” (as such term is defined bythe SEC) and if not, why not;

·       expandeddisclosure requirements for corporate insiders, including accelerated reportingof stock transactions by insiders and a prohibition on insider trading duringpension blackout periods;

·       aprohibition on personal loans to directors and officers, except certain loansmade by insured financial institutions;

·       disclosureof a code of ethics and filing a Current Report on Form 8-K for achange or waiver of such code;

·       mandatorydisclosure by analysts of potential conflicts of interest; and

·       arange of enhanced penalties for fraud and other violations.

Furthermore, the NASDAQ Stock Market (the “NASDAQ”)has also implemented corporate governance rules which implement themandates of the Sarbanes-Oxley Act. The material NASDAQ rules include,among other things, ensuring that a majority of the board of directors areindependent of management, establishing and publishing a code of conduct fordirectors, officers and employees, and requiring stockholder approval of allnew stock option plans and all material modifications. These rules affectthe Company because its common stock is listed on the NASDAQ National Marketunder the symbol “HFFC.”

The Company anticipates additional expenses incomplying with the provisions of the Sarbanes-Oxley Act and the resultingregulation. Management presently anticipates that the associated internal costsand third party expenses may be significant.

*HoldingCompany Regulation.**  *TheCompany is a unitary savings and loan holding company within the meaning of theHOLA. As such, the Company is required to register with and be subject to OTSexamination and supervision as well as certain reporting requirements. Inaddition, the OTS has enforcement authority over the Company and any of itsnon-savings institution subsidiaries. Among other things, this authoritypermits the OTS to restrict or prohibit activities that are determined to be aserious risk to the financial safety, soundness or stability of a subsidiarysavings bank. Unlike bank holding companies, a savings and loan holding companyis not subject to any regulatory capital requirements or to supervision by theFederal Reserve System.

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*“Grandfathered”Savings and Loan Holding Company Status.*   Becausethe 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. Assuch, the Company has restrictions on its business activities, provided theBank continues to be a “qualified thrift lender.” If, however, the Company isacquired by a non-financial company, or if it acquires another savingsassociation subsidiary (and becomes a multiple savings and loan holdingcompany), the Company will terminate its “grandfathered” unitary savings andloan holding company status, and become subject to certain additionallimitations on the types of business activities in which the Company couldengage. All “non-grandfathered” unitary savings and loan holding companies arelimited to financially related activities permissible for bank holdingcompanies, as defined under the Gramm-Leach-Bliley Act.

*Restrictions Applicable toAll Savings and Loan Holding Companies.**  *Federal law prohibits a savings andloan holding company, including the Company, directly or indirectly, fromacquiring:

·       control(as defined under the HOLA) of another savings institution (or a holdingcompany parent) without prior OTS approval;

·       throughmerger, consolidation, or purchase of assets, another savings institution or aholding company thereof, or acquiring all or substantially all of the assets ofsuch institution (or a holding company) without prior OTS approval; or

·       controlof any depository institution not insured by the FDIC (except through a mergerwith and into the holding company’s savings institution subsidiary that isapproved by the OTS).

A savings and loanholding company may not acquire as a separate subsidiary an insured institutionthat has a principal office outside of the state where the principal office ofits subsidiary institution is located, except:

·       inthe case of certain emergency acquisitions approved by the FDIC;

·       ifsuch holding company controls a savings institution subsidiary that operated ahome or branch office in such additional state as of March 5, 1987; or

·       ifthe laws of the state in which the savings institution to be acquired islocated specifically authorize a savings institution chartered by that state tobe acquired by a savings institution chartered by the state where the acquiringsavings institution or savings and loan holding company is located, or by aholding company that controls such a state chartered association.

In addition, if the Bank fails the QTL test (discussedabove), the Company must register with the FRB as a bank holding company underthe Bank Holding Company Act within one year of the Bank’s failure to soqualify.

The HOLA prohibits a savings and loan holding company(directly or indirectly, or through one or more subsidiaries) from acquiringanother savings association or holding company thereof without prior writtenapproval of the OTS; acquiring or retaining, with certain exceptions, more than5% of a non-subsidiary savings association, a non-subsidiary holding company,or a non-subsidiary company engaged in activities other than those permitted bythe HOLA; or acquiring or retaining control of a depository institution that isnot federally insured. In evaluating applications by holding companies toacquire savings associations, the OTS must consider the financial andmanagerial resources and future prospects of the company and institutioninvolved, the effect of the acquisition on the risk to the insurance funds, theconvenience and needs of the community and competitive factors.

*FederalSecurities Law.*   The common stock of the Companyis registered with the SEC under the Exchange Act. The Company is subject tothe information, proxy solicitation, insider trading restrictions and otherrequirements of the SEC under the Exchange Act.

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Company stock held by persons who are affiliates(generally officers, directors and principal stockholders) of the Company maynot be resold without registration or unless sold in accordance with certainresale restrictions. If the Company meets specified current public informationrequirements, each affiliate of the Company is able to sell in the publicmarket, without registration, a limited number of shares in any three-monthperiod.

*Delaware GeneralCorporation Law.**  *TheCompany is incorporated under the laws of the State of Delaware. Thus, theCompany is subject to regulation by the State of Delaware and the rights of theCompany’s stockholders are governed by the Delaware General Corporation Law.

**Federal and State Taxation**

The Company and its direct and indirect subsidiariesfile a consolidated federal income tax return on a fiscal year basis. Inaddition, each of Trust II, Trust III, Trust IV, and Trust V are required tofile 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 aminimum tax. An alternative minimum tax is imposed at a minimum tax rate of20.00% on alternative minimum taxable income, which is the sum of a corporation’sregular taxable income (with certain adjustments) and tax preference items,less any available exemption. The alternative minimum tax is imposed to theextent it exceeds the corporation’s regular income tax and net operating lossescan offset no more than 90.00% of alternative minimum taxable income.

To the extent earnings appropriated to a savingsassociation’s bad debt reserves for “qualifying real property loans” anddeducted for federal income tax purposes exceed the allowable amount of suchreserves computed under the experience method and to the extent of theassociation’s supplemental reserves for losses on loans (“Excess”), such Excessmay not, without adverse tax consequences, be utilized for the payment of cashdividends or other distributions to a shareholder (including distributions onredemption, dissolution or liquidation) or for any other purpose (except toabsorb bad debt losses). As of June 30, 2007, the Bank’s Excess for taxpurposes totaled approximately $4.8 million.

*SouthDakota Taxation.*   The Bank is subject to theSouth Dakota Franchise tax to the extent that such corporations are engaged inbusiness in the state of South Dakota. South Dakota does not have a corporateincome tax. The franchise tax will be imposed at a rate of 6.00% on franchisetaxable income which is computed in the same manner as federal taxable incomewith some minor variations to comply with South Dakota law, other than thecarryover of net operating losses which is not permitted under South Dakota law.A South Dakota return of franchise tax must be filed annually.

*MinnesotaTaxation.**  *TheBank is subject to the Minnesota Corporate Income tax to the extent that suchcorporations are engaged in business in the state of Minnesota. The CorporateIncome tax is imposed at a rate of 9.8% on corporate taxable income, which iscomputed in the same manner as federal taxable income with some minorvariations to comply with Minnesota law. A Minnesota return of Corporate Incometax must be filed annually.

*DelawareTaxation.*   As a Delaware holding company, theCompany is exempted from Delaware corporate income tax but is required to filean annual report with and pay an annual fee to the State of Delaware. TheCompany is also subject to an annual franchise tax imposed by the State ofDelaware, which is made in quarterly payments.

*Taxation in Other States.*   MidAmerica Capital is required to file state income tax returns in those stateswhich lessees have operations. The total taxes paid in the year ended June 30,2007 were not material to the operation of the Company.

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**Executive Officersof the Company**

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

*CurtisL. Hage*—Mr. Hage, age 61, is Chairman, Presidentand Chief Executive Officer of the Company. He was elected to the position ofChairman of the Board of Directors of the Company in September 1996 andhas held the positions of President and Chief Executive Officer since February 1991.Prior to such time, Mr. Hage served as Executive Vice President of theBank since 1986. Since joining the Bank in 1968, he served in variouscapacities prior to being elected Executive Vice President. Mr. Hagereceived his M.B.A. from the University of South Dakota and attended theGraduate School of Savings Institution Management at the University of Texas.

*DarrelL. Posegate—**Mr.* Posegate, age 49, has served asExecutive Vice President, Chief Financial Officer and Treasurer of the Companysince January 2002. He has served as Executive Vice President, ChiefFinancial Officer and Treasurer of the Bank from January 2002 until October 2006at which time he was elected to the position of President of the Bank. Prior tosuch time, he was employed as Chief Financial Officer for West Des Moines StateBank, Des Moines, Iowa, a state banking institution, from 1998 until joiningthe Bank. Prior to that time, he was employed in senior leadership roles forcommunity banking organizations in Iowa from 1983 to 1998. Mr. Posegatereceived his B.A. degree from Luther College, Decorah, Iowa, and is a CertifiedPublic Accountant.

*DavidA. Brown—**Mr.***Brown,age 45, has served as the Senior Vice President/Business Banking of the Banksince November 1999. Prior to joining the Bank, Mr. Brown served asVice President/Manager Commercial Banking of Firstar Bank, Sioux City, Iowa, anational banking institution, a position he held since December 1998.Mr. Brown received his M.B.A. and a B.S. in Business Administration fromthe University of South Dakota.

*MaryF. Hitzemann*—Ms. Hitzemann, age 54, has served asthe 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 RegionalHospital from May 1989 to May 1992. Ms. Hitzemann received herB.A. degree from Augustana College.

*BrentR. Olthoff—**Mr.*Olthoff, age 36, has served asSenior 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 VicePresident/Finance in July 2004. Prior to serving in his current role, Mr. Olthoffwas 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 StateUniversity.

*MarkS. Sivertson**—*Mr. Sivertson,age 49, has served as the Senior Vice President/Trust Officer of the Bank sinceJuly 1996. He joined the Bank in February 1995 as VicePresident/Trust Officer. Prior to joining the Bank, Mr. Sivertson was VicePresident and Trust Officer in charge of the Investment Management and TrustDepartment at Western Bank. He holds a law degree from the University of NorthDakota and his Certified Trust Financial Advisor designation from the AmericanBankers Association.

*NatalieA. Solberg—**Ms.*Solberg, age 44, has served asthe Senior Vice President/Service & Support of the Bank since October 2002.She joined the Bank in February 1994 as manager of the phone bankingcenter 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 1989to October 1993. Ms. Solberg received her B.S. from Northern StateUniversity.

*MichaelWestberg—**Mr.***Westberg,age 40, has served as the Senior Vice President/Service & Support ofthe Bank since July 2006. Mr. Westberg joined the Bank in February 1996as a branch manager. Prior to joining the Bank, he was employed with FirstSavings Bank, Beresford (South Dakota) from 1992 to 1996; 

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and The Associates, Dallas,Texas, from 1989 to 1992. Mr. Westberg attended Illinois State Universitymajoring in business.

*CheriL. Wolfe—**Ms.*Wolfe, age 49, has served asthe Vice President/Senior Controller and Principal Accounting Officer since May 2007.Ms. Wolfe joined the Bank in December 1999 as Vice President/GeneralAuditor. Prior to that time, she served as the Controller for The Summit Group, Inc.from 1996 to 1999 and as a Finance Officer for First Premier Bank, NA from 1995to 1996. Ms. Wolfe received her B.A. degree from Augustana College and isa Certified Public Accountant and Certified Financial Services Auditor.

**Item 1A.**                *Risk Factors*

The following are certainmaterial risks that our management believes are specific to us and ourbusiness. You should understand that it is not possible to predict or identifyall such potential risks and, as such, this list of risk factors should not beviewed as all-inclusive or in any particular order. An investment in shares ofour common stock involves various risks. Before deciding to make an investmentdecision regarding our common stock, you should carefully consider the risksdescribed below in conjunction with the other information in this Form 10-Kand information incorporated by reference into Form 10-K, includingour consolidated financial statements and related notes which are set forth inPart II, Item 8 “Financial Statements and Supplementary Data” of thisForm 10-K. Our business, financial condition and results ofoperations could be harmed by any of the following risks or by other risks thathave not been identified or that the Company may believe are immaterial orunlikely. The value or market price of our common stock could decline due toany of these risks, and you may lose all or part of your investment. The risksdiscussed below also include forward-looking statements and our actual resultsmay differ substantially from those discussed in these forward-lookingstatements.

**Risks Related toOur Business**

***We face strongcompetition for customers, which could prevent us from obtaining customers andmay cause us to pay higher interest rates to attract deposits and charge lowerrates to obtain the loan volume we need to grow, any of which may reduce ourprofitability.******  ***The banking business is highly competitiveand we experience competition in each of our markets from many other financialinstitutions, many of which are larger and may have significantly greaterfinancial and other resources than we have. Specifically, we compete withcommercial banks, credit unions, savings and loan associations, mortgagebanking firms, consumer finance companies, securities brokerage firms,insurance companies, money market funds and other mutual funds, as well assuper-regional, national and international financial institutions, that operateoffices in our primary market areas and elsewhere. Many of these competitorsare also well-established financial institutions.

Competitors that are not depository institutions aregenerally not subject to the extensive regulations that apply to us. We competewith these institutions both in attracting deposits and in making loans. Inaddition, we must attract our customer base from other existing financialinstitutions and from new residents. There is a risk that we will not be ableto compete successfully with these other financial institutions in our markets,and that we may have to pay higher interest rates to attract deposits or chargelower interest rates to obtain loan volume, resulting in reduced profitability.In new markets that we may enter, we will also compete against well-establishedcommunity banks that have developed relationships within the community.

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***Changes in interestrates may reduce our profitability.  ***Ourprofitability depends in large part on our net interest income, which is thedifference between interest earned from interest-earning assets, such as loansand mortgage-backed securities, and interest paid on interest-bearingliabilities, such as deposits and borrowings. Our net interest income will beadversely affected if market interest rates change such that the interest wepay on deposits and borrowings increases faster than the interest we earn onloans and investments. Many factors cause changes in interest rates, includinggovernmental monetary policies and domestic and international economic andpolitical conditions. While we intend to manage the effects of changes ininterest rates by adjusting the terms, maturities, and pricing of our assetsand liabilities, our efforts may not be effective in a changing rateenvironment and our financial condition and results of operations may suffer.

Interest rates were at historically low levels until June 2004at which time the Federal Reserve began increasing short-term interest rates 17times or 425 basis points. For the same three-year time period, long-terminterest rates have not increased in kind, as the 10-year Treasuryincreased 44 basis points and the 30-year Treasury declined by 16 basispoints. This flattening and slight inversion of the treasury yield curve causedby increasing short-term rates and lagging long-term rates has had, andcontinues to have, a negative impact on our net interest margin. If short-terminterest rates continue to rise, and if rates on our deposits and borrowingscontinue to re-price upwards faster than the rates on our long-term loans andinvestments, we will experience further compression of our net interest margin,which will have a negative effect on our profitability.

***Our growth mayrequire us to raise additional capital that may not be available when it isneeded or may not be available on terms acceptable to us.  ***We are required by regulatory authorities tomaintain adequate levels of capital to support our operations. To support ourfuture continued growth, we may need to raise additional capital. Our abilityto raise additional capital, if needed, will depend in part on conditions inthe capital markets at that time, which are outside our control. Accordingly,we cannot assure you of our ability to raise additional capital, if needed, onterms acceptable to us. If we cannot raise additional capital when needed, ourability to further expand our operations through internal growth could bematerially impaired.

In the event that we are able to raise capital throughthe issuance of additional shares of common stock or other securities, theownership interests of current investors would be diluted and the per sharebook value of our common stock may be diluted. New investors may also haverights, 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 mortgageloans, into the secondary market as a means to manage the size of the balancesheet and manage the use of capital. The demand for these products in thecapital markets is not driven by us and may not benefit us at the time we lookto sell the loans.

***We are subject toextensive regulations that may limit or restrict our activities and the cost ofcompliance is high.  ***We operate in a highlyregulated industry and are subject to examination, supervision andcomprehensive regulation by various regulatory agencies. Banking regulationsare primarily intended to protect the federal deposit insurance funds anddepositors, not stockholders. Our compliance with these regulations is costlyand 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 subjectto regulatory capital requirements, which require us to maintain adequatecapital to support our growth. If we fail to meet these capital and otherregulatory requirements, our ability to grow, our cost of funds and FDIC insurance,our ability to pay dividends on common stock, and our ability to makeacquisitions could be materially and adversely affected.

Congress and federal agencies continually review laws,regulations and policies applicable to the banking industry for possiblechanges, and we cannot predict the effects of these changes on our business 

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and profitability.Because, like all banks and bank holding companies, government regulationgreatly affects our business and financial results, our cost of compliancecould adversely affect our ability to operate profitably. See “Regulation”under Part I, Item 1 “Business” of this Form 10-K for adetailed discussion of regulation requirements.

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

***Our success isinfluenced by growth in South Dakota and lack of growth or changes in nationaland South Dakota economic and political conditions could adversely affect ourearnings, as our borrowers’ ability to repay loans and the value of thecollateral securing our loans decline and as loans and deposits decline.***   Our success andgrowth is significantly influenced by the growth in population and incomelevels and deposits in our primary market areas, which are mainly in SouthDakota. If the communities in which we operate do not grow or if prevailingeconomic conditions locally or nationally are unfavorable, our business may benegatively affected.

Additionally, there are inherent risks associated withour lending activities, including credit risk, which is the risk that borrowersmay not repay outstanding loans or the value of the collateral securing loanswill decrease. Conditions such as inflation, recessions, unemployment, changesin interest rates and money supply and other factors beyond our control mayadversely affect the ability of our borrowers to repay their loans and thevalue of collateral securing the loans, which could adversely affect ourearnings. Because our business operations and activities are concentrated inthe State of South Dakota and most of our credit exposure is in that state, weare specifically at risk from adverse economic, political and businessconditions that affect South Dakota.

***Our allowance forloan losses may prove to be insufficient to absorb losses in our loanportfolios, which could adversely affect our operating results.***   Like allfinancial institutions, we maintain an allowance for loan losses to provide forloans in our portfolio that may not be repaid in their entirety. Although webelieve that our allowance for loan losses is maintained at a level adequate toabsorb probable losses inherent in our loan portfolio as of the correspondingbalance sheet date, the determination of the appropriate level of the allowancefor loan losses inherently involves a high degree of subjectivity and requiresus to make significant estimates of current credit risks and future trends, allof which may undergo material changes. Accordingly, our allowance for loanlosses may not be sufficient to cover actual loan losses, and future provisionsfor loan losses could materially adversely affect our operating results bydecreasing our net income.

In evaluating the adequacy of our allowance for loanlosses, we consider numerous quantitative factors, including our historicalcharge-off experience, growth of our loan portfolio, changes in the compositionof our loan portfolio and the volume of delinquent and criticized loans. Inaddition, we use information about specific borrower situations, includingtheir financial position and estimated collateral values, to estimate the riskand amount of loss for those borrowers. Finally, we also consider manyqualitative factors, including general and economic business conditions,duration of the current business cycle, current general market collateralvaluations, trends apparent in any of the factors we take into account andother matters, which are by nature more subjective and fluid. Our estimates ofthe risk of loss and amount of loss on any loan are complicated by thesignificant uncertainties surrounding our borrowers’ abilities to successfullyexecute their business models through changing economic environments, 

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competitive challenges andother factors. In considering information about specific borrower situationsour analysis is subject to the risk that we are provided inaccurate orincomplete information. Because of the degree of uncertainty and susceptibilityof these factors to change, our actual losses may vary from our currentestimates.

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

***Our ability toretain and attract qualified employees is critical to the success of ourbusiness and the failure to do so may materially adversely affect ourperformance.***   Our people are our most important resourceand competition for qualified employees is intense. In order to retain andattract qualified employees, we must compensate such employees at marketlevels. Typically, those levels have caused employee compensation to be ourgreatest noninterest expense. In addition, because certain informationconcerning our employee compensation is included in our filings with the SECand is, therefore, available to our competitors, we believe that our employeesmay be more highly recruited by our competitors. If we are unable to continueto retain and attract qualified employees, or if compensation costs required toretain and attract qualified employees becomes more expensive, our performance,including our competitive position, could be affected.

***Our ability to maintain our reputation is critical tothe success of our business and the failure to do so may materially adverselyaffect our performance.***   Our reputation is one of the most valuablecomponents of our business. As such, we strive to conduct our business in amanner than enhances our reputation. This is done, in part, by recruiting,hiring and retaining employees who share our core values of being an integralpart of the communities we serve, delivering superior service to our customersand caring about our customers and associates. If our reputation is negativelyaffected, by the actions of our employees or otherwise, our business and,therefore, our operating results may be materially adversely affected.

**Risks Related to OurCommon Shares**

***The trading volumein our common stock has been low, and the sale of a substantial number ofshares of our common stock in the public market could depress the price of ourcommon stock and make it difficult for you to sell your shares.***   Our common stockis listed to trade on the NASDAQ National Market, but is thinly traded. As aresult, you may not be able to sell your shares of common stock on shortnotice. Additionally, thinly traded stock can be more volatile than stocktrading in an active public market. The sale of a substantial number of sharesof our common stock at one time could temporarily depress the market price ofour common stock, making it difficult for you to sell your shares and impairingour ability to raise capital.

***Our ability to paydividends depends primarily on dividends from our banking subsidiary, HomeFederal Bank, which is subject to regulatory limits.***   We are a unitarythrift holding company and our operations are conducted primarily by ourbanking subsidiary, Home Federal Bank. Since we receive substantially all ofour revenue from dividends from Home Federal Bank, our ability to pay dividendson our common stock depends on our receipt of dividends from Home Federal Bank.Dividend payments from Home Federal Bank are subject to legal and regulatorylimitations, generally based on net income and retained earnings. The abilityof Home Federal Bank to pay dividends to us is also subject to itsprofitability, financial condition, capital expenditures and other cash flow requirements.There is no assurance that Home Federal Bank will be able to pay dividends tous in the future or that we will generate adequate cash flow to pay dividendsin the future. The inability to receive dividends from Home Federal Bank couldhave an adverse affect on our business and financial conditions. Similarly, ourfailure to pay dividends on our common stock could have a material adverseeffect on the market price of our common stock.

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***We are subject tosecurity and operational risks relating to our use of technology that coulddamage our reputation and our business.***   Security breachesin our internet banking activities or other communication and informationsystems could damage our reputation, result in a loss of customer business,subject us to additional regulatory scrutiny, or expose us to civil litigationand possible financial liability, any of which could have a material adverseeffect on our financial condition and results of operations. We rely onstandard internet and other security systems to provide the security andauthentication necessary to effect secure transmission of data. Theseprecautions may not protect our systems from compromises or breaches of oursecurity measures.

***Certain provisionsof our certificate of incorporation and bylaws, as well as federal law,may discourage, delay or prevent an acquisition of control of us.***   Certainprovisions included in our certificate of incorporation and bylaws, as well ascertain provisions of federal law, may discourage, delay or prevent potentialacquisitions of control of us, particularly when attempted in a transactionthat is not negotiated directly with, and approved by, our Board of Directors,despite possible benefits to our stockholders.

Specifically, ourcertificate of incorporation and bylaws include certain provisions that:

·       limitthe voting power of shares held by a stockholder beneficially owning in excessof 10% of the then-outstanding shares of our common stock;

·       requirethat certain business combinations between us and a stockholder beneficiallyowning in excess of 10% of the then-outstanding shares of our common stock(i) be approved by at least 662¤3%of the total number of our outstanding voting shares, voting as a single class,(ii) be approved by a majority of the Board of Directors serving prior tothe 10% stockholder becoming such, or (iii) involve consideration pershare generally equal to that paid by such 10% stockholder when suchstockholder acquired his, her or its stock;

·       divideour Board of Directors into three classes serving staggered three-year termsand provide that a director may only be removed prior to the expiration ofa term for cause by the affirmative vote of the holders of at least 80% of thevoting power of all of the then-outstanding shares of capital stock entitled tovote in an election of directors;

·       requirethat a special meeting of stockholders be called pursuant to a resolutionadopted by a majority of our Board of Directors;

·       authorizethe issuance of preferred stock with such designations, rights and preferencesas may be determined from time to time by our Board of Directors; and

·       requirethat amendments to (i) our certificate of incorporation be approved by atwo-thirds vote of our Board of Directors and by a majority of the outstandingshares of our voting stock or, with respect to the amendment of certainprovisions (regarding, among other things, provisions relating to number,classification, election and removal of directors, amendment of the bylaws,call of special stockholder meetings, acquisitions of control, directorliability, and certain business combinations), by 80% of the outstanding sharesof our voting stock, and (ii) our bylaws be approved by a majority vote ofour Board of Directors or the affirmative vote of at least 80% of the totalvotes eligible to be voted at a duly constituted meeting of stockholders.

Furthermore, federal lawrequires OTS approval prior to any direct or indirect acquisition of “control”(as defined in OTS regulations) of the Bank, including any acquisition ofcontrol of us.

**Item 1B.**               *Unresolved Staff Comments*

None.

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**Item 2.**                        *Properties*

The Company and its direct and indirect subsidiariesconduct their business at the main office located at 225 South Main Avenue, SiouxFalls, South Dakota, 57104. Currently, the Bank also conducts business from 32other offices located in its primary market area. Of such 33 total businessoffices, the Company owns 17, including the main office, and leases 16 others.

The total net book valueof the Company’s premises and equipment (including land, building, leaseholdimprovements and furniture, fixtures and equipment) at June 30, 2007 was$15.8 million. Management believes that the Company’s existing properties areadequate for its current needs.

**Item 3.**                        *Legal Proceedings*

On June 26, 2006, the Company filed a $3.8 millionlawsuit against MetaBankand two individuals, J. Tyler Haahr and Daniel A. Nelson, for their rolein a participation loan, alleging fraud, breach of fiduciary duty, conspiracyand negligent misrepresentation. These damages were the result of a failure bythe lead bank to make disclosures regarding an investigation of the commercialcustomer by the Iowa Attorney General at the time the Bank agreed to anextension of loan participation agreements. Legal proceedings are currentlypending in the Second Judicial Circuit Court, Minnehaha County, South Dakota.

In addition, the Company,the Bank and each of their subsidiaries are, from time to time, involved asplaintiff or defendant in various legal actions arising in the normal course oftheir businesses. While the ultimate outcome of any such proceedings cannot bepredicted with certainty, it is generally the opinion of management, afterconsultation with counsel representing the Bank and the Company in any suchproceedings, that the resolution of any such proceedings should not have amaterial effect on the Company’s consolidated financial position or results ofoperations. The Company, the Bank and each of their subsidiaries are not awareof any legal actions or other proceedings contemplated by governmentalauthorities 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 periodended June 30, 2007.

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**PART II**

**Item 5.**                        *Market for Registrant’s Common Equity and Related Stockholder Matters*

**Stock Listing**

The Company’s common stock is traded under the symbol“HFFC” on the NASDAQ National Market System.

Thefollowing table sets forth the range of high and low sale prices for theCompany’s common stock for each of the fiscal quarters of the two years endedJune 30, 2007 and 2006. Quotations for such periods are as reported by theNASDAQ National Market System and have been retroactively adjusted for the 10%stock dividend paid on April 24, 2006 to shareholders of record as ofApril 10, 2006.

| **FISCAL 2007** | ** ** | ** ** | ** ** | **HIGH** | ** ** | **LOW** | ** ** |
|----------------------|------------|------------|------------|----------|------------|---------|------------|
| 1st Quarter          |       | $          | 17.50      |     | $          | 15.75   |       |
| 2nd Quarter          |       | $          | 17.73      |     | $          | 16.10   |       |
| 3rd Quarter          |       | $          | 18.50      |     | $          | 17.11   |       |
| 4th Quarter          |       | $          | 18.44      |     | $          | 17.17   |       |

 

| **FISCAL 2006** | ** ** | ** ** | ** ** | **HIGH** | ** ** | **LOW** | ** ** |
|----------------------|------------|------------|------------|----------|------------|---------|------------|
| 1st Quarter          |       | $          | 19.36      |     | $          | 15.46   |       |
| 2nd Quarter          |       | $          | 17.91      |     | $          | 16.23   |       |
| 3rd Quarter          |       | $          | 18.45      |     | $          | 16.89   |       |
| 4th Quarter          |       | $          | 18.95      |     | $          | 15.84   |       |

 

As of September 24, 2007, the Company had 489holders of record of its common stock.

The transfer agent for theCompany’s common stock is Mellon Investor Services, PO Box 3315, SouthHackensack, New Jersey, 07606-1915.

**Dividends**

The Company paid cashdividends on a quarterly basis of $0.1025, $0.1050, $0.1050 and $0.1050 pershare throughout fiscal 2007. The Company paid cash dividends on a quarterlybasis of $0.1023, $0.1023, $0.1025 and $0.1025 per share in fiscal 2006. TheBoard 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 businesspractices and other factors the Board of Directors deems relevant. OnJuly 30, 2007, the Board of Directors announced the approval of a cashdividend of $0.1050 per share and the Company paid the respective cashdividends on August 15, 2007 to shareholders of record onAugust 9, 2007. The Company’s ability to pay dividends is dependent on thedividend payments it receives from its subsidiary, the Bank, which are subjectto OTS regulations. The ability of the Company to pay dividends is also subjectto the terms of the agreements on subordinated debentures payable to trusts,should the Company elect to defer interest payments. In addition, the Company’sability to pay dividends is subject to the terms of its line of credit withFirst Tennessee Bank, NA. See Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Liquidity and Capital Resources”of this Form 10-K.

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**Stockholder ReturnPerformance**

The following linegraph compares the cumulative total stockholder return on the Company’s commonstock to the comparable cumulative total return of the NASDAQ Market Index andthe NASDAQ Bank Index for the last five years.

The performance graphassumes that on July 1, 2002, $100 was invested in the Company’s commonstock (at the closing price of the previous trading day) and in each of theindexes. The comparison assumes the reinvestment of all dividends. Cumulativetotal stockholder returns for the Company’s common stock, NASDAQ Market Indexand the NASDAQ Bank Index are based on the Company’s fiscal year endingJune 30.

**COMPARE 5-YEARCUMULATIVE TOTAL RETURNAMONG HF FINANCIAL CORP.NASDAQ MARKET INDEX AND NASDAQ BANK INDEX**

**ASSUMES $100 INVESTED ON JULY 1,2002ASSUMES DIVIDEND REINVESTEDFISCAL YEAR ENDING JUNE 30, 2007**

**Equity CompensationPlan**

Thefollowing table sets forth certain information about the common stock that maybe issued upon exercise of options, warrants and rights under all of theCompany’s existing equity compensation plans as of June 30, 2007, whichconsist of the 2002 Plan. The 1991 Stock Option Plan expired on October 27,2002 and the 1996 Director Restricted Stock Plan expired on January 1,2007. As a result, although the column below entitled “Number of Shares to beIssued Upon Exercise of Outstanding Options, Warrants and 

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Rights” includes common stock to be issued upon unexpiredoptions issued under the 1991 Stock Option Plan, no common stock remainsavailable for future issuance under the 1991 Stock Option Plan.

| ** **                                                        | ** ** | ** **                                     | ** ** | ** **                        | ** ** | **Number of Shares**            | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------------|------------|
| ** **                                                        | ** ** | ** **                                     | ** ** | ** **                        | ** ** | **Remaining Available for**     | ** ** |
| ** **                                                        | ** ** | **Number of Shares to be** | ** ** | **Weighted-Average**              | ** ** | **Future Issuance Under**       | ** ** |
| ** **                                                        | ** ** | **Issued Upon Exercise of**     | ** ** | **Exercise Price of**   | ** ** | **Equity Compensation Plans**   | ** ** |
| ** **                                                        | ** ** | **Outstanding Options,**                  | ** ** | **Outstanding Options,**     | ** ** | **(Excluding Shares Reflected** | ** ** |
| **Plan Category**                                            | ** ** | ** **                                     | ** ** | **Warrants and Rights** | ** ** | **Warrants and Rights**         | ** ** | **in the First Column)** | ** ** |
| Equity plan compensation  plans approved by stockholders          |       |                                           | 343,365    |                              |       |                                      | $          | 12.75 |   |   |   | 618,352 |   |   |
| Equity plan  compensation plans not approved by stockholders |       |                                           | N/A        |                              |       |                                      | N/A        |   |   |   | N/A |   |   |
| Total                                                             |       |                                           | 343,365    |                              |       |                                      | $          | 12.75 |   |   |   | 618,352 |   |   |
|                                                                   |            |                                                |            |                                   |            |                                           |            |  |  |  |  |  |  |  |  |  |

 

**Sales ofUnregistered Stock**

The Company had no salesof unregistered stock during the fiscal year ended June 30, 2007.

**Issuer Purchases ofEquity Securities**

Thefollowing table sets forth the purchases by the Company of its common stockduring the quarterly period ended June 30, 2007:

| ** **               | ** ** | **Total**          | ** ** | ** **          | ** ** | **Total Number**                  | ** ** | **Maximum Number of**        | ** ** |
|--------------------------|------------|--------------------|------------|---------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **               | ** ** | **Number**         | ** ** | **Average**         | ** ** | **of Shares Purchased**      | ** ** | **Shares that May Yet** | ** ** |
| ** **               | ** ** | **of Shares** | ** ** | **Price Paid** | ** ** | **as Part of Publicly** | ** ** | **Be Purchased Under**       | ** ** |
| **Period**               | ** ** | ** **         | ** ** | **Purchased**       | ** ** | **per Share**                     | ** ** | **Announced Programs**            | ** ** | **the Current Program** | ** ** |
| April 1 - 30,  2007 |       |               | —     |                |       |                                   | $          | 0.00                                   |       |   |   | — |   |   |   | 394,035 |   |   |
| May 1 - 31,  2007   |       |               | —     |                |       |                                   | $          | 0.00                                   |       |   |   | — |   |   |   | 399,141 |   |   |
| June 1 - 30,  2007  |       |               | —     |                |       |                                   | $          | 0.00                                   |       |   |   | — |   |   |   | 399,141 |   |   |
| 4th Quarter Total        |       |               | —     |                |       |                                   | $          | 0.00                                   |       |   |   | — |   |   |   |   |   |   |
|                          |            |                    |            |                     |            |                                        |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |

 

During the fiscal year ended June 30, 2007, theCompany had in effect a stock buy back program which was publicly announced onApril 24, 2006 in which the Company was permitted to repurchase up to 10%of the common stock of the Company that was outstanding on May 1, 2006,which equaled 394,035 shares. This stock buy back program expired onApril 30, 2007. No shares were purchased under the program during thefiscal year ended June 30, 2007.

The Company approved a newstock buy back program, which began on May 1, 2007 and was publiclyannounced on April 30, 2007. Under this program, the Company mayrepurchase up to 10% of the common stock of the Company outstanding onMay 1, 2007, which equals 399,141 shares, through April 30, 2008.There were no shares purchased pursuant to the program during the fiscal yearended June 30, 2007.

**Item 6.**                        *Selected Financial Data*

Thefollowing table sets forth selected consolidated financial statement andoperations data with respect to the Company for the periods indicated. Thisinformation should be read in conjunction with the Financial Statements and relatednotes appearing in Part II, Item 8 “Financial Statements and SupplementaryData” of this Form 10-K and with Part II, Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” ofthis Form 10-K. The Company’s selected financial statement andoperations data for each of the fiscal years 2003 and 2004 have been derivedfrom audited consolidated financial statements, which have been audited byMcGladrey & Pullen, LLP, independent public accountants. The Company’sselected financial statement and operations data for each of the fiscal 

41

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years 2005 through 2007 have been derived from auditedconsolidated financial statements, which have been audited by Eide Bailly, LLP,independent public accountants.

| ** **                                           | ** ** | **At June 30,**            | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(Dollars in Thousands)** | ** ** |
| **Selected Statement of Financial  Condition Data:** |       |                                 |       |   |   |   |   |   |   |   |   |
| Total assets                                         |       | $                                    | 1,001,454  |   | $ | 961,294 |   | $ | 897,874 |   | $ | 847,070 |   | $ | 801,103 |   |
| Securities  available for sale                       |       | 142,223                              |       | 145,518 |   | 142,429 |   | 122,715 |   | 88,527 |   |
| FHLB stock                                           |       | 5,058                                |       | 5,647 |   | 7,699 |   | 5,469 |   | 7,025 |   |
| Loans and leases  receivable                         |       | 761,599                              |       | 721,603 |   | 670,581 |   | 640,946 |   | 595,417 |   |
| Loans held for  sale                                 |       | 8,776                                |       | 7,623 |   | 10,238 |   | 10,351 |   | 15,984 |   |
| Deposits                                             |       | 815,864                              |       | 769,002 |   | 681,216 |   | 658,719 |   | 621,381 |   |
| Advances from  FHLB and other borrowings             |       | 68,600                               |       | 91,620 |   | 119,664 |   | 93,750 |   | 89,819 |   |
| Subordinated  debentures payable to trusts           |       | 27,837                               |       | 27,837 |   | 27,837 |   | 27,837 |   | 20,620 |   |
| Stockholders’  equity                           |       | 62,270                               |       | 56,058 |   | 53,635 |   | 51,649 |   | 49,358 |   |
|                                                      |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                                                    | ** ** | **Years Ended June 30,**                      | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                    | ** ** | **(Dollars in Thousands, Except Per Share  Data)** | ** ** |
| **Selected Statement of Income  Data:**                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| Interest and  dividend income                                                 |       | $                                                  | 61,874     |   | $ | 53,411 |   | $ | 44,946 |   | $ | 40,260 |   | $ | 44,262 |   |
| Interest expense                                                              |       | 36,240                                             |       | 27,762 |   | 18,747 |   | 15,188 |   | 17,997 |   |
| Net interest income                                                           |       | 25,634                                             |       | 25,649 |   | 26,199 |   | 25,072 |   | 26,265 |   |
| Provision for  losses on loans and leases                                     |       | 1,198                                              |       | 5,279 |   | 2,681 |   | 2,020 |   | 3,173 |   |
| Net interest income after provision for losses on  loans and leases      |       | 24,436                                             |       | 20,370 |   | 23,518 |   | 23,052 |   | 23,092 |   |
| Loan servicing  income                                                        |       | 1,803                                              |       | 1,123 |   | 1,248 |   | 1,334 |   | 1,442 |   |
| Gain on sale of  land, net                                                    |       | —                                             |       | 3,557 |   | — |   | — |   | — |   |
| Gain on sale of  branches, net                                                |       | 2,763                                              |       | — |   | — |   | — |   | — |   |
| Gain on sale of  loans, net                                                   |       | 923                                                |       | 969 |   | 924 |   | 1,555 |   | 1,797 |   |
| Gain on sale of  securities, net                                              |       | —                                             |       | 3 |   | 20 |   | 43 |   | 352 |   |
| Other noninterest  income                                                     |       | 7,707                                              |       | 7,199 |   | 6,822 |   | 6,896 |   | 6,895 |   |
| Noninterest  expense                                                          |       | (29,605                                            | )          | (26,499 | ) | (24,936 | ) | (24,773 | ) | (26,048 | ) |
| Income from continuing operations before income  taxes                        |       | 8,027                                              |       | 6,722 |   | 7,596 |   | 8,107 |   | 7,530 |   |
| Income tax  expense                                                           |       | 2,644                                              |       | 2,214 |   | 2,431 |   | 2,891 |   | 2,584 |   |
| Income from continuing operations                                             |       | 5,383                                              |       | 4,508 |   | 5,165 |   | 5,216 |   | 4,946 |   |
| Discontinued Operations:                                                      |       |                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) from operations of discontinued  segment (net of income  taxes) |       | —                                             |       | — |   | — |   | — |   | 253 |   |
| (Loss) on discontinued segment (net of income taxes)                          |       | —                                             |       | — |   | — |   | — |   | (224 | ) |
| Income (loss) from discontinued  operations                                   |       | —                                             |       | — |   | — |   | — |   | 29 |   |
| Net income                                                                    |       | $                                                  | 5,383      |   | $ | 4,508 |   | $ | 5,165 |   | $ | 5,216 |   | $ | 4,975 |   |

 

42

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| ** **                                                                                                        | ** ** | **Years Ended June 30,**                                         | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2007**                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                        | ** ** | **(Dollars in Thousands, Except Per Share Data)** | ** ** |
| Basic earnings (loss)  per share:(1)                                                                              |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Income from continuing operations                                                                                 |       | $                                                                               | 1.35       |   | $ | 1.15 |   | $ | 1.33 |   | $ | 1.34 |   | $ | 1.24 |   |
| Income (loss) from discontinued operations                                                                        |       | —                                                                          |       | — |   | — |   | — |   | 0.01 |   |
| Net income                                                                                                        |       | 1.35                                                                            |       | 1.15 |   | 1.33 |   | 1.34 |   | 1.25 |   |
| Diluted earnings (loss)  per share:(1)                                                                            |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Income from continuing operations                                                                                 |       | 1.33                                                                            |       | 1.13 |   | 1.29 |   | 1.30 |   | 1.22 |   |
| Income (loss) from discontinued operations                                                                        |       | —                                                                          |       | — |   | — |   | — |   | 0.01 |   |
| Net income                                                                                                        |       | 1.33                                                                            |       | 1.13 |   | 1.29 |   | 1.30 |   | 1.23 |   |
| Dividends  declared per share(1)                                                                                  |       | 0.42                                                                            |       | 0.41 |   | 0.40 |   | 0.39 |   | 0.38 |   |
| Dividend payout  ratio from continuing  operations(2)                                                             |       | 30.93                                                                           | %          | 35.20 | % | 30.03 | % | 29.33 | % | 30.81 | % |
| Interest rate  spread (average during period)                                                                     |       | 2.36                                                                            | %          | 2.60 | % | 3.02 | % | 3.18 | % | 3.42 | % |
| Net interest margin(3)                                                                                            |       | 2.80                                                                            |       | 2.98 |   | 3.29 |   | 3.41 |   | 3.72 |   |
| Net interest  margin, TE(4)                                                                                       |       | 2.85                                                                            |       | 3.01 |   | 3.32 |   | 3.45 |   | 3.75 |   |
| Average  interest-earning assets to average interest-bearing liabilities                                          |       | 1.11                                                                            |       | 1.12 |   | 1.12 |   | 1.11 |   | 1.12 |   |
| Equity to total  assets (end of period)                                                                           |       | 6.22                                                                            |       | 5.83 |   | 5.97 |   | 6.10 |   | 6.16 |   |
| Equity-to-assets  ratio (ratio of average equity to average total assets)                                    |       | 6.06                                                                            |       | 5.94 |   | 6.25 |   | 6.36 |   | 6.52 |   |
| Nonperforming  assets to total assets (end of  period)                                                            |       | 0.40                                                                            |       | 0.40 |   | 0.78 |   | 0.27 |   | 0.77 |   |
| Allowance for  loan and lease losses to nonperforming loans and leases (end of  period)(5)                   |       | 167.87                                                                          |       | 168.11 |   | 73.24 |   | 174.75 |   | 65.89 |   |
| Allowance for  loan and lease losses to total loans and leases (end of period)                               |       | 0.76                                                                            |       | 0.77 |   | 0.74 |   | 0.55 |   | 0.62 |   |
| Nonperforming  loans and leases to total loans and leases (end of period)(5)                                 |       | 0.45                                                                            |       | 0.46 |   | 1.01 |   | 0.32 |   | 0.95 |   |
| Noninterest  expense to average total assets                                                                      |       | 3.00                                                                            |       | 2.87 |   | 2.91 |   | 3.11 |   | 3.42 |   |
| Net interest  income after provision for losses for loans and leases to noninterest  expense (end of period) |       | 82.54                                                                           |       | 76.87 |   | 94.31 |   | 93.05 |   | 88.65 |   |
| Return on assets  (ratio of income from continuing operations to average total assets)                            |       | 0.55                                                                            |       | 0.49 |   | 0.60 |   | 0.66 |   | 0.65 |   |
| Return on assets  (ratio of net income to average total assets)                                              |       | 0.55                                                                            |       | 0.49 |   | 0.60 |   | 0.66 |   | 0.65 |   |
| Return on equity  (ratio of income from continuing operations to average equity)                                  |       | 9.01                                                                            |       | 8.23 |   | 9.66 |   | 10.30 |   | 9.96 |   |
| Return on equity (ratio  of net income to average equity)                                                         |       | 9.01                                                                            |       | 8.23 |   | 9.66 |   | 10.30 |   | 10.02 |   |
| Operating  Efficiency Ratio(6)                                                                                    |       | 76.56                                                                           |       | 71.41 |   | 67.68 |   | 68.57 |   | 69.08 |   |
| Efficiency  Ratio(7)                                                                                              |       | 76.24                                                                           |       | 68.83 |   | 70.81 |   | 70.98 |   | 70.88 |   |
| Number of full-service  offices                                                                                   |       | 33                                                                              |       | 35 |   | 34 |   | 34 |   | 34 |   |
|                                                                                                                   |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          All per share data hasbeen retroactively adjusted for the 10% stock dividend paid on April 24,2006.

(2)          Dividends declared pershare divided by net income per share from continuing operations.

43

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(3)          Net interest incomedivided by average interest-earning assets.

(4)          Net interest marginexpressed on a fully taxable equivalent basis.

(5)          Nonperforming loans andleases include nonaccruing loans and leases and accruing loans delinquent morethan 90 days.

(6)          Total noninterestexpense divided by the sum of net interest income plus total noninterest incomeexcluding net interest expense on trust preferred securities and gain on saleof branches and gain on sale of land.

(7)          Total noninterestexpense divided by the sum of net interest income plus total noninterestincome.

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**Item 7.**                        *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*

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

**Executive Summary**

The Company’s net income for fiscal 2007 was $5.4million, or $1.33 per diluted share, compared to $4.5 million, or $1.13 perdiluted share for fiscal 2006. Return on average equity was 9.01% at June 30,2007, compared to 8.23% at June 30, 2006. 

The Company adopted SFAS 123R effective as of July 1,2005. See Note 16 of “Notes to Consolidated Financial Statements,” which isincluded in Part II, Item 8 “Financial Statements and Supplementary Data”of this Form 10-K for details on stock options and expensing. 

Net interest income for fiscal 2007 was $25.6 million,essentially flat with a decrease of $15,000 or 0.1% over the same period a yearago. The net interest margin was 2.80%, compared to 2.98% for the same period ayear ago, a decline of 18 basis points. On a fully taxable equivalent basis,the net interest margin for fiscal 2007 was 2.85%, compared to 3.01% in fiscal2006. The cost of funds rate on interest-bearing liabilities increased from3.60% in fiscal 2006 to 4.39% in fiscal 2007, a change of 79 basis points. Forthe same period, yields on earning assets increased from 6.20% to 6.75%, anincrease of 55 basis points. Increases in volume from fiscal 2006 to fiscal2007 of average earning assets and interest-bearing liabilities were 6.4% and6.8% respectively. The flattening of the treasury yield curve caused byincreasing short-term rates and lagging long-term rates continued to affect theCompany’s net interest margin ratio during fiscal 2007. 

Variability of the net interest margin ratio may beaffected by many aspects, including Federal Reserve policies for short-terminterest rates, competitive and global economic factors and customerpreferences for various products and services. 

The allowance for loan and lease losses increased to$5.9 million at June 30, 2007, compared to $5.7 million at June 30,2006, an increase of $215,000 or 3.8%. The ratio of allowance for loan andlease losses to total loans and leases was 0.76% as of June 30, 2007compared to 0.77% at June 30, 2006. Total nonperforming assets at June 30,2007 were $4.0 million as compared to $3.9 million at June 30, 2006. Theratio of nonperforming assets to total assets remained the same at 0.40% for June 30,2007 and June 30, 2006. The allowance for loan and lease losses iscalculated based on loan and lease levels, loan and lease loss history, creditquality of the loan and lease portfolio, and environmental factors such aseconomic health of the region and management experience. This risk ratinganalysis is designed to give the Company a consistent and systematicmethodology to determine proper levels for the allowance at a given time. 

As of June 30, 2007, the Company continued torecord a receivable in the amount of $223,000 from the sale of certain loanparticipation interests in December 2005. The balance of this receivablerepresents the remaining amount the Company expects to be paid on thereceivable and the Company has requested such payment from the lead bank. Inaddition, on June 26, 2006, the Company filed a $3.8 million lawsuitagainst this lead bank for their role in this participation loan, allegingfraud, conspiracy, and negligent misrepresentation. See Part 1, Item 3 “LegalProceedings” of this Form 10-K. 

Total deposits at June 30, 2007 were $815.9million, an increase of $46.9 million, or 6.1%, from June 30, 2006. Interestexpense on these deposits was $28.5 million for fiscal 2007, an increase of$8.3 million, or 41.3%, over the same period a year ago. A primary factoraffecting interest expense was certificate of deposit accounts. The volume ofcertificate of deposit accounts increased by $43.2 million, or 13.5%, from June 30,2006 to June 30, 2007. Interest expense for these accounts increased by$6.1 million, or 56.6%, compared to the same period in the prior fiscal year 

45

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The total risk-basedcapital ratio was 11.05% at June 30, 2007, compared to 10.65% at June 30,2006. This continues to place the Bank in the “well-capitalized” categorywithin OTS regulation at June 30, 2007 and is consistent within the “well-capitalized”OTS category in which the Company plans to operate. The Company historicallyhas been able to manage the size of its assets through secondary market loansales of single-family mortgages, student loans and a loan securitization. 

Noninterest expense forfiscal 2007 was $29.6 million, compared to $26.5 million a year ago, anincrease of $3.1 million or 11.7%. Compensation and employee benefits forfiscal 2007 accounted for an increase of $1.7 million, or 10.1%, from the sameperiod a year ago. Net healthcare costs, inclusive of self-funded healthclaims, administration fees and fully-insured dental premiums offset by stoploss insurance receivable and employee reimbursements for fiscal 2007 were $2.1million, compared to $1.5 million for the same period a year ago, an increaseof $654,000 or 43.7%. This change is primarily due to higher health claimsexpense amidst rising healthcare costs in the medical industry. 

Noninterest income forfiscal 2007 was $13.2 million, compared to $12.9 million for the same period ayear ago, an increase of $345,000 or 2.7%. Excluding the one-time $2.8 milliongain on sale of branches in December 2006 and the one-time $3.6 milliongain sale of land in December 2005, the increase was $1.1 million or 12.3%.This increase was driven primarily by increases in loan servicing income andfees on deposits. Loan servicing income increased in fiscal 2007 by $680,000 or60.6% from fiscal 2006. Fees on deposits increased in fiscal 2007 by $595,000or 13.1% from fiscal 2006. 

The Company focuses onbalancing operating costs with operating revenue levels in order to providebetter efficiency ratios over time and continues to review its operations forways to reduce its cost structure while continuing to support long-term revenueenhancements. The operating efficiency ratio for fiscal 2007 was 76.56%,compared to 71.41% for the same period a year ago, an increase of 515 basis points.The operating efficiency ratio excludes the impact of net interest expense onthe variable priced trust preferred securities and the one-time gain on sale ofbranches and the one-time gain on sale of land. The Company has issued trustpreferred securities primarily to provide funding for stock repurchases and torepay other borrowings. Net interest expense on the $27.8 million of trustpreferred securities outstanding increased to $2.7 million for fiscal 2007,compared to $2.2 million for the same period a year ago, an increase of$444,000 or 19.9%. The average rate paid on these securities increased 160basis points, from 8.01% in fiscal 2006 to 9.61% in fiscal 2007. The totalefficiency ratio was 76.24% at June 30, 2007 compared to 68.83% for thesame period a year ago, an increase of 741 basis points. Factors contributingto this decrease in the efficiency ratio from a year ago include an increase of$3.1 million in noninterest expense for fiscal 2007, compared to the sameperiod a year ago. It is the Company’s continuing goal to move the operatingefficiency ratio towards the 50% level over the long term. Management believesthat this can be accomplished through steady growth of the balance sheet andthe containment of incremental operating expenses.

**General**

The Company is a financialservices provider and, as such, has inherent risks that must be managed inorder to achieve net income. Primary risks that affect net income includecredit risk, liquidity risk, operational risk, regulatory compliance risk andreputation risk. The Company’s net income is derived by management of the netinterest margin, the ability to collect fees from services provided, bycontrolling the costs of delivering services and the management of loan andlease losses. The primary source of revenues comes from the net interestmargin, which represents the difference between income on interest-earningassets (i.e. loans and investment securities) and expense on interest-bearingliabilities (i.e. deposits and borrowed funding). The net interest margin isaffected by regulatory, economic and competitive factors that influenceinterest rates, loan demand and deposit flows. Fees earned include charges fordeposit services, trust services and loan services. Personnel costs are theprimary expenses required to deliver the services to customers. Other costsinclude occupancy and equipment and general and administrative expenses.

46

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**Financial ConditionData**

At June 30, 2007 the Company had total assets of$1,001.5 million, an increase of $40.2 million from the level at June 30,2006. The increase in assets was due primarily to increases in net loans andleases receivable of $40.0 million, and servicing rights of $5.2 million offsetby a decrease in cash and cash equivalents of $4.6 million. The increase inliabilities of $33.9 million was due to increases in deposits of $46.9 millionand accrued expenses and other liabilities of $6.7 million, offset by adecrease in advances from the FHLB and other borrowings of $23.0 million fromthe levels at June 30, 2006. In addition, stockholders’ equity increasedto $62.3 million at June 30, 2007 from $56.1 million at June 30, 2006primarily due to net income of $5.4 million offset by cash dividends paid of$1.7 million.

The increase in net loans and leases receivable of$40.0 million was due primarily to an increase in purchases and originationsover sales, amortization and repayments of principal. In addition, deferredfees and discounts decreased by $301,000 primarily due to a decrease of$262,000 for deferred fees and discounts on indirect automobile loans thatinclude prepaid dealer reserves.

The increase in servicing rights of $5.2 million wasprimarily due to the purchase of $4.9 million of servicing rights in the firstquarter of fiscal 2007.

The decrease in cash and cash equivalents of $4.6million was primarily due to the timing of items in clearing. 

The $46.9 million increase in deposits was primarilydue to increases in interest bearing checking accounts of $32.2 million,in-market certificates of deposit of $29.1 million, and out-of-marketcertificates of deposit of $14.1 million, offset by decreases in money marketaccounts of $19.9 million and savings accounts of $10.5 million.

Advances from the FHLB andother borrowings decreased $23.0 million for the year ended June 30, 2007primarily due to the Company decreasing its overnight Fed Funds advances by$1.1 million, in addition to a net decrease of $22.0 million in short- andlong-term advances during the fiscal year ended June 30, 2007. 

**Analysis of NetInterest Income**

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

47

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*Average Balances, InterestRates and Yields.**  *Thefollowing table presents for the periods indicated, the total dollar amount ofinterest 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 tabledoes not reflect any effect of income taxes. Average balances consist of dailyaverage balances for the Bank with simple average balances for all othercompanies. The average balances include nonaccruing loans and leases. Theyields on loans and leases include origination fees, net of costs, which areconsidered adjustments to yield.

| ** **               | ** ** | **Years Ended June 30,** | ** ** |
|--------------------------|------------|-----------------------------------------|------------|
| ** **               | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **               | ** ** | **Average**                             | ** ** | **Interest** | ** ** | ** ** | ** ** | **Average** | ** ** | **Interest** | ** ** | ** ** | ** ** | **Average** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Outstanding**                         | ** ** | **Earned/** | ** ** | **Yield/** | ** ** | **Outstanding** | ** ** | **Earned/** | ** ** | **Yield/** | ** ** | **Outstanding** | ** ** | **Earned/** | ** ** | **Yield/** | ** ** |
| ** **               | ** ** | **Balance**                             | ** ** | **Paid** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Paid** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Paid** | ** ** | **Rate** | ** ** |
| ** **               | ** ** | **(Dollars in Thousands)**    | ** ** |
| Interest-earning assets: |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                          |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| Loans and leases receivable(1)(3)            |   |   | $       | 758,455 |   |   |   | $      | 54,344 |   |   |   | 7.17   | %      |    |    | $       | 703,787 |   |   |   | $      | 47,096 |   |   |   | 6.69    | %      |    |    | $      | 665,830 |   |   |   | $      | 40,489 |   |   |   | 6.08 | % |   |
|----------------------------------------------|--------|--------|---------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|---------|---------|---------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|---------|---------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|------|---|--------|
| Investment securities(2)(3)                  |   |   | 152,132 |    |   |   | 7,209  |   |   |   | 4.74   | %      |   |   | 151,139 |    |    |    | 6,133  |   |   |   | 4.06   | %      |   |   | 123,066 |   |    |    | 4,256  |    |   |   | 3.46   | %      |   |
| FHLB stock                                   |   |   | 6,406   |    |   |   | 321    |   |   |   | 5.01   | %      |   |   | 6,871   |    |    |    | 182    |   |   |   | 2.65   | %      |   |   | 6,248   |   |    |    | 201    |    |   |   | 3.22   | %      |   |
| Total interest-earning assets                |   |   | 916,993 |    |   |   | $      | 61,874 |   |   |   | 6.75   | %      |   |    | 861,797 |    |    |   | $      | 53,411 |   |   |   | 6.20   | %      |    |   | 795,144 |    |   |    | $      | 44,946 |   |   |   | 5.65   | %      |   |
| Noninterest-earning assets                   |   |   | 68,832  |    |   |   |   |   |   |   |   |   |   |   | 61,491  |    |    |    |   |   |   |   |   |   |   |   | 60,428  |   |    |    |   |    |   |   |   |   |   |
| Total assets                                 |   |   | $       | 985,825 |   |   |   |   |   |   |   |   |   |   |    | $       | 923,288 |    |   |   |   |   |   |   |   |   |    |   | $       | 855,572 |   |    |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:               |   |   |    |    |   |   |   |   |   |   |   |   |   |   |    |    |    |    |   |   |   |   |   |   |   |   |    |   |    |    |   |    |   |   |   |   |   |
| Deposits:                                    |   |   |    |    |   |   |   |   |   |   |   |   |   |   |    |    |    |    |   |   |   |   |   |   |   |   |    |   |    |    |   |    |   |   |   |   |   |
| Checking and money market                    |   |   | $       | 282,312 |   |   |   | $      | 10,436 |   |   |   | 3.70   | %      |    |    | $       | 274,093 |   |   |   | $      | 8,281  |   |   |   | 3.02    | %      |    |    | $      | 263,037 |   |   |   | $      | 4,845  |   |   |   | 1.84 | % |   |
| Savings                                      |   |   | 46,207  |    |   |   | 1,240  |   |   |   | 2.68   | %      |   |   | 51,356  |    |    |    | 1,150  |   |   |   | 2.24   | %      |   |   | 49,204  |   |    |    | 578    |    |   |   | 1.17   | %      |   |
| Certificates of deposit                      |   |   | 362,321 |    |   |   | 16,829 |   |   |   | 4.64   | %      |   |   | 298,940 |    |    |    | 10,744 |   |   |   | 3.59   | %      |   |   | 260,579 |   |    |    | 7,236  |    |   |   | 2.78   | %      |   |
| Total interest-bearing deposits              |   |   | 690,840 |    |   |   | 28,505 |   |   |   | 4.13   | %      |   |   | 624,389 |    |    |    | 20,175 |   |   |   | 3.23   | %      |   |   | 572,820 |   |    |    | 12,659 |    |   |   | 2.21   | %      |   |
| FHLB advances and other borrowings           |   |   | 106,151 |    |   |   | 5,061  |   |   |   | 4.77   | %      |   |   | 119,727 |    |    |    | 5,357  |   |   |   | 4.47   | %      |   |   | 111,332 |   |    |    | 4,409  |    |   |   | 3.96   | %      |   |
| Subordinated debentures payable to trusts(4) |   |   | 27,837  |    |   |   | 2,674  |   |   |   | 9.61   | %      |   |   | 27,837  |    |    |    | 2,230  |   |   |   | 8.01   | %      |   |   | 27,837  |   |    |    | 1,679  |    |   |   | 6.03   | %      |   |
| Total interest-bearing liabilities           |   |   | 824,828 |    |   |   | $      | 36,240 |   |   |   | 4.39   | %      |   |    | 771,953 |    |    |   | $      | 27,762 |   |   |   | 3.60   | %      |    |   | 711,989 |    |   |    | $      | 18,747 |   |   |   | 2.63   | %      |   |
| Noninterest-bearing deposits                 |   |   | 76,698  |    |   |   |   |   |   |   |   |   |   |   | 77,419  |    |    |    |   |   |   |   |   |   |   |   | 72,627  |   |    |    |   |    |   |   |   |   |   |
| Other liabilities                            |   |   | 24,558  |    |   |   |   |   |   |   |   |   |   |   | 19,109  |    |    |    |   |   |   |   |   |   |   |   | 17,465  |   |    |    |   |    |   |   |   |   |   |
| Total liabilities                            |   |   | 926,084 |    |   |   |   |   |   |   |   |   |   |   | 868,481 |    |    |    |   |   |   |   |   |   |   |   | 802,081 |   |    |    |   |    |   |   |   |   |   |
| Equity                                       |   |   | 59,741  |    |   |   |   |   |   |   |   |   |   |   | 54,807  |    |    |    |   |   |   |   |   |   |   |   | 53,491  |   |    |    |   |    |   |   |   |   |   |
| Total liabilities and equity                 |   |   | $       | 985,825 |   |   |   |   |   |   |   |   |   |   |    | $       | 923,288 |    |   |   |   |   |   |   |   |   |    |   | $       | 855,572 |   |    |   |   |   |   |   |   |   |   |
| Net interest income; interest rate spread    |   |   |    |    |   |   | $      | 25,634 |   |   |   | 2.36   | %      |   |    |    |    |    |   | $      | 25,649 |   |   |   | 2.60   | %      |    |   |    |    |   |    | $      | 26,199 |   |   |   | 3.02   | %      |   |
| Net interest margin(5)                       |   |   |    |    |   |   |   |   |   |   | 2.80   | %      |   |   |    |    |    |    |   |   |   |   | 2.98   | %      |   |   |    |   |    |    |   |    |   |   | 3.29   | %      |   |
| Net interest  margin, TE(6)                  |   |   |    |    |   |   |   |   |   |   | 2.85   | %      |   |   |    |    |    |    |   |   |   |   | 3.01   | %      |   |   |    |   |    |    |   |    |   |   | 3.32   | %      |   |

----

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

(2)                 Includes federal funds sold.

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

(4)                 Includes $290 expense in December 2006 forunamortized debt issuance costs.

(5)                 Net interest margin is net interest income divided byaverage interest-earning assets.

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

48

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**Rate/VolumeAnalysis of Net Interest Income**

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

| ** **                                 | ** ** | **Years Ended June 30,** | ** ** | **Years Ended June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                 | ** ** | **2007 vs. 2006**             | ** ** | **2006 vs. 2005**             | ** ** |
| ** **                                 | ** ** | **Increase**                            | ** ** | **Increase**                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **(Decrease)**                          | ** ** | **(Decrease)**                          | ** ** | **Total** | ** ** | **Increase** | ** ** | **(Decrease)** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **Due to**                         | ** ** | **Due to**                         | ** ** | **Increase** | ** ** | **Due to** | ** ** | **Due to** | ** ** | **Increase** | ** ** |
| ** **                                 | ** ** | **Volume**                              | ** ** | **Rate**                                | ** ** | **(Decrease)** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| ** **                                 | ** ** | **(Dollars in Thousands)**    | ** ** |
| Interest-earning assets:                   |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans and leases receivable(1)             |       |                                    | $          | 3,658                                   |       |   |   | $ | 3,590 |   |   |   | $ | 7,248 |   |   |   | $ | 2,308 |   |   |   | $ | 4,299 |   |   |   | $ | 6,607 |   |   |
| Investment securities(2)                   |       |                                    | 40         |                                    |       |   | 1,036 |   |   |   | 1,076 |   |   |   | 971 |   |   |   | 906 |   |   |   | 1,877 |   |   |
| FHLB stock                                 |       |                                    | (18        | )                                       |       |   | 157 |   |   |   | 139 |   |   |   | 20 |   |   |   | (39 | ) |   |   | (19 | ) |   |
| Total interest-earning assets              |       |                                    | $          | 3,680                                   |       |   |   | $ | 4,783 |   |   |   | $ | 8,463 |   |   |   | $ | 3,299 |   |   |   | $ | 5,166 |   |   |   | $ | 8,465 |   |   |
| Interest-bearing  liabilities:             |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                  |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Checking and money market                  |       |                                    | $          | 248                                     |       |   |   | $ | 1,907 |   |   |   | $ | 2,155 |   |   |   | $ | 204 |   |   |   | $ | 3,232 |   |   |   | $ | 3,436 |   |   |
| Savings                                    |       |                                    | (115       | )                                       |       |   | 205 |   |   |   | 90 |   |   |   | 25 |   |   |   | 547 |   |   |   | 572 |   |   |
| Certificates of deposit                    |       |                                    | 2,278      |                                    |       |   | 3,807 |   |   |   | 6,085 |   |   |   | 1,065 |   |   |   | 2,443 |   |   |   | 3,508 |   |   |
| Total interest-bearing deposits            |       |                                    | 2,411      |                                    |       |   | 5,919 |   |   |   | 8,330 |   |   |   | 1,294 |   |   |   | 6,222 |   |   |   | 7,516 |   |   |
| FHLB advances and other borrowings         |       |                                    | (607       | )                                       |       |   | 311 |   |   |   | (296 | ) |   |   | 332 |   |   |   | 616 |   |   |   | 948 |   |   |
| Subordinated debentures payable to  trusts |       |                                    | —     |                                    |       |   | 444 |   |   |   | 444 |   |   |   | — |   |   |   | 551 |   |   |   | 551 |   |   |
| Total interest-bearing liabilities         |       |                                    | $          | 1,804                                   |       |   |   | $ | 6,674 |   |   |   | $ | 8,478 |   |   |   | $ | 1,626 |   |   |   | $ | 7,389 |   |   |   | $ | 9,015 |   |   |
| Net interest income increase (decrease)    |       |                                    |       |                                    |       |   |   |   |   |   | $ | (15 | ) |   |   |   |   |   |   |   |   |   |   | $ | (550 | ) |   |

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

(2)             Includes federal funds sold.

**Application ofCritical Accounting Policies**

GAAP requires management to utilize estimates whenreporting financial results. The Company has identified the policies discussedbelow as Critical Accounting Policies because the accounting estimates requiremanagement to make certain assumptions about matters that may be uncertain atthe time the estimate was made and a different method of estimating could havebeen reasonably made that could have a material impact on the presentation ofthe Company’s financial condition, changes in financial condition or results ofoperations.

*Allowancefor Loan and Lease Losses**—GAAP*requires theCompany to set aside reserves or maintain an allowance against probable loanand lease losses in the loan and lease portfolio. Management must develop aconsistent and systematic approach to estimate the appropriate balances thatwill cover the probable losses. Due to the uncertainty of future events, theapproach includes a process that may differ significantly from othermethodologies and still produce an estimate that is in accordance with GAAP.

49

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The allowance is compiledby utilizing the Company’s loan and lease risk rating system, which isstructured to identify weaknesses in the loan and lease portfolio. The riskrating system has evolved to a process whereby management believes the systemwill properly identify the credit risk associated with the loan and leaseportfolio. Due to the stratification of loans and leases for the allowancecalculation, the estimate of the allowance for loan and lease losses couldchange materially if the loan and lease risk rating system would not properlyidentify the strength of a large or a few large loan and lease customers.Although management believes that it uses the best information available todetermine the allowance, unforeseen market or borrower conditions could resultin adjustments and net earnings being significantly affected if circumstancesdiffer substantially from the assumptions used in making the finaldeterminations.

*Mortgage Servicing Rights(“MSR”)—*The Company records a servicing asset forcontractually separated servicing from the underlying mortgage loans.  The asset is initially recorded at fair valueand represents an intangible asset backed by an income stream from the servicedassets. The asset is amortized in proportion to and over the period ofestimated net servicing income.

At each balance sheetdate, the MSRs are analyzed for impairment, which occurs when the fair value ofthe MSRs is lower than the amortized book value. The Company’s MSRs areprimarily servicing rights acquired on South Dakota Housing DevelopmentAuthority first time homebuyers program. Due to the lack of quoted markets forthe Company’s servicing portfolio, the Company estimates the fair value of theMSRs using present value of future cash flow analysis. If the analysis producesa fair value that is greater than or equal to the amortized book value of theMSRs, no impairment is recognized. If the fair value is less than the bookvalue, an expense for the difference is charged to earnings by initiating a MSRvaluation account. If the Company determines this impairment is temporary, anyfuture changes in fair value are recorded as a change in earnings and thevaluation. If the Company determines the impairment to be permanent, thevaluation is written off against the MSRs which results in a new amortizedbalance.

The Company has includedMSRs as a critical accounting policy because the use of estimates fordetermining fair value using present value concepts may produce results whichmay significantly differ from other fair value analysis perhaps even to thepoint of recording impairment. The risk to earnings is when the underlyingmortgages payoff significantly faster than the assumptions used in thepreviously recorded amortization. Estimating future cash flows on the underlyingmortgages is a difficult analysis and requires judgment based on the bestinformation available. The Company looks at alternative assumptions andprojections when preparing a reasonable and supportable analysis. Based on theCompany’s quarterly analysis of MSRs, there was no impairment to the MSRs atJune 30, 2007.

*Self-Insurance—*TheCompany has a self-insured healthcare plan for its employees up to certainlimits. To mitigate a portion of these risks, the Company has a stop-lossinsurance policy through a commercial insurance carrier for coverage in excessof $65,000 per individual occurrence with a maximum aggregate limitation of$2.0 million. The estimate of self-insurance liability is based upon knownclaims and an estimate of incurred, but not reported (“IBNR”) claims. IBNRclaims are estimated using historical claims lag information received by athird party claims administrator. Due to the uncertainty of health claims, theapproach includes a process that may differ significantly from other methodologiesand still produce an estimate that is in accordance with GAAP. Althoughmanagement believes that it uses the best information available to determinethe accrual, unforeseen health claims could result in adjustments to theaccrual. These adjustments could significantly affect net earnings ifcircumstances differ substantially from the assumptions used in estimating theaccrual.

**Asset Quality**

When a borrower fails tomake a required payment on a loan within 10 to 15 days after the payment isdue, the Bank generally institutes collection procedures by issuing a latenotice. The customer is contacted again when the payment is between 17 and 40days past due. In most cases, delinquencies are cured promptly; however, if aloan has been delinquent for more than 40 days, the Bank attempts additional 

50

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writtenas well as verbal contacts and, if necessary, personal contact with theborrower in order to determine the reason for the delinquency and to effect acure, and, where appropriate, reviews the condition of the property and thefinancial circumstances of the borrower. Based upon the results of any suchinvestigation, the Bank may: (i) accept a repayment program which underappropriate circumstances could involve an extension in the case of consumer loansfor the arrearage from the borrower, (ii) seek evidence, in the form of alisting contract, of efforts by the borrower to sell the property if theborrower has stated that he is attempting to sell, or (iii) initiateforeclosure proceedings. When a loan payment is delinquent for 90 days, theBank generally will initiate foreclosure proceedings unless management issatisfied the credit problem is correctable.

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

Leases are generallyclassified as nonaccrual when there are reasonable doubts as to thecollectibility of principal and/or interest. Leases may be placed on nonaccrualwhen the lease has experienced either four consecutive months with no paymentsor once the account is five months in arrears. Interest collections onnonaccrual leases, for which the ultimate collectibility of principal isuncertain, are applied as principal reductions.

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

Nonperforming assets(nonaccrual loans and leases, accruing loans and leases delinquent more than 90days and foreclosed assets) increased to $4.0 million at June 30, 2007from $3.9 million at June 30, 2006, an increase of $114,000. In addition,the ratio of nonperforming assets to total assets, which is one indicator ofcredit risk exposure, remained at 0.40% at June 30, 2007, the same asJune 30, 2006.

Nonaccruing loans andleases increased $1.2 million to $2.2 million at June 30, 2007 compared to$1.0 million at June 30, 2006. Included in nonaccruing loans and leases atJune 30, 2007 were four loans totaling $228,000 secured by one- tofour-family real estate, one commercial real estate loan totaling $25,000, 14 commercialbusiness loans totaling $1.4 million, one equipment finance lease totaling$118,000 and 34 consumer loans totaling $387,000.

The Company’snonperforming loans and leases, which represent nonaccrual and past due 90 daysand still accruing, have increased $133,000 from the levels at June 30,2006. The risk rating system in place is designed to identify and manage thenonperforming loans and leases. Commercial and agricultural loans and equipmentfinance leases will have specific reserve allocations based on collateralvalues or based on the present value of expected cash flows if the loans orleases are deemed impaired. Loans and leases that are not performing do notnecessarily result in a loss.

As of June 30, 2007,the Company had $508,000 of foreclosed assets. The balance of foreclosed assetsat June 30, 2007 consisted of $180,000 in equipment finance leases,$170,000 in consumer collateral and $158,000 in single-family residences.

At June 30, 2007, theCompany had designated $21.0 million of itsassets as special mention and classified $5.4 million of its assets thatmanagement has determined need to be closely monitored because of possiblecredit problems of the borrowers or the cash flows of the secured properties.At June 30, 2007, the Company had $19.7 million in multi-family,commercial real estate and agricultural participation loans 

51

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purchased,of which $243,000 were classified at June 30, 2007. These loans and leaseswere considered in determining the adequacy of the allowance for loan and leaselosses. The allowance for loan and lease losses is established based onmanagement’s evaluation of the risks probable in the loan and lease portfolioand changes in the nature and volume of loan and lease activity. Suchevaluation, which includes a review of all loans and leases for which full collectibilitymay not be reasonably assured, considers the estimated fair market value of theunderlying collateral, present value of expected principal and interestpayments, economic conditions, historical loss experience and other factorsthat warrant recognition in providing for an adequate loan and lease lossallowance.

Although the Company’smanagement believes that the June 30, 2007 recorded allowance for loan andlease losses was adequate to provide for probable losses on the related loansand leases, there can be no assurance that the allowance existing atJune 30, 2007 will be adequate in the future.

Inaccordance with the Company’s internal classification of assets policy,management evaluates the loan and lease portfolio on a monthly basis toidentify loss potential and determines the adequacy of the allowance for loanand lease losses quarterly. Loans are placed on nonaccrual status when thecollection of principal and/or interest become doubtful. Foreclosed assetsinclude assets acquired in settlement of loans. The following table sets forththe amounts and categories of the Company’s nonperforming assets fromcontinuing operations for the periods indicated.

| ** **                                                                 | ** ** | **At June 30,**            | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                 | ** ** | **(Dollars in Thousands)** | ** ** |
| Nonaccruing loans and leases:                                              |       |                                 |       |   |   |   |   |   |   |   |   |
| One- to four-family                                                        |       | $                                    | 228        |   | $ | 371 |   | $ | 263 |   | $ | 86 |   | $ | 103 |   |
| Commercial real estate                                                     |       | 25                                   |       | — |   | 70 |   | 75 |   | 310 |   |
| Commercial business                                                        |       | 1,441                                |       | 341 |   | 4,518 |   | 795 |   | 472 |   |
| Equipment finance leases                                                   |       | 118                                  |       | 36 |   | 130 |   | 21 |   | 30 |   |
| Consumer(1)                                                                |       | 378                                  |       | 287 |   | 341 |   | 564 |   | 909 |   |
| Agricultural                                                               |       | —                               |       | — |   | — |   | 20 |   | 2,541 |   |
| Total                                                                      |       | 2,190                                |       | 1,035 |   | 5,322 |   | 1,561 |   | 4,365 |   |
| Accruing loans and leases delinquent more than 90 days:               |       |                                 |       |   |   |   |   |   |   |   |   |
| One- to four-family                                                        |       | 470                                  |       | 358 |   | 98 |   | — |   | 330 |   |
| Commercial real estate                                                     |       | 178                                  |       | 308 |   | 292 |   | — |   | 42 |   |
| Commercial business                                                        |       | 213                                  |       | 814 |   | 1,052 |   | 221 |   | 779 |   |
| Equipment finance leases                                                   |       | 88                                   |       | 302 |   | 71 |   | 281 |   | 313 |   |
| Consumer(1)                                                                |       | 1                                    |       | 7 |   | — |   | — |   | 2 |   |
| Agricultural                                                               |       | 358                                  |       | 541 |   | 96 |   | — |   | — |   |
| Total                                                                      |       | 1,308                                |       | 2,330 |   | 1,609 |   | 502 |   | 1,466 |   |
| Foreclosed assets:                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| One- to four-family                                                        |       | 158                                  |       | 96 |   | 39 |   | 100 |   | 258 |   |
| Equipment finance leases                                                   |       | 180                                  |       | 254 |   | — |   | — |   | — |   |
| Consumer(1)                                                                |       | 170                                  |       | 177 |   | 50 |   | 112 |   | 77 |   |
| Total(2)                                                                   |       | 508                                  |       | 527 |   | 89 |   | 212 |   | 335 |   |
| Total nonperforming  assets(3)                                             |       | $                                    | 4,006      |   | $ | 3,892 |   | $ | 7,020 |   | $ | 2,275 |   | $ | 6,166 |   |
| Ratio of nonperforming  assets to total assets(4)                          |       | 0.40                                 | %          | 0.40 | % | 0.78 | % | 0.27 | % | 0.77 | % |
| Ratio of nonperforming loans and leases to total loans and  leases(5) |       | 0.45                                 | %          | 0.46 | % | 1.01 | % | 0.32 | % | 0.95 | % |

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(1)          Consists ofnonperforming consumer loans inclusive of mobile home loans and exclusive ofcredit card loans.

52

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

(3)          Nonperforming assetsinclude nonaccruing loans and leases, accruing loans and leases delinquent morethan 90 days and foreclosed assets.

(4)          Percentage is calculatedbased upon total assets of the Company and its direct and indirect subsidiarieson a consolidated basis.

(5)          Nonperforming loans andleases include both nonaccruing and accruing loans and leases delinquent morethan 90 days.

Thefollowing table sets forth information with respect to activity in theCompany’s allowance for loan and lease losses from continuing operations duringthe periods indicated. Balances related to discontinued credit card loanoperations have been eliminated for all periods presented.

| ** **                                                                                                    | ** ** | **Years Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                    | ** ** | **(Dollars in Thousands)**    | ** ** |
| Balance at beginning of  period                                                                               |       | $                                       | 5,657      |   | $ | 5,076 |   | $ | 3,605 |   | $ | 3,842 |   | $ | 4,461 |   |
| *Charge-offs:*                                                                                                |       |                                    |       |   |   |   |   |   |   |   |   |
| One- to four-family                                                                                           |       | (12                                     | )          | (1 | ) | — |   | (7 | ) | (9 | ) |
| Commercial real estate                                                                                        |       | —                                  |       | — |   | (31 | ) | (92 | ) | — |   |
| Commercial business                                                                                           |       | (386                                    | )          | (3,389 | ) | (187 | ) | (457 | ) | (1,234 | ) |
| Equipment finance leases                                                                                      |       | (162                                    | )          | (165 | ) | (269 | ) | (30 | ) | (124 | ) |
| Consumer(1)                                                                                                   |       | (701                                    | )          | (1,066 | ) | (1,044 | ) | (1,143 | ) | (1,205 | ) |
| Agricultural                                                                                                  |       | (31                                     | )          | (502 | ) | (14 | ) | (835 | ) | (1,429 | ) |
| Total charge-offs                                                                                             |       | (1,292                                  | )          | (5,123 | ) | (1,545 | ) | (2,564 | ) | (4,001 | ) |
| *Recoveries:*                                                                                                 |       |                                    |       |   |   |   |   |   |   |   |   |
| One- to four-family                                                                                           |       | 3                                       |       | 1 |   | 9 |   | 4 |   | 3 |   |
| Commercial real estate                                                                                        |       | 1                                       |       | 6 |   | — |   | 1 |   | — |   |
| Commercial business                                                                                           |       | 9                                       |       | 15 |   | 31 |   | 3 |   | 5 |   |
| Equipment finance leases                                                                                      |       | 0                                       |       | 40 |   | 2 |   | 64 |   | 41 |   |
| Consumer(1)                                                                                                   |       | 216                                     |       | 237 |   | 215 |   | 232 |   | 324 |   |
| Agricultural                                                                                                  |       | 80                                      |       | 126 |   | 78 |   | 3 |   | 100 |   |
| Total recoveries                                                                                              |       | 309                                     |       | 425 |   | 335 |   | 307 |   | 473 |   |
| Net (charge-offs)                                                                                             |       | (983                                    | )          | (4,698 | ) | (1,210 | ) | (2,257 | ) | (3,528 | ) |
| Additions charged to  operations                                                                              |       | 1,198                                   |       | 5,279 |   | 2,681 |   | 2,020 |   | 3,173 |   |
| Allowance related to  assets acquired (sold), net                                                             |       | —                                  |       | — |   | — |   | — |   | (264 | ) |
| Balance at end of period                                                                                      |       | $                                       | 5,872      |   | $ | 5,657 |   | $ | 5,076 |   | $ | 3,605 |   | $ | 3,842 |   |
| Ratio of net  (charge-offs) during the period to average loans and leases outstanding during  the period |       | (0.13                                   | )%         | (0.67 | )% | (0.18 | )% | (0.36 | )% | (0.59 | )% |
| Ratio of allowance for  loan and lease losses to total loans and leases at end of period                 |       | 0.76                                    | %          | 0.77 | % | 0.74 | % | 0.55 | % | 0.62 | % |
| Ratio of allowance for loan and lease losses to nonperforming  loans and leases at end of period    |       | 167.87                                  | %          | 168.11 | % | 73.24 | % | 174.75 | % | 65.89 | % |

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(1)          Includes mobile homeloans.

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Thedistribution of the Company’s allowance for loan and lease losses and impairedloss summary as required by the Financial Accounting Standards Board, (“FASB”)Statement No. 114, “Accounting by Creditors for Impairment of a Loan” aresummarized in the following tables.

| ** **                                 | ** ** | **At June 30,**            | ** **       |
|--------------------------------------------|------------|--------------------------------------|------------------|
| ** **                                 | ** ** | **2007**                             | ** **       | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                 | ** ** | ** **                           | ** **       | **Percent of Loans in** | ** ** | ** ** | ** ** | **Percent of Loans in** | ** ** | ** ** | ** ** | **Percent of Loans in** | ** ** | ** ** | ** ** | **Percent of Loans in** | ** ** | ** ** | ** ** | **Percent of Loans in** | ** ** |
| ** **                                 | ** ** | ** **                           | ** **       | **Each Category to** | ** ** | ** ** | ** ** | **Each Category to** | ** ** | ** ** | ** ** | **Each Category to** | ** ** | ** ** | ** ** | **Each Category to** | ** ** | ** ** | ** ** | **Each Category to** | ** ** |
| ** **                                 | ** ** | **Amount** (4)                  | ** **       | **Total Loans** | ** ** | **Amount** (4) | ** ** | **Total Loans** | ** ** | **Amount** (4) | ** ** | **Total Loans** | ** ** | **Amount** (4) | ** ** | **Total Loans** | ** ** | **Amount** | ** ** | **Total Loans** | ** ** |
| ** **                                 | ** ** | **(Dollars in Thousands)** | ** **       |
| One- to four-family(1)                     |       |                                 | $  342 |   |   |   | 5.82 | % |   |   | $  193 |   |   |   | 17.02 | % |   |   | $  186 |   |   |   | 17.21 | % |   |   | $     15 |   |   |   | 17.51 | % |   |   | $     28 |   |   |   | 17.39 | % |   |
| Commercial and multi-family real estate(1) |       |                                 | 647              |   |   |   | 11.02 |   |   |   | 396 |   |   |   | 26.54 |   |   |   | 261 |   |   |   | 19.66 |   |   |   | 220 |   |   |   | 20.57 |   |   |   | 241 |   |   |   | 23.34 |   |   |
| Commercial business(2)                     |       |                                 | 2,795            |   |   |   | 47.60 |   |   |   | 3,133 |   |   |   | 17.42 |   |   |   | 2,953 |   |   |   | 22.96 |   |   |   | 1,270 |   |   |   | 22.85 |   |   |   | 1,033 |   |   |   | 22.09 |   |   |
| Consumer(3)                                |       |                                 | 1,178            |   |   |   | 20.06 |   |   |   | 1,432 |   |   |   | 26.99 |   |   |   | 1,343 |   |   |   | 29.45 |   |   |   | 1,736 |   |   |   | 29.48 |   |   |   | 1,595 |   |   |   | 27.79 |   |   |
| Agricultural                               |       |                                 | 910              |   |   |   | 15.50 |   |   |   | 503 |   |   |   | 12.03 |   |   |   | 333 |   |   |   | 10.72 |   |   |   | 364 |   |   |   | 9.59 |   |   |   | 945 |   |   |   | 9.39 |   |   |
| Total                                      |       |                                 | $ 5,872     |   |   |   | 100.00 | % |   |   | $ 5,657 |   |   |   | 100.00 | % |   |   | $ 5,076 |   |   |   | 100.00 | % |   |   | $ 3,605 |   |   |   | 100.00 | % |   |   | $ 3,842 |   |   |   | 100.00 | % |   |

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(1)        Includesconstruction and development loans.

(2)        Includesequipment finance leases.

(3)        Includesmobile home loans.

(4)        TheCompany migrated its allocation methodology of allowances by type in fiscal2002 to reflect a more systematic method based in part on the Company’shistorical charge-offs by each loan type as compared to primarily a pro rataallocation on loan balances in prior years.

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| ** **                | ** ** | **FASB 5**                      | ** ** | **FASB 114**                   | ** ** | **FASB 5**                     | ** ** | **FASB 114**      | ** ** |
|---------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|------------------------|------------|
| ** **                | ** ** | **Allowance**                        | ** ** | **Impaired Loan**              | ** ** | **Allowance**                       | ** ** | **Impaired Loan** | ** ** |
| ** **                | ** ** | **for Loan and**           | ** ** | **Valuation**                       | ** ** | **for Loan and**          | ** ** | **Valuation**          | ** ** |
| ** **                | ** ** | **Lease Losses**                | ** ** | **Allowance**                       | ** ** | **Lease Losses**               | ** ** | **Allowance**          | ** ** |
| **Loan Type**        | ** ** | ** **                           | ** ** | **At June 30, 2007** | ** ** | **At June 30, 2006** | ** ** |
| ** **                | ** ** | **(Dollars in Thousands)** | ** ** |
| One- to  four-family      |       |                                 | $          | 342                                 |       |                                |       | —                 |       |   |   | $ | 193 |   |   |   | — |   |   |
| Commercial real  estate   |       |                                 | 524        |                                |       |                                | —     |                   |       |   | 317 |   |   |   | — |   |   |
| Multi-family real  estate |       |                                 | 123        |                                |       |                                | —     |                   |       |   | 79 |   |   |   | — |   |   |
| Commercial  business      |       |                                 | 1,974      |                                |       |                                | 335        |                   |       |   | 2,563 |   |   |   | — |   |   |
| Equipment finance  leases |       |                                 | 486        |                                |       |                                | —     |                   |       |   | 570 |   |   |   | — |   |   |
| Consumer(1)               |       |                                 | 1,178      |                                |       |                                | —     |                   |       |   | 1,432 |   |   |   | — |   |   |
| Agricultural              |       |                                 | 860        |                                |       |                                | 50         |                   |       |   | 503 |   |   |   | — |   |   |
| Total                     |       |                                 | $          | 5,487                               |       |                                |       | $                      | 385        |   |   |   | $ | 5,657 |   |   |   | — |   |   |
|                           |            |                                      |            |                                     |            |                                     |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Includesmobile home loans.

**FASB114 Impaired Loan Summary**

| ** **           | ** ** | ** **                           | ** ** | ** **                          | ** ** | **Impaired**                        | ** ** | ** **       | ** ** | ** **  | ** ** | **Impaired**  | ** ** |
|----------------------|------------|--------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|------------------|------------|-------------|------------|---------------|------------|
| ** **           | ** ** | **Number**                           | ** ** | ** **                          | ** ** | **Loan**                            | ** ** | **Number**       | ** ** | ** **  | ** ** | **Loan**      | ** ** |
| ** **           | ** ** | **of Loan**                     | ** ** | **Loan**                            | ** ** | **Valuation**                       | ** ** | **of Loan** | ** ** | **Loan**    | ** ** | **Valuation** | ** ** |
| ** **           | ** ** | **Customers**                        | ** ** | **Balance**                         | ** ** | **Allowance**                       | ** ** | **Customers**    | ** ** | **Balance** | ** ** | **Allowance** | ** ** |
| **Loan Type**   | ** ** | ** **                           | ** ** | **At June 30, 2007** | ** ** | **At June 30, 2006** | ** ** |
| ** **           | ** ** | **(Dollars in Thousands)** | ** ** |
| Commercial  business |       |                                 | 7          |                                |       | $                                   | 1,360      |             |       | $           | 335        |          |       |   | 4 |   |   |   | $ | 325 |   |   |   | — |   |   |
| Agricultural         |       |                                 | 1          |                                |       | 121                                 |       |             | 50         |        |       |          | —     |   |   |   | — |   |   |   | — |   |   |
| Total                |       |                                 | 8          |                                |       | $                                   | 1,481      |             |       | $           | 385        |          |       |   | 4 |   |   |   | $ | 325 |   |   |   | — |   |   |
|                      |            |                                      |            |                                     |            |                                     |            |                  |            |             |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The allowance for loan and lease losses was $5.9million at June 30, 2007 as compared to $5.7 million at June 30, 2006. The ratioof the allowance for loan and lease losses to total loans and leases was 0.76%at June 30, 2007 compared to 0.77% at June 30, 2006. The Company’s managementhas considered nonperforming assets and other assets of concern in establishingthe allowance for loan and lease losses. The Company continues to monitor itsallowance for possible loan and lease losses and make future additions orreductions in light of the level of loans and leases in its portfolio and aseconomic conditions dictate. The current level of the allowance for loan andlease losses is a result of management’s assessment of the risks within theportfolio based on the information revealed in credit reporting processes. TheCompany utilizes a risk-rating system on all commercial business, agricultural,construction, multi-family and commercial real estate loans, includingpurchased loans. A periodic credit review is performed on all types of loansand leases to establish the necessary reserve based on the estimated riskwithin the portfolio. This assessment of risk takes into account thecomposition of the loan and lease portfolio, historical loss experience foreach loan and lease category, previous loan and lease experience,concentrations of credit, current economic conditions and other factors that inmanagement’s judgment deserve recognition. OTS regulators have reviewed theCompany’s methodology for determining allowance requirements on the Company’sloan and lease portfolio and have made no required recommendations forincreases in the allowances during the three year period ended June 30, 2007.

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

Although managementbelieves that it uses the best information available to determine theallowances, unforeseen market conditions could result in adjustments and netearnings being significantly 

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affectedif circumstances differ substantially from the assumptions used in making thefinal determinations. Future additions to the Company’s allowances result fromperiodic loan, property and collateral reviews and thus cannot be predicted inadvance. See Note 1 of “Notes to Consolidated Financial Statements,” which isincluded in Part II, Item 8 “Financial Statements and Supplementary Data”of this Form 10-K for a description of the Company’s policyregarding the provision for losses on loans and leases.

**Comparison of theYears 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 yearended June 30, 2007, an $875,000 increase in earnings compared to $4.5million 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, thereturn on average equity was 9.01%, a 9.5% increase compared to 8.23% in theprior year. For the year ended June 30, 2007, the return on average assetswas 0.55%, a 12.2% increase compared to 0.49% in the prior year. As discussedin 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 millionand increases in noninterest income of $345,000 offset by increases innoninterest expense of $3.1 million.

*Interestand Dividend Income.*   Interest and dividendincome 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 $4.8million 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 millionincrease in interest and dividend income was the result of a 6.4% increase inthe average volume of total interest-earning assets. The average yield oninterest-earning assets was 6.75% for the year ended June 30, 2007 ascompared to 6.20% for the prior year. The average volume of loans and leasesreceivable increased from $703.8 million for the year ended June 30, 2006to $758.5 million for the year ended June 30, 2007. For the year endedJune 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 ininterest and dividend income was due in part to the repricing of loans andinvestments that generally reflected national interest rates.

*InterestExpense.*   Interest expense was $36.2 million forthe year ended June 30, 2007 as compared to $27.7 million for the prioryear, an increase of $8.5 million or 30.5%. A $5.9 million increase was theresult of a 27.9% increase in the average rate paid on interest-bearingdeposits. The average rate on interest-bearing deposits was 4.13% for the yearended June 30, 2007 as compared to 3.23% for the prior year. A $311,000increase in interest expense was the result of a 6.7% increase in the averageyield on FHLB advances and other borrowings to 4.77% for the year endedJune 30, 2007 compared to 4.47% for the prior fiscal year and a $607,000decrease in interest expense was the result of an 11.3% decrease in the averagebalance of FHLB advances and other borrowings. In addition, interest expenseincreased $444,000 due to the average yield on subordinated debentures payableto trust increasing to 9.61% for the year ended June 30, 2007 compared to8.01% for the prior fiscal year.

*NetInterest Income.*   The Company’s net interestincome 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 netinterest margin decreased to 2.80% for the year ended June 30, 2007 ascompared to 2.98% for the prior year. The Company continues to have adiversified loan portfolio comprised of a mix of consumer and business typelending. This mix helps the Company manage the net interest margin and interestrate risk by retaining loan and lease production on the balance sheet orlooking at alternatives through secondary markets.

*Provisionfor Losses on Loans and Leases.*   The allowancefor loan and lease losses is maintained at a level which is considered bymanagement to be adequate to absorb probable losses on existing loans andleases that may become uncollectible, based on an evaluation of thecollectibility of the loans and leases and prior loan and lease lossexperience. The evaluation takes into consideration such factors as changes inthe nature and volume of the loan and lease portfolio, overall portfolioquality, review of specific problem 

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loans and leases, andcurrent economic conditions that may affect the borrower’s ability to pay. Theallowance for loan and lease losses is established through a provision for losseson loans and leases charged to expense. See “Asset Quality” above for furtherdiscussion.

Provision for losses on loans and leases decreased$4.1 million, or 77.3%, to $1.2 million for the year ended June 30, 2007as 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 atJune 30, 2007 was $5.9 million. The allowance increased from theJune 30, 2006 balance of $5.7 million primarily as a result of charge-offsexceeding recoveries by $1.0 million offset by the provision for losses onloans and leases of $1.2 million. The ratio of allowance for loan and leaselosses 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 leaselosses to total loans and leases at June 30, 2007 was 0.76% compared to0.77% at June 30, 2006. The Bank’s management believes that theJune 30, 2007 recorded allowance for loan and lease losses was adequate toprovide for probable losses on the related loans and leases, based on itsevaluation of the collectibility of loans and leases and prior loss experience.

*NoninterestIncome.*   Noninterest income was $13.2 million forthe year ended June 30, 2007 as compared to $12.9 million for the yearended June 30, 2006, an increase of $345,000, or 2.7%. The increase innoninterest 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-timegain on sale of branches of $2.8 million, offset by decreases in othernoninterest income of $174,000 and the one-time gain on sale of land of $3.6million completed in fiscal 2006.

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

The net gain on sale of land of $3.6 million was dueto the completion of the sale of a parcel of land purchased for expansionseveral years ago. The sale was completed during the second quarter of fiscal2006 and produced the one-time gain on sale. The Company has acquired otherlocations in the interim and determined that it no longer needed this parcelfor the expansion planned.

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

Fees on deposits increased by $595,000 to $5.1 millionduring the year ended June 30, 2007 as compared to $4.5 million for theprior 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 andATM service fees.

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

Other noninterest income for the year endedJune 30, 2007 was $1.6 million as compared to $1.8 million for the prioryear, a decrease of $174,000. This decrease was primarily due to $137,000 ofsecuritization income recorded in fiscal 2006. There was no securitizationincome recorded in fiscal 2007. See “Consumer Lending—*OtherConsumer Lending*” and “Off-Balance Sheet Financing Arrangements” ofthis Form 10-K for more information on the automobilesecuritization.

*NoninterestExpense.*   Noninterest expense was $29.6 millionfor the year ended June 30, 2007 as compared to $26.5 million for theprior year, an increase of $3.1 million. The increase in noninterest 

57

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expense was due primarilyto increases in compensation and employee benefits of $1.7 million, advertisingof $685,000 and occupancy and equipment of $459,000.

Compensation and employee benefits increased $1.7million during the year ended June 30, 2007 as compared to the priorfiscal 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 administrationfees offset by stop loss and employee reimbursement under the Company’sself-insured health plan, was $2.1 million for the fiscal year endedJune 30, 2007, an increase of 43.7% compared to the prior fiscal year. TheCompany has had a self-insured health plan since January 1994. Managementcontinues to believe the current structure is a reasonable alternative totraditional healthcare plans over the long term. This is a challenging area forall companies and the Company continues to review its healthcare plans in aneffort to provide its employees with affordable health care.

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

Occupancy and equipment costs increased $459,000during 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 ofincreased building and property maintenance expense.

*Income Tax Expense.*   TheCompany’s income tax expense increased $430,000, or 19.4%, for the year endedJune 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. Theeffective tax rate for the years ended June 30, 2007 and June 30,2006 was 32.94%.

**Comparison of theYears Ended June 30, 2006 and June 30, 2005**

*General.*   TheCompany’s income was $4.5 million or $1.15 and $1.13 for basic and dilutedearnings per share, respectively, for the year ended June 30, 2006, a$657,000 decrease in earnings compared to $5.2 million or $1.33 and $1.29 forbasic and diluted earnings per share, respectively, for the prior year. For theyear ended June 30, 2006, the return on average equity was 8.23%, a 14.8%decrease compared to 9.66% in the prior year. For the year ended June 30,2006, the return on average assets was 0.49%, an 18.3% decrease compared to0.60% in the prior year. As discussed in more detail below, the decreases weredue to a variety of key factors, including increases provision for losses onloans and leases of $2.6 million and noninterest expense of $1.6 million and adecrease in net interest income of $550,000 offset by increases in noninterestincome of $3.8 million and a decrease in income tax expense of $217,000.

*Interestand Dividend Income.**  *Interestand dividend income was $53.4 million for the year ended June 30, 2006 ascompared to $44.9 million for the prior year, an increase of $8.5 million or18.8%. A $5.2 million increase in interest and dividend income was the resultof a 9.7% increase in the average yield on interest-earning assets and a $3.3million increase in interest, dividend and loan fee income was the result of a8.4% increase in the average volume of total interest-earning assets. Theaverage yield on interest-earning assets was 6.20% for the year endedJune 30, 2006 as compared to 5.65% for the prior year. The average volumeof loans and leases receivable increased from $665.8 million for the year endedJune 30, 2005 to $703.8 million for the year ended June 30, 2006. Forthe year ended June 30, 2006, the average yield on loans and leasesreceivable was 6.69%, an increase of 10.0% from 6.08% in the prior year. Theoverall increase in interest and dividend income was due in part to therepricing of loans and investments that generally reflected national interestrates. From June 30, 2005 to June 30, 2006, the prime rate increasedfrom 6.00% to 8.25%.

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*InterestExpense.**  *Interestexpense was $27.7 million for the year ended June 30, 2006 as compared to$18.7 million for the prior year, an increase of $9.0 million or 48.1%. A $6.2million increase was the result of a 46.2% increase in the average rate paid oninterest-bearing deposits. The average rate on interest-bearing deposits was3.23% for the year ended June 30, 2006 as compared to 2.21% for the prioryear. A $616,000 increase in interest expense was the result of a 12.9%increase in the average yield on FHLB advances and other borrowings to 4.47%for the year ended June 30, 2006 compared to 3.96% for the prior fiscalyear and a $332,000 increase in interest expense was the result of a 7.5%increase in the average balance of FHLB advances and other borrowings. Inaddition, interest expense increased $551,000 due to the average yield onsubordinated debentures payable to trusts increasing to 8.01% for the yearended June 30, 2006 compared to 6.03% in the prior fiscal year.

*NetInterest Income.*   The Company’s netinterest income for the year ended June 30, 2006 decreased $550,000, or 2.1%,to $25.6 million compared to $26.2 million for the prior year. The increase innet interest income was due to an increase in the average balance of interest earningassets and gradual increases in average interest rates over the prior year. TheCompany’s net interest margin decreased to 2.98% for the year ended June 30,2006 as compared to 3.29% for the prior year. The Company continues to have adiversified loan portfolio comprised of a mix of consumer and business typelending. This mix helps the Company manage the net interest margin and interestrate risk by taking the production and keeping the loans on balance sheet orlooking at alternatives through secondary markets.

*Provisionfor Losses on Loans and Leases.*   The allowancefor loan and lease losses is maintained at a level which is considered bymanagement to be adequate to absorb probable losses on existing loans andleases that may become uncollectible, based on an evaluation of thecollectibility of the loans and leases and prior loan and lease lossexperience. The evaluation takes into consideration such factors as changes inthe nature and volume of the loan and lease portfolio, overall portfolio quality,review of specific problem loans and leases, and current economic conditionsthat may affect the borrower’s ability to pay. The allowance for loan and leaselosses is established through a provision for losses on loans and leasescharged to expense.

Provision for losses on loans and leases increased$2.6 million, or 96.9%, to $5.3 million for the year ended June 30, 2006as compared to $2.7 million in the prior year. Net charge-offs increased from$1.2 million during fiscal 2005 to $4.7 million during fiscal 2006. Inaddition, nonperforming assets decreased $3.1 million as compared to the priorfiscal year primarily due to the downgrade of a $4.1 million participation loanas of June 30, 2005.

The allowance for loan and lease losses atJune 30, 2006 was $5.7 million. The allowance increased from theJune 30, 2005 balance of $5.1 million primarily as a result of charge-offsexceeding recoveries by $4.7 million offset by the provision for losses onloans and leases of $5.3 million. The ratio of allowance for loan and leaselosses to nonperforming loans and leases at June 30, 2006 was 168.11%compared to 73.24% at June 30, 2005. The allowance for loan and leaselosses to total loans and leases at June 30, 2006 was 0.77% compared to0.74% at June 30, 2005. The Bank’s management believes that theJune 30, 2006 recorded allowance for loan and lease losses was adequate toprovide for probable losses on the related loans and leases, based on itsevaluation of the collectibility of loans and leases and prior loss experience.

*NoninterestIncome.**  *Noninterestincome was $12.9 million for the year ended June 30, 2006 as compared to$9.0 million for the year ended June 30, 2005, an increase of $3.8million, or 42.6%. The increase in noninterest income was due primarily to again on sale of land of $3.6 million as a result of a land sale transactioncompleted during the second quarter of fiscal 2006. The remaining increase innoninterest income was due to increases in trust income of $148,000, fees ondeposits of $140,000 and commission and insurance income of $77,000 offset by adecrease in loan servicing income of $125,000.

The net gain on sale of land of $3.6 million was dueto the completion of the sale of a parcel of land purchased for expansionseveral years ago. The sale was completed during the second quarter of fiscal2006 

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and produced the one-timegain on sale. The Company has acquired other locations in the interim anddetermined that it no longer needed this parcel for the expansion planned.

Trust income increased by $148,000 to $849,000 duringthe year ended June 30, 2006 as compared to the prior year primarily dueto assets under management increasing from $100.5 million to $114.6 million.

Fees on deposits increased $140,000 from $4.4 millionfor the year ended June 30, 2005 to $4.5 million for the year endedJune 30, 2006, primarily due to an increase of $117,000 in income frompoint-of-sale purchases by customers.

Commission and insurance income was $531,000 for theyear ended June 30, 2006 compared to $454,000 in the prior year, anincrease of $77,000. The increase was primarily due to increased sales ofcredit related insurance products on consumer loans resulting from a change ininsurance carrier to a company, which offers a more extensive selection of creditinsurance products.

Loan servicing income decreased $125,000, to $1.1million for the year ended June 30, 2006, compared to $1.2 millionprimarily due to a decrease in servicing income on securitized loans of$148,000 and a decrease in the loan servicing rate received on South DakotaHousing loans offset by an increase in the number of loans serviced (excludingSouth Dakota Housing Loans) from 402 loans with a total balance of $35.3million at June 30, 2005 to 581 loans with a total balance of $57.3 millionat June 30, 2006.

*NoninterestExpense.**  *Noninterestexpense was $26.5 million for the year ended June 30, 2006 as compared to$24.9 million for the prior year, an increase of $1.6 million. The increase innoninterest expense was due primarily to increases in compensation and employeebenefits of $1.2 million, check and data processing of $272,000 and occupancyand equipment of $238,000 offset by a decrease in advertising expense of$156,000.

Compensation and employee benefits increased $1.2million during the year ended June 30, 2006 as compared to the priorfiscal year primarily due to increases in employee compensation of $1.2 millionand net healthcare costs of $240,000. Net healthcare costs, inclusive of healthclaims and administration fees offset by stop loss and employee reimbursementunder the Company’s self-insured health plan was $1.5 million for the fiscalyear ended June 30, 2006, an increase of $240,000, or 19.1% compared tothe prior fiscal year. The Company has had a self-insured health plan sinceJanuary 1994. Management continues to believe the current structure is areasonable alternative to traditional health care plans over the long term.This is a challenging area for all companies and the Company continues toreview its health care plans in an effort to provide its employees withaffordable health care.

Check and data processing increased $272,000 to $2.2million for the year ended June 30, 2006, primarily due to increases incomputer service expense of $81,000, advantage expense of $77,000 and freightand courier expense of $69,000.

Occupancy and equipment increased 7.7% to $3.3 millionfor the year ended June 30, 2006 as compared to $3.1 million for the prioryear. The increase was primarily due to an increase in furniture and fixturedepreciation expense of $102,000.

Advertising expense decreased 15.4% to $856,000 forthe year ended June 30, 2006 as compared to $1.0 million for the prioryear primarily due to fewer marketing campaigns in fiscal 2006 as compared tothe prior fiscal year.

*IncomeTax Expense.**  *TheCompany’s income tax expense decreased $217,000, or 8.9%, for the year endedJune 30, 2006 to $2.2 million compared to $2.4 million for the prior year.The decrease was primarily due to decreases in income before income taxes andchanges in temporary tax differences resulting from an increase in netcharge-offs. The effective tax rate was 32.94% and 32.00% for the years endedJune 30, 2006 and June 30, 2005, respectively. This increase was aresult of an increase in permanent tax differences primarily resulting from anincrease in tax-exempt interest income

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**Liquidity andCapital Resources**

The Company’s liquidity is comprised of three primaryclassifications: cash flows from operating activities, cash flows frominvesting activities and cash flows from financing activities. Net cashprovided by operating activities was $10.3 million for the fiscal year endedJune 30, 2007. For the fiscal year ended June 30, 2006, net cashprovided by operating activities was $11.7 million. Net cash used in investingactivities was $44.1 million for the fiscal year ended June 30, 2007. Forthe fiscal year ended June 30, 2006, net cash used in investing activitieswas $62.0 million. Net cash provided by financing activities for the fiscalyear ended June 30, 2007 was $29.2 million primarily due to a net increasein deposit accounts of $80.4 million offset by a $33.6 million sale ofdeposits related to branch sales completed in the second quarter of fiscal2007. This compares to net cash provided by financing activities in the priorfiscal year of $59.1 million primarily due to a net increase in depositaccounts of $87.8 million.

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

Liquidity management is both a daily and long-termresponsibility of management. The Bank adjusts its investments in liquid assetsbased 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) theobjectives of its asset/liability management program. Excess liquidity isinvested generally in interest-bearing overnight deposits and other short-termgovernment and agency obligations. At June 30, 2007, the Bank had $2.6million invested in federal funds sold. During the year ended June 30,2007, the Bank decreased its borrowings with the FHLB and FRB by $23.0 million.

The Bank anticipates that it will have sufficientfunds available to meet current loan commitments. At June 30, 2007, theBank had outstanding commitments to originate and purchase mortgage andcommercial loans of $20.5 million and to sell mortgage loans of $11.1 million.Commitments by the Bank to originate loans are not necessarily executed by thecustomer. The Bank monitors the ratio of commitments to funding for use inliquidity management. At June 30, 2007, the Bank had no outstandingcommitments to purchase investment securities available for sale and nocommitments to sell investment securities available for sale.

Although in-market deposits are the Bank’s primarysource of funds, the Bank’s policy has been to utilize borrowings where thefunds can be invested in either loans or securities at a positive rate ofreturn or to use the funds for short-term liquidity purposes. The Bankcurrently has $15.0 million in an unsecured line of federal funds with FirstTennessee Bank, NA. There were no funds drawn on the line of credit atJune 30, 2007. Also, the Bank has implemented arrangements to acquireout-of-market certificates of deposit as an additional source of funding. As ofJune 30, 2007, the Bank had $71.5 million in out-of-marketcertificates of deposit. The Bank may also seek other sources of contingentliquidity including additional federal funds purchased lines with correspondentbanks and lines of credit with the FRB.

The Company has a line of credit for $6.0 million withFirst Tennessee Bank, NA for liquidity needs in the Company. The note isshort-term in duration and is subject to annual review. In case of default onthe notes, the Company’s ability to pay cash dividends may be restricted. AtJune 30, 2007 no funds were advanced on the line of credit. See Note 8 of “Notesto Consolidated Financial Statements,” which is included in Part II, Item8 “Financial Statements and Supplementary Data” of this Form 10-K,Part II, 

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Item 7 “FinancialCondition Data” of this Form 10-K and Exhibit 10.10 of thisForm 10-K for additional information.

The Company uses its capital resources to pay dividendsto its stockholders, to repurchase Company stock in the market pursuant toBoard of Directors’ approved plans, to support organic growth, to makeacquisitions, to service its debt obligations and to provide funding forinvestment into the Bank of Tier 1 (core) capital.

During the year ended June 30, 2007, the Companyhad in effect a stock buy back program which was publicly announced onApril 24, 2006 in which the Company was permitted to repurchase up to 10%of the common stock of the Company that was outstanding on May 1, 2006.This stock buy back program expired on April 30, 2007. There were noshares purchased under the program during the fiscal years ended June 30,2006 or June 30, 2007.

The Company approved a new stock buy back program,which began on May 1, 2007 and was publicly announced on April 30,2007. Under this program, the Company may repurchase up to 10% of the commonstock of the Company outstanding on May 1, 2007, which equals 399,141shares, through April 30, 2008. There were no shares purchased under theprogram during the fiscal year ended June 30, 2007.

Savings institutions insured by the FDIC are requiredto meet three regulatory capital requirements. If a requirement is not met,regulatory authorities may take legal or administrative actions, includingrestrictions on growth or operations or, in extreme cases, seizure.Institutions not in compliance may apply for an exemption from the requirementsand submit a recapitalization plan. Under these capital requirements, at June 30,2007, the Bank met all current capital requirements.

The OTS has adoptedcapital requirements for savings institutions comparable to the requirement fornational banks. The minimum OTS core capital requirement for well-capitalizedinstitutions is 5.00% of total adjusted assets. The Bank had Tier 1 (core)capital of 8.31% at June 30, 2007. The minimum OTS risk-based capitalrequirement for well-capitalized institutions is 10.00% of risk-weightedassets. The Bank had risk-based capital of 11.05% at June 30, 2007.

**Off-Balance SheetFinancing Arrangements**

During fiscal 2003, theBank securitized and sold consumer automobile loans in the amount of $50.0million through HFSC and Home Federal Automobile Securitization Trust 2003-A.As a result of this securitization transaction, the Bank had off-balance sheetautomobile loans in the amount of $35.5 million at June 30, 2003. AtJune 30, 2005, the outstanding balance was $6.6 million. As part of thesales transaction, the Bank retained servicing responsibilities and a retainedinterest in the interest payments from the receivables, which was subordinatedto third party investors’ interests. The receivables were sold without legalrecourse to third party conduits. The sale provided the Bank with an additionalsource of liquidity at interest rates more favorable than it could receivethrough other forms of financing. It also assisted in reducing capitalrequirements and credit risk to the Bank, in addition to giving the Bank accessto the national capital markets. The Bank had the option to execute a clean-upcall when the remaining balance of the loans outstanding was at 10% of theoriginal balance. On November 9, 2005, the Bank exercised its option to executethe cleanup call by purchasing the outstanding principal balances of thesecuritized motor vehicle installment loans.

**Impact of Inflationand Changing Prices**

The Consolidated FinancialStatements and Notes thereto presented in Part II, Item 8 “FinancialStatements and Supplementary Data” of this Form 10-K have been preparedin accordance with GAAP, which require the measurement of financial positionand operating results in terms of historical dollars without considering thechange in the relative purchasing power of money over time due to inflation.The 

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impactof inflation is reflected in the increased cost of the Bank’s operations.Unlike most industrial companies, nearly all the assets and liabilities of theBank are monetary in nature. As a result, interest rates have a greater impacton the Bank’s performance than do the effects of general levels of inflation.Interest rates do not necessarily move in the same direction or to the sameextent as the prices of goods and services.

**Effect of NewAccounting Standards**

In March 2006, FASB issued SFAS No. 156,“Accounting for Servicing of Financial Assets,” which amends SFAS No. 140.SFAS No. 156 requires the recognition of all separately recognizedservicing assets and servicing liabilities to be initially measured at fairvalue utilizing the amortization method or fair market value method. SFAS 156is effective the beginning of the first fiscal year that begins afterSeptember 15, 2006. Under the amortization method, an entity shallamortize the value of servicing assets or liabilities in proportion to and overthe period of estimated net servicing income or net servicing loss and assessservicing assets or liabilities for impairment or increased obligation based onfair value at each reporting date. Under the fair value method, an entity shallmeasure servicing assets or liabilities at fair value at each reporting dateand report changes in fair value in earnings in the period in which the changesoccur. The Company has not determined the effect the adoption of SFASNo. 156 will have on its financial statements.

In July 2006, FASB issued FIN 48 “Accounting forUncertainty in Income Taxes—an interpretation of FASB Statement No. 109”to create a single model to address accounting for uncertainty in taxpositions. FIN 48 clarifies that a tax position must be more likely than not ofbeing sustained before being recognized in the financial statements. Asrequired, the Company will adopt FIN 48 effective July 1, 2007. TheCompany does not expect that the adoption of FIN 48 will have a material impacton our financial position.

In September 2006, FASB issued Statement ofFinancial Accounting Standards No. 157 (SFAS 157), “Fair ValueMeasurements.” SFAS 157 provides a common definition of fair value and aframework for measuring assets and liabilities at fair values when a particularstandard prescribes it. In addition, the Statement expands disclosures aboutfair value measurements. As required by SFAS 157, the Company will adopt thisnew accounting standard effective July 1, 2008. Management is currentlyreviewing the impact of SFAS 157 on our financial statements.

In September 2006, FASB issued Statement ofFinancial Accounting Standards No. 158 (SFAS 158), “Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans—an amendment of FASBStatements No. 87, 88, 106 and 132R.” SFAS 158 requires recognition of theoverfunded or underfunded status of pension and other postretirement benefitplans on the balance sheet. Under SFAS 158, gains and losses, priorservice costs and credits and any remaining transition amounts under SFAS 87and SFAS 106 that have not yet been recognized through net periodic benefitcost will be recognized in accumulated other comprehensive income, net of taxeffects, until they are amortized as a component of net periodic cost. Also,the measurement date—the date at which the benefit obligation and plan assetsare measured—is required to be the company’s fiscal year-end. As required bySFAS 158, the Company adopted the balance sheet recognition provisions atJune 30, 2007 and will adopt the year-end measurement date in 2008.

In February 2007,FASB issued Statement of Financial Accounting Standards No. 159 (SFAS159), “The Fair Value Option for Financial Assets and FinancialLiabilities—Including an Amendment of FASB Statement No. 115.” SFAS159 allows companies the choice to measure many financial instruments andcertain other items at fair value. This gives a company the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex 

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hedgeaccounting provisions. The Statement is effective July 1, 2008. Managementis currently reviewing the impact of SFAS 159 on our financial statements.

**Asset/Liability andRisk Management**

Interest rate risk is the most significant market riskaffecting the Company. Other types of market risk, such as foreign currencyexchange rate risk and commodity price risk, do not arise in the normal courseof the Company’s business activities. The Bank, like other financialinstitutions, is subject to interest rate risk to the extent that its interest-bearingliabilities with short- and medium-term maturities mature or reprice morerapidly than its interest-earning assets. The Company does not currently engagein trading activities or use derivative instruments to control interest raterisk although it may in the future, if necessary, to manage interest rate risk.

As a continuing part of its financial strategy, theBank considers methods of managing this asset/liability mismatch consistent withmaintaining acceptable levels of net interest income. In order to properlymonitor interest rate risk, the Board of Directors has created anAsset/Liability Committee whose principal responsibilities are to assess theBank’s asset/liability mix and recommend strategies to the Board that willenhance income while managing the Bank’s vulnerability to changes in interestrates.

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

One approach used to quantify interest rate risk isthe net portfolio value (“NPV”) analysis. In essence, this analysis calculatesthe difference between the present value of the liabilities and the presentvalue of expected cash flows from assets and off-balance sheet contracts. Thefollowing table sets forth, at June 30, 2007 and June 30, 2006, ananalysis of the Company’s interest rate risk as measured by the estimatedchanges in NPV resulting from instantaneous and sustained parallel shifts inthe yield curve (+300 or -100 basis points, measured in 100 basis pointincrements). Due to the low prevailing interest rate environment, -300 NPV wasnot estimated by the OTS.

Thedata in the following tables is based on assumptions utilized by the OTS inassessing interest rate risk of thrift institutions and published in “SelectedAsset and Liability Price Tables as of June 30, 2007” and “Selected Assetand Liability Price Tables as of June 30, 2006.” Even if interest rateschange in the designated amounts, there can be no assurance that the Company’sassets and liabilities would perform as set forth below. In addition, a changein U.S. Treasury rates in the designated amounts accompanied by a change in theshape of the Treasury yield curve would cause significantly different changesto the NPV than indicated below.

| **June 30, 2007** | ** ** |
|-----------------------------|------------|
| ** **                  | ** ** | **Estimated** | ** ** | **Estimated Increase** | ** ** |
| **Change in**          | ** ** | **NPV** | ** ** | **(Decrease) in NPV** | ** ** |
| **Interest Rates**     | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)** | ** ** |
| Basis Points                |       |   |   |   |   |   |   |   |   |
| +300                        |       |   | $ | 101,843 |   | $ | (25,309 | ) |   | (20 | )% |   |
| +200                        |       |   | 110,655 |   | (16,497 | ) |   | (13 | ) |   |
| +100                        |       |   | 119,202 |   | (7,950 | ) |   | (6 | ) |   |
| —                      |       |   | 127,152 |   | — |   |   | — |   |   |
| -100                        |       |   | 131,950 |   | 4,798 |   |   | 4 |   |   |
| -200                        |       |   | 131,297 |   | 4,146 |   |   | 3 |   |   |
|                             |            |  |  |  |  |  |  |  |  |  |  |  |

 

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| **June **30, 2006**** | ** ** |
|---------------------------------|------------|
| ** **                      | ** ** | **Estimated** | ** ** | **Estimated Increase** | ** ** |
| **Change in**              | ** ** | **NPV** | ** ** | **(Decrease) in NPV** | ** ** |
| **Interest Rates**         | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Basis Points                    |       |   |   |   |   |   |   |   |   |
| +300                            |       |   | $ | 87,096 |   | $ | (24,868 | ) |   | (22 | )% |   |
| +200                            |       |   | 95,152 |   | (16,812 | ) |   | (15 | ) |   |
| +100                            |       |   | 103,741 |   | (8,223 | ) |   | (7 | ) |   |
| —                          |       |   | 111,964 |   | — |   |   | — |   |   |
| -100                            |       |   | 119,214 |   | 7,250 |   |   | 6 |   |   |
| -200                            |       |   | 121,611 |   | 9,647 |   |   | 9 |   |   |
|                                 |            |  |  |  |  |  |  |  |  |  |  |  |

 

**ContractualObligations**

Thefollowing table sets forth information with respect to the Company’scontractual obligations as of June 30, 2007. Operating lease obligationsare primarily related to the lease of certain branch offices, which the Companyhas committed to as of June 30, 2007.

| ** **                          | ** ** | **Payments due by period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **1 Year**                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Greater than** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **or Less**                          | ** ** | **1 to 3 Years** | ** ** | **3 to 5 Years** | ** ** | **5 Years** | ** ** | **Total** | ** ** |
| Deposits without  a stated maturity |       | $                                         | 452,490    |   |   | — |   |   |   | — |   |   |   | — |   |   | $ | 452,490 |   |
| Certificates of Deposit             |       | 316,088                                   |       |   | 38,979 |   |   |   | 8,105 |   |   |   | 202 |   |   | 363,374 |   |
| FHLB and Federal Funds              |       | 6,500                                     |       |   | 35,000 |   |   |   | 22,000 |   |   |   | 5,000 |   |   | 68,500 |   |
| Long-Term Debt Obligations          |       | —                                    |       |   | — |   |   |   | — |   |   |   | 27,837 |   |   | 27,837 |   |
| Operating Lease Obligations         |       | 732                                       |       |   | 1,313 |   |   |   | 722 |   |   |   | 1,534 |   |   | 4,301 |   |
| Total Contractual  Obligations      |       | $                                         | 775,810    |   |   | $ | 75,292 |   |   |   | $ | 30,827 |   |   |   | $ | 34,573 |   |   | $ | 916,502 |   |
|                                     |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 7A.**                *Quantitative and Qualitative Disclosures About Market Risk*

*Interest Rate RiskManagement*

The Company’s net income is largely dependent on itsnet interest income. Net interest income is susceptible to interest rate riskto the degree that interest-bearing liabilities with short- and medium-termmaturities mature or reprice more rapidly than its interest-earning assets.When interest-bearing liabilities mature or reprice more quickly thaninterest-earning assets in a given period, a significant increase in marketrates of interest could adversely affect net interest income. Similarly, wheninterest-earning assets mature or reprice more quickly than interest-bearingliabilities, falling interest rates could result in a decrease in net income.

In an attempt to manage its exposure to change ininterest rates, management monitors the Company’s interest rate risk. TheAsset/Liability Committee meets periodically to review the Company’s interestrate risk position and profitability, and to recommend adjustments forconsideration by executive management. Management also reviews the Bank’ssecurities portfolio, formulates investment strategies, and oversees the timingand implementation of transactions to assure attainment of the Board’sobjectives in the most effective manner. In managing market risk and theasset/liability mix, the Bank has placed its emphasis on developing a portfolioin which, to the extent practicable, assets and liabilities reprice withinsimilar periods. Notwithstanding the Company’s interest rate risk managementactivities, the potential for changing interest rates is an uncertainty thatcan have an adverse effect on net income. The Company does not currently engagein trading activities or use derivative instruments to control interest raterisk although it may in the future, if necessary, to manage interest rate risk.

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In adjusting the Company’s asset/liability position,management attempts to manage the Company’s interest rate risk while enhancingnet interest margins. At times, depending on the level of general interestrates, the relationship between long and short-term interest rates, marketconditions and competitive factors, management may determine to increase theCompany’s interest rate risk position somewhat in order to increase its netinterest margin. The Company’s results of operations and net portfolio valuesremain vulnerable to increases in interest rates and to fluctuations in thedifference between long- and short-term interest rates.

Consistent with the asset/liability managementphilosophy described above, the Company has taken several steps to manage itsinterest rate risk. The Company has structured its security portfolio toshorten the repricing of its interest-earning assets. The Company’smortgage-backed securities and securities available for sale typically haveeither short or medium terms to maturity or adjustable interest rates. AtJune 30, 2007, the Company had investment securities available for sale of$27.7 million with contractual maturities of five years or less. Variable-ratemortgage-backed securities totaled $42.7 million at June 30, 2007.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 $46.6million annually over the past three fiscal years. The Company also managesinterest rate risk reduction by utilizing non-certificate depositor accountsfor certain liquidity purposes. The Board and management believe that suchaccounts carry a lower cost than certificate accounts, and that a materialportion of such accounts may be more resistant to changes in interest ratesthan are certificate accounts. At June 30, 2007, the Company had$66.2 million of savings accounts, $212.5 million of money market accounts and$173.7 million of checking accounts, representing 55.5% of total depositor accounts.

One approach used to quantify interest rate risk isthe NPV analysis. In essence, this analysis calculates the difference betweenthe present value of liabilities and the present value of expected cash flowsfrom assets and off-balance sheet contracts. See Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Asset/Liability and Risk Management” of this Form 10-Kfor further discussion regarding the NPV analysis and an analysis of theCompany’s interest rate risk as measured by the estimated changes in NPVresulting from instantaneous and sustained parallel shifts in the yield curve.

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**Item 8.**                        *Financial Statements and Supplementary Data*

**TABLEOF CONTENTS**
| **INDEPENDENT REGISTERED  PUBLIC ACCOUNTING FIRM’S REPORT ON THE FINANCIAL STATEMENTS** |   | 68     |
|----------------------------------------------------------------------------------------------|--------|--------|
| **CONSOLIDATED  FINANCIAL STATEMENTS**                                                       |   |   |
| Statements of Financial  Condition                                                           |   | 69     |
| Statements of Income                                                                         |   | 70     |
| Statements of Stockholders’  Equity                                                     |   | 71     |
| Statements of Cash Flows                                                                     |   | 72     |
| Notes  to Consolidated Financial Statements                                                  |   | 74     |

 

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****

**Report ofIndependent Registered Public Accounting Firm**

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

We have audited the accompanying consolidatedstatements of financial condition of HF Financial Corp. as of June 30,2007 and 2006, and the related consolidated statements of income, stockholders’equity and cash flows for each of the years in the three-year period ended June 30,2007. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our audits in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch an opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believe ouraudits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of HF Financial Corp. as of June 30, 2007 and 2006, and theresults of its operations and its cash flows for each of the years in thethree-year period ended June 30, 2007, in conformity with accountingprinciples generally accepted in the United States of America.

****

Sioux Falls, South DakotaSeptember 24, 2007

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**HF FINANCIAL CORP.CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONJUNE 30, 2007 AND 2006(DOLLARS IN THOUSANDS, except share data)**

| ** **                                                                                                                                                     | ** ** | **2007**    | ** **    | **2006**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|---------------|------------|------------|
| **ASSETS**                                                                                                                                                     |       |        |          |       |       |
| Cash and cash equivalents                                                                                                                                      |       | **$**       | **22,476**    | ** ** | $          | 27,037 |   |
| Securities  available for sale (Note 3)                                                                                                                        |       | **142,223** | ** **    | 145,518    |       |
| Federal Home Loan  Bank stock (Note 8)                                                                                                                         |       | **5,058**   | ** **    | 5,647      |       |
| Loans held for  sale (Note 4)                                                                                                                                  |       | **8,776**   | ** **    | 7,623      |       |
| Loans and leases  receivable (Note 4)                                                                                                                          |       | **761,599** | ** **    | 721,603    |       |
| Accrued interest  receivable                                                                                                                                   |       | **8,495**   | ** **    | 6,880      |       |
| Office properties  and equipment, net of accumulated depreciation (Note 6)                                                                                     |       | **15,830**  | ** **    | 14,459     |       |
| Foreclosed real  estate and other properties                                                                                                                   |       | **508**     | ** **    | 1,889      |       |
| Cash value of  life insurance                                                                                                                                  |       | **13,519**  | ** **    | 13,013     |       |
| Servicing rights  (Note 5)                                                                                                                                     |       | **10,871**  | ** **    | 5,648      |       |
| Goodwill, net                                                                                                                                                  |       | **4,951**   | ** **    | 4,951      |       |
| Other assets  (Note 10)                                                                                                                                        |       | **7,148**   | ** **    | 7,026      |       |
|                                                                                                                                                           |       | **$**       | **1,001,454** | ** ** | $          | 961,294 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                 |       | ** **  | ** **    |       |       |
| Liabilities                                                                                                                                                    |       | ** **  | ** **    |       |       |
| Deposits (Note 7)                                                                                                                                              |       | **$**       | **815,864**   | ** ** | $          | 769,002 |   |
| Advances from Federal Home Loan Bank and other borrowings  (Note 8)                                                                                            |       | **68,600**  | ** **    | 91,620     |       |
| Subordinated debentures payable to trusts (Note 9)                                                                                                             |       | **27,837**  | ** **    | 27,837     |       |
| Advances by borrowers for taxes and insurance                                                                                                                  |       | **10,337**  | ** **    | 6,969      |       |
| Accrued expenses and other liabilities (Note 14)                                                                                                               |       | **16,546**  | ** **    | 9,808      |       |
| Total liabilities                                                                                                                                              |       | **939,184** | ** **    | 905,236    |       |
| Stockholders’  equity (Note 12)                                                                                                                           |       | ** **  | ** **    |       |       |
| Preferred stock, $.01 par value, 500,000 shares authorized,  none outstanding                                                                                  |       | **—**  | ** **    | —     |       |
| Series A Junior Participating Preferred Stock,  $1.00 stated value, 50,000 shares authorized, none outstanding                                            |       | **—**  | ** **    | —     |       |
| Common stock, $.01 par value, 10,000,000 shares authorized,  5,991,200 and 5,926,496 shares issued at June 30, 2007 and June 30,  2006, respectively |       | **60**      | ** **    | 59         |       |
| Common stock subscribed for but not issued, 4,623  and 4,078 shares at June 30, 2007 and June 30, 2006, respectively                                 |       | **81**      | ** **    | 65         |       |
| Additional paid-in capital                                                                                                                                     |       | **20,898**  | ** **    | 19,384     |       |
| Retained earnings, substantially restricted                                                                                                                    |       | **71,900**  | ** **    | 68,179     |       |
| Accumulated other comprehensive (loss), net of related  deferred tax effect  (Note 17)                                                                         |       | **(1,502**  | **)**         | (2,462     | )          |
| Less cost of treasury stock, 1,977,836 and 1,977,836  shares at June 30, 2007 and 2006, respectively                                                      |       | **(29,167** | **)**         | (29,167    | )          |
|                                                                                                                                                           |       | **62,270**  | ** **    | 56,058     |       |
|                                                                                                                                                           |       | **$**       | **1,001,454** | ** ** | $          | 961,294 |   |

 

See Notes to Consolidated Financial Statements

69

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**HF FINANCIAL CORP.CONSOLIDATED STATEMENTS OF INCOMEYEARS ENDED JUNE 30, 2007, 2006 AND 2005(DOLLARS IN THOUSANDS, except share data)**

| ** **                                                          | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Interest, dividend and  loan fee income:                            | ** ** | ** ** | ** ** |       |       |     |       |
| Loans and leases receivable                                         | ** ** | **$**      | **54,344** | ** ** | $          | 47,096   |       | $ | 40,489 |   |
| Investment securities and interest-bearing deposits                 | ** ** | **7,530**  | ** ** | 6,315      |       | 4,457    |       |
|                                                                | ** ** | **61,874** | ** ** | 53,411     |       | 44,946   |       |
| Interest expense:                                                   | ** ** | ** ** | ** ** |       |       |     |       |
| Deposits                                                            | ** ** | **28,505** | ** ** | 20,175     |       | 12,659   |       |
| Advances from Federal Home Loan Bank and other  borrowings          | ** ** | **7,735**  | ** ** | 7,587      |       | 6,088    |       |
|                                                                | ** ** | **36,240** | ** ** | 27,762     |       | 18,747   |       |
| Net interest income                                                 | ** ** | **25,634** | ** ** | 25,649     |       | 26,199   |       |
| Provision for  losses on loans and leases                           | ** ** | **1,198**  | ** ** | 5,279      |       | 2,681    |       |
| Net interest income after provision for losses on  loans and leases | ** ** | **24,436** | ** ** | 20,370     |       | 23,518   |       |
| Noninterest  income:                                                | ** ** | ** ** | ** ** |       |       |     |       |
| Gain on sale of branches, net                                       | ** ** | **2,763**  | ** ** | —     |       | —   |       |
| Gain on sale of land, net                                           | ** ** | **—** | ** ** | 3,557      |       | —   |       |
| Fees on deposits                                                    | ** ** | **5,133**  | ** ** | 4,538      |       | 4,398    |       |
| Loan servicing income                                               | ** ** | **1,803**  | ** ** | 1,123      |       | 1,248    |       |
| Gain on sale of loans, net                                          | ** ** | **923**    | ** ** | 969        |       | 924      |       |
| Earnings on cash value of life insurance                            | ** ** | **597**    | ** ** | 570        |       | 561      |       |
| Trust income                                                        | ** ** | **936**    | ** ** | 849        |       | 701      |       |
| Commission and insurance income                                     | ** ** | **500**    | ** ** | 531        |       | 454      |       |
| Gain on sale of securities, net                                     | ** ** | **—** | ** ** | 3          |       | 20       |       |
| Other                                                               | ** ** | **541**    | ** ** | 711        |       | 708      |       |
|                                                                | ** ** | **13,196** | ** ** | 12,851     |       | 9,014    |       |
| Noninterest  expense:                                               | ** ** | ** ** | ** ** |       |       |     |       |
| Compensation and employee benefits                                  | ** ** | **18,379** | ** ** | 16,691     |       | 15,493   |       |
| Occupancy and equipment                                             | ** ** | **3,797**  | ** ** | 3,338      |       | 3,100    |       |
| Check and data processing expense                                   | ** ** | **2,299**  | ** ** | 2,165      |       | 1,893    |       |
| Marketing                                                           | ** ** | **1,541**  | ** ** | 856        |       | 1,012    |       |
| Foreclosed real estate and other properties, net                    | ** ** | **101**    | ** ** | 184        |       | 200      |       |
| Other                                                               | ** ** | **3,488**  | ** ** | 3,265      |       | 3,238    |       |
|                                                                | ** ** | **29,605** | ** ** | 26,499     |       | 24,936   |       |
| Income before income taxes                                          | ** ** | **8,027**  | ** ** | 6,722      |       | 7,596    |       |
| Income tax  expense (Note 10)                                       | ** ** | **2,644**  | ** ** | 2,214      |       | 2,431    |       |
| Net income                                                          | ** ** | **$**      | **5,383**  | ** ** | $          | 4,508    |       | $ | 5,165 |   |
| Basic earnings per share (Note 13):                                 | ** ** | **$**      | **1.35**   | ** ** | $          | 1.15     |       | $ | 1.33 |   |
| Diluted earnings  per share (Note 13):                              | ** ** | **1.33**   | ** ** | 1.13       |       | 1.29     |       |
| Dividend declared per  share                                        | ** ** | **0.42**   | ** ** | 0.41       |       | 0.40     |       |

 

See Notes to Consolidated Financial Statements

70

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**HF FINANCIAL CORP.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYYEARS ENDED JUNE 30, 2007, 2006 AND 2005(DOLLARS IN THOUSANDS, except share data)**

| ** **                                                                                      | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **   | ** ** | ** **       | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|--------------|------------|------------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                                                                      | ** ** | ** ** | ** ** | **Common**     | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **       | ** ** | **Other**         | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                                                                      | ** ** | **Common** | ** ** | **Stock**      | ** ** | **Paid-in**    | ** ** | **Retained** | ** ** | **Deferred**     | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | ** ** | ** ** |
| ** **                                                                                      | ** ** | **Stock**  | ** ** | **Subscribed** | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Compensation** | ** ** | **(Loss)**        | ** ** | **Stock**    | ** ** | **Total**  | ** ** |
| Balance,  June 30, 2004                                                                    |       |       | $          | 53             |       |           |       | $            | 698        |             |       |              | $          | 17,680       |       |       |       | $ | 61,653 |   |   |   | $ | (1,147 | ) |   |   | $ | (1,327 | ) |   |   | $ | (25,961 | ) |   | $ | 51,649 |   |
| Comprehensive income                                                                            |       |       |       |           |       |           |       |         |       |             |       |              |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                      |       |       | —     |           |       |           | —     |         |       |             | —     |              |       |         | 5,165      |       |       |   | — |   |   |   | — |   |   |   | — |   |   | 5,165 |   |
| Net changes in  unrealized gain (loss) on securities available for sale, net of deferred  taxes |       |       | —     |           |       |           | —     |         |       |             | —     |              |       |         | —     |       |       |   | — |   |   |   | 516 |   |   |   | — |   |   | 516 |   |
| Net change in  retained interest, net of deferred taxes                                         |       |       | —     |           |       |           | —     |         |       |             | —     |              |       |         | —     |       |       |   | — |   |   |   | (25 | ) |   |   | — |   |   | (25 | ) |
| Comprehensive  income                                                                           |       |       |       |           |       |           |       |         |       |             |       |              |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 5,656 |   |
| Issuance of stock  and exercise of stock options (Note 16)                                      |       |       | 2          |           |       |           | (698       | )            |       |             | 1,510      |              |       |         | —     |       |       |   | 49 |   |   |   | — |   |   |   | — |   |   | 863 |   |
| Common stock subscribed  for but not issued                                                     |       |       | —     |           |       |           | 1,266      |         |       |             | —     |              |       |         | —     |       |       |   | (1,266 | ) |   |   | — |   |   |   | — |   |   | — |   |
| Cash dividends  paid on common stock                                                            |       |       | —     |           |       |           | —     |         |       |             | —     |              |       |         | (1,551     | )          |       |   | — |   |   |   | — |   |   |   | — |   |   | (1,551 | ) |
| Purchase of  treasury stock                                                                     |       |       | —     |           |       |           | —     |         |       |             | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   |   | (3,206 | ) |   | (3,206 | ) |
| Amortization of  deferred compensation                                                          |       |       | —     |           |       |           | —     |         |       |             | —     |              |       |         | —     |       |       |   | 224 |   |   |   | — |   |   |   | — |   |   | 224 |   |
| Balance,  June 30, 2005                                                                    |       |       | 55         |           |       |           | 1,266      |         |       |             | 19,190     |              |       |         | 65,267     |       |       |   | (2,140 | ) |   |   | (836 | ) |   |   | (29,167 | ) |   | 53,635 |   |
| Comprehensive income                                                                            |       |       |       |           |       |           |       |         |       |             |       |              |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                      |       |       | —     |           |       |           | —     |         |       |             | —     |              |       |         | 4,508      |       |       |   | — |   |   |   | — |   |   |   | — |   |   | 4,508 |   |
| Net 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                                                                           |       |       |       |           |       |           |       |         |       |             |       |              |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 2,882 |   |
| Issuance of stock  and exercise of stock options (Note 16)                                      |       |       | 4          |           |       |           | (1,266     | )            |       |             | 1,878      |              |       |         | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   | 616 |   |
| Common stock  subscribed for but not issued                                                     |       |       | —     |           |       |           | 65         |         |       |             | (65        | )                 |       |         | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Cash dividends  paid on common stock                                                            |       |       | —     |           |       |           | —     |         |       |             | —     |              |       |         | (1,596     | )          |       |   | — |   |   |   | — |   |   |   | — |   |   | (1,596 | ) |
| Reclassify  deferred compensation to additional paid-in capital                                 |       |       | —     |           |       |           | —     |         |       |             | (2,140     | )                 |       |         | —     |       |       |   | 2,140 |   |   |   | — |   |   |   | — |   |   | — |   |
| Amortization of  deferred compensation                                                          |       |       | —     |           |       |           | —     |         |       |             | 521        |              |       |         | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   | 521 |   |
| Balance,  June 30, 2006                                                                    |       |       | 59         |           |       |           | 65         |         |       |             | 19,384     |              |       |         | 68,179     |       |       |   | — |   |   |   | (2,462 | ) |   |   | (29,167 | ) |   | 56,058 |   |
| Comprehensive income                                                                            |       |       |       |           |       |           |       |         |       |             |       |              |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                      |       |       | —     |           |       |           | —     |         |       |             | —     |              |       |         | 5,383      |       |       |   | — |   |   |   | — |   |   |   | — |   |   | 5,383 |   |
| Net changes in  unrealized gain (loss) on securities available for sale, net of deferred  taxes |       |       | —     |           |       |           | —     |         |       |             | —     |              |       |         | —     |       |       |   | — |   |   |   | 1,058 |   |   |   | — |   |   | 1,058 |   |
| Adjustment to  initially apply FASB Statement No. 158, net of tax                          |       |       | —     |           |       |           | —     |         |       |             | —     |              |       |         | —     |       |       |   | — |   |   |   | (98 | ) |   |   | — |   |   | (98 | ) |
| Comprehensive  income                                                                           |       |       |       |           |       |           |       |         |       |             |       |              |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 6,343 |   |
| Issuance of stock  and exercise of stock options (Note 16)                                      |       |       | 1          |           |       |           | (65        | )            |       |             | 1,079      |              |       |         | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   | 1,015 |   |
| Common stock  subscribed for but not issued                                                     |       |       | —     |           |       |           | 81         |         |       |             | (81        | )                 |       |         | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Cash dividends  paid on common stock                                                            |       |       | —     |           |       |           | —     |         |       |             | —     |              |       |         | (1,662     | )          |       |   | — |   |   |   | — |   |   |   | — |   |   | (1,662 | ) |
| Amortization of  deferred compensation                                                          |       |       | —     |           |       |           | —     |         |       |             | 516        |              |       |         | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   | 516 |   |
| Balance, June 30,  2007                                                                    |       |       | $          | 60             |       |           |       | $            | 81         |             |       |              | $          | 20,898       |       |       |       | $ | 71,900 |   |   |   | $ | — |   |   |   | $ | (1,502 | ) |   |   | $ | (29,167 | ) |   | $ | 62,270 |   |

 

See Notes to Consolidated Financial Statements

71

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**HF FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2007, 2006 AND 2005 (DOLLARS IN THOUSANDS, except share data)**

| ** **                                                                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash Flows From  Operating Activities                                                         |       |     |       |     |       |     |       |
| Net income                                                                                    |       | $        | 5,383      |     | $          | 4,508    |       | $ | 5,165 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities   |       |     |       |     |       |     |       |
| Provision for losses on loans and leases                                                      |       | 1,198    |       | 5,279    |       | 2,681    |       |
| Depreciation                                                                                  |       | 1,623    |       | 1,504    |       | 1,417    |       |
| Amortization of discounts and premiums on securities  and other                               |       | 1,817    |       | 1,781    |       | 1,566    |       |
| Stock based compensation                                                                      |       | 628      |       | 709      |       | 331      |       |
| Deferred income taxes (credits)                                                               |       | (485     | )          | (557     | )          | (836     | )          |
| Net change in loans held for resale                                                           |       | (230     | )          | 3,584    |       | 1,037    |       |
| (Gain) on sale of loans, net                                                                  |       | (923     | )          | (969     | )          | (924     | )          |
| Realized (gain) on sale of securities, net                                                    |       | —   |       | (3       | )          | (20      | )          |
| (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 |       | 52       |       | 30       |       | 53       |       |
| (Gain) Loss on disposal of office properties and  equipment, net                              |       | (9       | )          | 29       |       | 6        |       |
| Change in other assets and liabilities (Note 20)                                              |       | 4,017    |       | (660     | )          | (490     | )          |
| Net cash provided  by operating activities                                                    |       | 10,308   |       | 11,678   |       | 9,986    |       |
| Cash Flows From  Investing Activities                                                         |       |     |       |     |       |     |       |
| Loan participations purchased                                                                 |       | (22,143  | )          | (4,969   | )          | (16,835  | )          |
| Loan participations sold                                                                      |       | —   |       | 14,277   |       | —   |       |
| Net change in loans outstanding                                                               |       | (24,556  | )          | (66,856  | )          | (15,706  | )          |
| Proceeds from sale of land                                                                    |       | —   |       | 4,863    |       | —   |       |
| Purchase of land held for sale                                                                |       | —   |       | (1,209   | )          | —   |       |
| Proceeds from sale of loans associated with branch  sales                                     |       | 4,256    |       | —   |       | —   |       |
| Securities available for sale                                                                 |       |     |       |     |       |     |       |
| Sales, maturities and repayments                                                              |       | 35,666   |       | 53,085   |       | 51,106   |       |
| Purchases                                                                                     |       | (31,048  | )          | (59,781  | )          | (70,941  | )          |
| Purchase of Federal Home Loan Bank stock                                                      |       | (4,172   | )          | (4,522   | )          | (5,958   | )          |
| Redemption of Federal Home Loan Bank stock                                                    |       | 4,762    |       | 6,574    |       | 3,729    |       |
| Proceeds from sale of office properties and equipment                                         |       | 17       |       | 3        |       | 2        |       |
| Proceeds from sale of office properties and  equipment associated with branch sales           |       | 340      |       | —   |       | —   |       |
| Purchase of office properties and equipment                                                   |       | (3,342   | )          | (3,170   | )          | (1,848   | )          |
| Purchase of servicing rights                                                                  |       | (6,140   | )          | (989     | )          | (959     | )          |
| Proceeds from sale of foreclosed real estate and  other properties                            |       | 2,277    |       | 715      |       | 733      |       |
| Net cash (used  in) investment activities                                                     |       | (44,083  | )          | (61,979  | )          | (56,677  | )          |
|                                                                                               |            |          |            |          |            |          |            |  |  |  |

 

See Notes to Consolidated Financial Statements

72

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**HF FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) YEARS ENDED JUNE 30, 2007, 2006 AND 2005 (DOLLARS IN THOUSANDS, except share data)**

 

| ** **                                                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash Flows From  Financing Activities                                        |       |     |       |     |       |     |       |
| Net increase in deposit accounts                                             |       | $        | 80,425     |     | $          | 87,786   |       | $ | 22,497 |   |
| Proceeds of  advances from Federal Home                                      |       |     |       |     |       |     |       |
| Loan Bank and other borrowings                                               |       | 722,111  |       | 807,905  |       | 548,976  |       |
| Payments on  advances from Federal Home                                      |       |     |       |     |       |     |       |
| Loan Bank and other borrowings                                               |       | (745,131 | )          | (835,949 | )          | (523,062 | )          |
| Payment of debt issue costs                                                  |       | —   |       | (7       | )          | —   |       |
| Proceeds from issuance of subordinated debentures                            |       | 10,000   |       | —   |       | —   |       |
| Deposit account disbursements associated with branch  sales                  |       | (33,563  | )          | —   |       | —   |       |
| Proceeds on core deposit premium                                             |       | 2,763    |       | —   |       | —   |       |
| Redemption of subordinated debentures                                        |       | (10,000  | )          | —   |       | —   |       |
| Increase (decrease) in advances by borrowers                                 |       | 3,368    |       | 523      |       | 55       |       |
| Purchases of treasury stock                                                  |       | —   |       | —   |       | (3,206   | )          |
| Proceeds from issuance of common stock                                       |       | 903      |       | 428      |       | 756      |       |
| Cash dividends paid                                                          |       | (1,662   | )          | (1,596   | )          | (1,551   | )          |
| Net cash provided by financing activities                                    |       | 29,214   |       | 59,090   |       | 44,465   |       |
| Increase (decrease) in cash and cash equivalents                             |       | (4,561   | )          | 8,789    |       | (2,226   | )          |
| Cash and Cash  Equivalents                                                   |       |     |       |     |       |     |       |
| Beginning                                                                    |       | 27,037   |       | 18,248   |       | 20,474   |       |
| Ending                                                                       |       | $        | 22,476     |     | $          | 27,037   |       | $ | 18,248 |   |
| Supplemental  Disclosure of Cash Flows Information                           |       |     |       |     |       |     |       |
| Cash payments for interest                                                   |       | $        | 34,848     |     | $          | 26,540   |       | $ | 18,554 |   |
| Cash payments (receipts) for income and franchise  taxes, net                |       | 1,914    |       | 3,861    |       | 1,704    |       |
| Supplemental  Disclosure of Noncash Investing and Financing Activities       |       |     |       |     |       |     |       |
| Foreclosed real estate and other properties acquired  in settlement of loans |       | $        | 481        |     | $          | 989      |       | $ | 783 |   |
| Loans receivable reclassified as held for sale                               |       | —   |       | 223      |       | —   |       |
| Office property  reclassified as held for sale                               |       | —   |       | 153      |       | —   |       |

 

See Notes to Consolidated Financial Statements

73

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**HF FINANCIAL CORP.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

**NOTE 1—SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

The accounting andreporting policies of HF Financial Corp. and subsidiaries (“the Company”)conform to accounting principles generally accepted in the United States ofAmerica and to general practice within the industry. The following is adescription of the more significant of those policies that the Company followsin preparing and presenting its consolidated financial statements.

*Nature ofOperations*

The Company, a unitary thrift holding company, was formedin November 1991, for the purpose of owning all of the outstanding stock ofHome Federal Bank (“the Bank”). The Company is incorporated under the laws ofthe State of Delaware and generally is authorized to engage in any activitythat is permitted by the Delaware General Corporation Law. The executiveoffices of the Company and its direct and indirect subsidiaries are located inSioux Falls, South Dakota.

The Bank was founded in1929 and is a federally chartered stock savings bank headquartered in SiouxFalls, South Dakota. The Bank provides full-service consumer and commercialbusiness banking, including an array of financial products, to meet the needsof its market place. The Bank attracts deposits from the general public anduses 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’sconsumer loan portfolio includes, among other things, automobile loans, homeequity loans, loans secured by deposit accounts and student loans. The Bankalso purchases mortgage-backed securities and invests in U.S. Government andagency obligations and other permissible investments. The Bank receives loanservicing income on loans serviced for others and commission income fromcredit-life insurance on consumer loans. The Bank, through its wholly-ownedsubsidiaries, offers annuities, mutual funds, life insurance and otherfinancial products and equipment leasing services.

*Principles ofConsolidation*

The accompanyingconsolidated financial statements include the accounts of the Company, theCompany’s wholly-owned subsidiaries, HomeFirst Mortgage Corp. (the MortgageCorp.), 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 FederalSecuritization Corp. (HFSC), Mid-America Service Corporation and PMD, Inc. All intercompanybalances and transactions have been eliminated in consolidation.

*Basis of FinancialStatement Presentation and Use of Estimates*

In preparing theconsolidated financial statements, management is required to make estimates andassumptions that affect the reported amounts of assets and liabilities as ofthe date of the statement of financial condition and revenues and expenses forthe fiscal year. Actual results could differ significantly from thoseestimates. Material estimates that are particularly susceptible to significantchange in the near-term related to the determination of the allowance for loanand lease losses, self- insurance, the retained interest asset and servicingrights.

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

*Cash and CashEquivalents*

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

*Trust Assets*

Assets of the trustdepartment, other than trust cash on deposit at the Bank, are not included inthese consolidated financial statements because they are not assets of theBank.

*Securities*

Management determines the appropriate classificationof securities at the date individual securities are acquired and evaluates theappropriateness of such classifications at each statement of financialcondition date.

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

Premiums and discounts onsecurities are amortized over the contractual lives of those securities, exceptfor mortgage-backed securities, for which prepayments are probable andpredictable, which are amortized over the estimated expected repayment terms ofthe underlying mortgages. The method of amortization results in a constanteffective yield on those securities (the interest method). Interest on debtsecurities is recognized in income as accrued. Realized gains and losses on thesale of securities are determined using the specific identification method.

*Loans Held for Sale*

Loans receivable, whichthe Bank may sell or intends to sell prior to maturity, are carried at thelower of net book value or fair value on an aggregate basis. Such loans heldfor sale include loans receivable that management intends to use as part of itsasset/liability strategy, or that may be sold in response to changes ininterest rates, changes in prepayment risk or other similar factors.

*Loans and LeasesReceivable*

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

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

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

Loans and leases are generally classified asnonaccrual when there are reasonable doubts as to the collectibility ofprincipal and/or interest and/or when payment becomes 90 days past due, exceptloans which are well secured and in the process of collection. Uncollectibleinterest on loans and leases that are impaired or contractually past due ischarged off based on management’s periodic evaluation. The charge to interestincome is equal to all interest previously accrued, and income is subsequentlyrecognized only to the extent cash payments are received until, in management’sjudgment, the borrower’s ability to make periodic interest and principalpayments is no longer in doubt, in which case the loan is returned to accrualstatus.

The Company’s leases receivable are classified asdirect finance leases. Under the direct financing method of accounting forleases, the total net payments receivable under the lease contracts and theresidual value of the leased equipment, net of unearned income, are recorded asa net investment in direct financing leases and the unearned income is recognizedeach month on a basis which approximates the interest method.

The allowance for loan and lease losses is establishedas losses are estimated to have occurred through a provision for loan lossescharged to earnings. Loan losses are charged against the allowance whenmanagement believes the uncollectibility of a loan balance is confirmed.

The allowance for loan losses is evaluated on aregular basis by management and is based upon management’s periodic review ofthe collectibility of the loans in light of historical experience, the natureand volume of the loan portfolio, adverse situations that may affect theborrower’s ability to repay, estimated value of any underlying collateral andprevailing economic conditions. This evaluation is inherently subjective as itrequires estimates that are susceptible to significant revision as moreinformation becomes available.

A loan is considered impaired when, based on currentinformation and events, it is probable that the Company will be unable tocollect the scheduled payments of principal or interest when due according tothe contractual terms of the loan agreement. Factors considered by managementin determining impairment include payment status, collateral value, and theprobability of collecting scheduled principal and interest payments when due.Loans that experience insignificant payment delays and payment shortfallsgenerally are not classified as impaired. Management determines thesignificance of payment delays and payment shortfalls on a case-by-case basis,taking into consideration all of the circumstances surrounding the loan and theborrower, including the length of the delay, the reasons for the delay, theborrower’s prior payment record, and the amount of the shortfall in relation tothe principal and interest owed. Impairment is measured on a loan by loan basisfor commercial and construction loans by either the present value of expectedfuture cash flows discounted at the loan’s effective interest rate, the loan’sobtainable market price, or the fair value of the collateral if the loan iscollateral dependent.

Large groups of similarbalance homogeneous loans are collectively evaluated for impairment.Accordingly, the Company does not separately identify individual consumer andresidential loans for impairment disclosures.

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

*Loan OriginationFees and Related Discounts*

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

Commitment fees and costsrelating to commitments, the likelihood of exercise of which is remote, arerecognized during the commitment period. If the commitment is subsequentlyexercised during the commitment period, the remaining unamortized commitmentfee at the time of exercise is recognized over the life of the loan as anadjustment of yield.

*Loan Servicing*

The cost allocated toservicing rights purchased or retained has been recognized as a separate assetand is being amortized in proportion to and over the period of estimated netservicing income. Servicing rights are periodically evaluated for impairmentbased on the fair value of those rights. Fair values are estimated usingdiscounted cash flows based on current market rates of interest. For purposesof measuring impairment, the rights are stratified by one or more predominantrisk characteristics of the underlying loans. The Bank stratifies itscapitalized servicing rights based on loan type. The Company performs quarterlytesting to determine if loan servicing rights purchased and retained servicingrights are impaired. As of June 30, 2007 there was no impairment to loanservicing rights purchased and retained servicing rights.

*Goodwill*

Goodwill is the difference between the purchase priceand the amounts assigned to the net assets acquired and accounted for under thepurchase method of accounting. Prior to July 2002, goodwill was amortized over10 years. Subsequent to the provisions of the Financial Accounting StandardsBoard (FASB) Statement No. 142, *Goodwill andOther Intangible Assets*, which requires that goodwill no longer beamortized to earnings, but instead be reviewed at least annually for impairmentand the FASB issued Statement No. 147, *Acquisitionsof Certain Financial Institutions*, which provides guidance on theaccounting for the acquisition of a financial institution, the Company nolonger amortizes goodwill assets after October 1, 2002.

At June 30, 2007, theCompany had $4,951 of goodwill that is not being amortized. The Companyperforms annual testing to determine if goodwill is impaired. As of June 30,2007, there is no impairment with respect to intangible assets.

*Foreclosed RealEstate and Other Properties*

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

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

Land held for sale iscarried at the lower of cost, including cost of improvements and amenitiesincurred subsequent to acquisition, or fair value less cost to sell. Costsrelating to the development and improvement of property are capitalized,whereas costs relating to holding property are expensed. The carrying amount ofland held for sale was $1,362 at June 30, 2006 and $0 at June 30, 2007, as theproperty was sold in June 2007.

*Office Propertiesand Equipment*

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

*Income Taxes*

Deferred taxes areprovided on an asset and liability method whereby deferred tax assets arerecognized for deductible temporary differences and operating loss and taxcredit carryforwards and deferred tax liabilities are recognized for taxabletemporary differences. Temporary differences are the differences between thereported amounts of assets and liabilities and their tax bases. Deferred taxassets 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 assetswill not be realized. Deferred tax assets and liabilities are adjusted for theeffects of changes in tax laws and rates on the date of enactment.

*Earnings Per Share(EPS)*

Basic EPS represents income available to commonstockholders divided by the weighted-average number of common sharesoutstanding during the period. Diluted EPS reflects additional common sharesthat would have been outstanding if dilutive potential common shares had beenissued.

During the third quarterof fiscal 2006, the Company declared a 11¤10 -for-1 stocksplit of all of the common stock of the Company outstanding, payable in theform of a 1¤10-for-1stock dividend. The 10% stock dividend was paid on April 24, 2006 toshareholders of record as of April 10, 2006. All per share data and number ofcommon shares outstanding have been retroactively adjusted for all periodspresented as a result of the stock split.

*Segment Reporting*

Operating segments are defined as components of anenterprise for which separate financial information is available that is evaluatedregularly by the chief operating decision makers in deciding how to allocateresources and in assessing performance. The Company’s reportable segments are“banking” (including leasing activities) and “other.” The “banking” segment isconducted through the Bank and Mid America Capital and the “other” segment iscomposed of smaller nonreportable segments, the Company and inter-segmenteliminations.

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

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

| ** **                                | ** ** | **Banking** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-------------|------------|-----------|------------|-----------|------------|
| *2007*                                    |       |        |       |      |       |      |       |
| Net interest income                       |       | $           | 29,057     |      | $          | (3,423    | )          | $ | 25,634 |   |
| Intersegment  interest income             |       | (878        | )          | 878       |       | —    |       |
| Provision for  losses on loans and leases |       | (1,198      | )          | —    |       | (1,198    | )          |
| Noninterest  income                       |       | 13,355      |       | (159      | )          | 13,196    |       |
| Intersegment  noninterest income          |       | (348        | )          | 348       |       | —    |       |
| Noninterest  expense                      |       | (28,828     | )          | (777      | )          | (29,605   | )          |
| Intersegment  noninterest expense         |       | 8           |       | (8        | )          | —    |       |
| Income before income taxes                |       | $           | 11,168     |      | $          | (3,141    | )          | $ | 8,027 |   |
| Total assets                              |       | $           | 999,871    |      | $          | 1,583     |       | $ | 1,001,454 |   |
| *2006*                                    |       |        |       |      |       |      |       |
| Net interest income                       |       | $           | 28,905     |      | $          | (3,256    | )          | $ | 25,649 |   |
| Intersegment  interest income             |       | (1,144      | )          | 1,144     |       | —    |       |
| Provision for  losses on loans and leases |       | (5,279      | )          | —    |       | (5,279    | )          |
| Noninterest  income                       |       | 9,584       |       | 3,267     |       | 12,851    |       |
| Intersegment  noninterest income          |       | (183        | )          | 183       |       | —    |       |
| Noninterest  expense                      |       | (25,857     | )          | (642      | )          | (26,499   | )          |
| Intersegment  noninterest expense         |       | 6           |       | (6        | )          | —    |       |
| Income (loss) before income taxes         |       | $           | 6,032      |      | $          | 690       |       | $ | 6,722 |   |
| Total assets                              |       | $           | 958,352    |      | $          | 2,942     |       | $ | 961,294 |   |
| *2005*                                    |       |        |       |      |       |      |       |
| Net interest income                       |       | $           | 29,081     |      | $          | (2,882    | )          | $ | 26,199 |   |
| Intersegment  interest income             |       | (1,233      | )          | 1,233     |       | —    |       |
| Provision for  losses on loans and leases |       | (2,681      | )          | —    |       | (2,681    | )          |
| Noninterest  income                       |       | 8,873       |       | 141       |       | 9,014     |       |
| Intersegment  noninterest income          |       | (124        | )          | 124       |       | —    |       |
| Noninterest  expense                      |       | (23,950     | )          | (986      | )          | (24,936   | )          |
| Intersegment  noninterest expense         |       | 4           |       | (4        | )          | —    |       |
| Income (loss) before income taxes         |       | $           | 9,970      |      | $          | (2,374    | )          | $ | 7,596 |   |
| Total assets                              |       | $           | 892,404    |      | $          | 5,470     |       | $ | 897,874 |   |

 

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

*Stock-basedcompensation*

In December 2004, FASB issued Statement of FinancialAccounting Standards (“SFAS”) No. 123R, *Share-BasedPayment,* which requires the measurement of all employee share-basedpayments to employees, including grants of employee stock options, using afair-value based method and the recording of such expense in the Company’sconsolidated financial statements. SFAS No. 123R is a revision of SFAS No.123, *Accounting for Stock-BasedCompensation,*and supersedes Accounting Principles Board (“APB”)Opinion No. 25, *Accounting for Stock Issuedto Employees*.

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

| ** **                                                                                                                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Net income, as  reported                                                                                                                         |       | **$**      | **5,383**  |     | $          | 4,508    |       | $ | 5,165 |   |
| Add stock-based  employee compensation expense included in reported net income, net of related  tax effects                                      |       | **N/A**    |       | N/A      |       | 214      |       |
| Deduct total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax  effects(1) |       | **N/A**    |       | N/A      |       | (442     | )          |
| Pro forma net income                                                                                                                             |       | **$**      | **5,383**  |     | $          | 4,508    |       | $ | 4,937 |   |
| Basic earnings  per share;                                                                                                                       |       | ** ** |       |     |       |     |       |
| As reported                                                                                                                                      |       | **$**      | **1.35**   |     | $          | 1.15     |       | $ | 1.33 |   |
| Pro forma                                                                                                                                        |       | **N/A**    |       | N/A      |       | 1.27     |       |
| Diluted earnings  per share:                                                                                                                     |       | ** ** |       |     |       |     |       |
| As reported                                                                                                                                      |       | **$**      | **1.33**   |     | $          | 1.13     |       | $ | 1.29 |   |
| Pro forma                                                                                                                                        |       | **N/A**    |       | N/A      |       | 1.24     |       |

----

(1)          Includes expensesrelated to restricted stock reported in net income.

The Company adopted SFAS No. 123R effective as of July1, 2005, using the Black-Scholes option-pricing model and the modifiedprospective method in which compensation cost is recognized for all awardsgranted subsequent to the Company’s adoption of this statement as well as forthe unvested portion of awards outstanding as of the Company’s adoption of thisstatement. Prior to July 1, 2005, the Company accounted for stock-basedcompensation in accordance with APB No. 25 and related interpretations. Assuch, no stock-based employee compensation cost was recognized for grants underthe Company’s stock option and incentive plans, as all options granted underthose plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant. See Note 16 for more information on stockoption and incentive plans.

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**HF FINANCIAL CORP.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006  (DOLLARS IN THOUSANDS, except share data)**

*Self-insurance*

The Company has had a self-insured health plan for itsemployees, subject to certain limits, since January 1994. The Bank is named theplan administrator for this plan and has retained the services of anindependent third party administrator to process claims and handle other dutiesfor this plan. The third party administrator does not assume liability forbenefits payable under this plan. 

The Company assumes the responsibility for funding theplan benefits out of general assets, however employees cover some of the costsof covered benefits through contributions, deductibles, co-pays andparticipation amounts. An employee is eligible for coverage upon completion of30 calendar days of regular employment. The plan, which is on a calendar year basis,is intended to comply with, and be governed by, the Employee Retirement IncomeSecurity Act of 1974, as amended. 

Theaccrual estimate for pending and incurred but not reported health claims isbased upon a pending claims lag report provided by a third party provider. Althoughmanagement believes that it uses the best information available to determinethe accrual, unforeseen health claims could result in adjustments and netearnings being significantly affected if circumstances differ substantially fromthe assumptions used in estimating the accrual. Net healthcare costs areinclusive of health claims expenses and administration fees offset by stop lossand employee reimbursement. The following table is a summary of net healthcarecosts by quarter during fiscal years 2007, 2006 and 2005.

| ** **                  | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Quarter ended  September 30 |       | **$**    | **436**    |     | $          | 419      |       | $ | 381 |   |
| Quarter ended  December 31  |       | **357**  |       | 409      |       | 213      |       |
| Quarter ended  March 31     |       | **760**  |       | 382      |       | 379      |       |
| Quarter ended  June 30      |       | **596**  |       | 285      |       | 282      |       |
| Net healthcare  costs       |       | **$**    | **2,149**  |     | $          | 1,495    |       | $ | 1,255 |   |

 

**NOTE 2—RECLASSIFICATION**

Duringthe third quarter of fiscal 2006, the Company completed a line item change ofits income recorded on originated mortgage servicing rights for loans sold toSouth Dakota Housing. This process was done upon a fuller interpretation ofStatement No. 140 as issued by the FASB. All periods prior to fiscal 2006 havebeen revised in presentation to reflect this line item and there was no changeto net income, earnings per share, or recorded value of servicing rights as aresult of this line item change. The following table reflects the effects ofthe line item change on the Company’s consolidated statements of income for thefiscal year 2005. 

| ** **                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Loan servicing  income      |       | $        | (198       | )        | $          | (244 | ) |
| Gain on sale of  loans, net |       | 198      |       | 244      |       |
| Net income change           |       | $        | —     |     | $          | — |   |

 

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**HF FINANCIAL CORP.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006  (DOLLARS IN THOUSANDS, except share data)**

**NOTE 3—INVESTMENTSIN SECURITIES**

Theamortized cost and fair values of investments in securities, all of which areclassified as available for sale according to management’s intent, are asfollows: 

| ** **                 | ** ** | **June 30, 2007**          | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | ** **                           | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Amortized**                        | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                 | ** ** | **Cost**                             | ** ** | **Gains** | ** ** | **(Losses)** | ** ** | **Value** | ** ** |
| ** **                 | ** ** | **(Dollars in Thousands)** | ** ** |
| Debt securities:           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| U.S. government agencies   |       | $                                    | 12,092     |   |   | $ | 21 |   |   |   | $ | (102 | ) |   | $ | 12,011 |   |
| Federal Home Loan Bank     |       | 17,433                               |       |   | 12 |   |   |   | (122 | ) |   | 17,323 |   |
| Municipal bonds            |       | 8,088                                |       |   | — |   |   |   | (183 | ) |   | 7,905 |   |
| Preferred Term Securities  |       | 11,018                               |       |   | 16 |   |   |   | (126 | ) |   | 10,908 |   |
|                       |       | 48,631                               |       |   | 49 |   |   |   | (533 | ) |   | 48,147 |   |
| Equity securities:         |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| FNMA                       |       | 8                                    |       |   | 18 |   |   |   | — |   |   | 26 |   |
| Federal Ag Mortgage        |       | 7                                    |       |   | 6 |   |   |   | — |   |   | 13 |   |
| Other Investments          |       | 184                                  |       |   | — |   |   |   | — |   |   | 184 |   |
|                       |       | 199                                  |       |   | 24 |   |   |   | — |   |   | 223 |   |
| Mortgage-backed securities |       | 95,657                               |       |   | 5 |   |   |   | (1,809 | ) |   | 93,853 |   |
|                       |       | $                                    | 144,487    |   |   | $ | 78 |   |   |   | $ | (2,342 | ) |   | $ | 142,223 |   |

 

| ** **                                | ** ** | **June 30, 2006** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | ** **                  | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Amortized**               | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                | ** ** | **Cost**                    | ** ** | **Gains** | ** ** | **(Losses)** | ** ** | **Value** | ** ** |
| Debt securities                           |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| U.S. government agencies and corporations |       | $                           | 12,024     |   |   | $ | — |   |   |   | $ | (225 | ) |   | $ | 11,799 |   |
| Federal Home Loan Bank                    |       | 9,933                       |       |   | — |   |   |   | (222 | ) |   | 9,711 |   |
| Municipal bonds                           |       | 6,103                       |       |   | — |   |   |   | (184 | ) |   | 5,919 |   |
| Preferred term securities                 |       | 11,019                      |       |   | 55 |   |   |   | (123 | ) |   | 10,951 |   |
|                                      |       | 39,079                      |       |   | 55 |   |   |   | (754 | ) |   | 38,380 |   |
| Equity securities                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| FNMA                                      |       | 8                           |       |   | 11 |   |   |   | — |   |   | 19 |   |
| Federal agricultural mortgage             |       | 7                           |       |   | 3 |   |   |   | — |   |   | 10 |   |
| Other                                     |       | 67                          |       |   | — |   |   |   | — |   |   | 67 |   |
|                                      |       | 82                          |       |   | 14 |   |   |   | — |   |   | 96 |   |
| Mortgage-backed securities                |       | 110,328                     |       |   | 1 |   |   |   | (3,287 | ) |   | 107,042 |   |
|                                      |       | $                           | 149,489    |   |   | $ | 70 |   |   |   | $ | (4,041 | ) |   | $ | 145,518 |   |

 

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**HF FINANCIAL CORP.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006  (DOLLARS IN THOUSANDS, except share data)**

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

| ** **                 | ** ** | **June 30, 2007**            | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **Less than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                 | ** ** | ** **                             | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                 | ** ** | **Fair**                               | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                 | ** ** | **Value**                              | ** ** | **(Losses)** | ** ** | **Value** | ** ** | **(Losses)** | ** ** | **Value** | ** ** | **(Losses)** | ** ** |
| ** **                 | ** ** | **(Dollars in Thousands)**   | ** ** |
| Debt securities:           |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. government agencies   |       | $                                      | 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 | ) |   |
| Preferred term 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 | ) |   |

 

| ** **                                     | ** ** | **June 30, 2006**            | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **Less than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                                     | ** ** | ** **                             | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                                     | ** ** | **Fair**                               | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                                     | ** ** | **Value**                              | ** ** | **(Losses)** | ** ** | **Value** | ** ** | **(Losses)** | ** ** | **Value** | ** ** | **(Losses)** | ** ** |
| Debt securities                                |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. government agencies and corporations |       | $                                      | 7,896      |   |   | $ | (128 | ) |   | $ | 3,903 |   |   | $ | (97 | ) |   | $ | 11,799 |   |   | $ | (225 | ) |   |
| Federal Home Loan Bank                         |       | 8,243                                  |       |   | (190 | ) |   | 1,468 |   |   | (32 | ) |   | 9,711 |   |   | (222 | ) |   |
| Municipal bonds                                |       | 4,353                                  |       |   | (174 | ) |   | 1,566 |   |   | (10 | ) |   | 5,919 |   |   | (184 | ) |   |
| Preferred Term Securities                      |       | 1,896                                  |       |   | (123 | ) |   | — |   |   | — |   |   | 1,896 |   |   | (123 | ) |   |
|                                           |       | 22,388                                 |       |   | (615 | ) |   | 6,937 |   |   | (139 | ) |   | 29,325 |   |   | (754 | ) |   |
| Mortgage-backed securities                     |       | 33,094                                 |       |   | (709 | ) |   | 73,876 |   |   | (2,578 | ) |   | 106,970 |   |   | (3,287 | ) |   |
|                                           |       | $                                      | 55,482     |   |   | $ | (1,324 | ) |   | $ | 80,813 |   |   | $ | (2,717 | ) |   | $ | 136,295 |   |   | $ | (4,041 | ) |   |

 

Management does not believe that any individualunrealized losses as of June 30, 2007 represent an other-than-temporaryimpairment. The unrealized losses reported for mortgage-backed securitiesrelate primarily to securities issued by FNMA, GNMA and FHLMC. These unrealizedlosses in total are primarily attributable to changes in interest rates and thecontractual cashflows of those investments are guaranteed by an agency of theU.S. government. As a group, the unrealized losses, were less than 1.7% of itsrespective amortized cost basis for June 30, 2007. Because the decline inmarket value is attributable to changes in interest rates and not creditquality and because the Company has the ability and intent to hold thoseinvestments until a recovery of fair value, which may be at maturity, theCompany does not consider those investments to be other-than-temporarilyimpaired at June 30, 2007. 

83

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**HF FINANCIAL CORP.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006  (DOLLARS IN THOUSANDS, except share data)**

Theamortized cost and fair values of debt securities as of June 30, 2007, bycontractual maturity, are shown below. Expected maturities will differ fromcontractual maturities because the borrowers may have the right to call orprepay obligations with or without call or prepayment penalties. 

| ** **                              | ** ** | **Amortized** | ** ** | **Fair**  | ** ** |
|-----------------------------------------|------------|---------------|------------|-----------|------------|
| ** **                              | ** ** | **Cost**      | ** ** | **Value** | ** ** |
| Due in one year  or less                |       | $             | 285        |      | $          | 284 |   |
| Due after one  year through five years  |       | 27,437        |       | 27,207    |       |
| Due after five  years through ten years |       | 6,614         |       | 6,596     |       |
| Due after ten  years                    |       | 14,295        |       | 14,060    |       |
|                                    |       | 48,631        |       | 48,147    |       |
| Mortgage-backed  securities             |       | 95,657        |       | 93,853    |       |
|                                    |       | $             | 144,288    |      | $          | 142,000 |   |

 

Equity securities have been excluded from the maturitytable above because they do not have contractual maturities associated withdebt securities. 

Thecomponents of other comprehensive income (loss)—net change in unrealized gain(loss) on securities available for sale are as follows:

| ** **                                                                   | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Unrealized  holding gain (loss) arising during the year                      |       | **$**                                   | **1,707**  | ** ** | $ | (2,617 | ) | $ | 853 |   |
| Less  reclassification adjustment for net gains realized in net   income     |       | **—**                              | ** ** | (3 | ) | (20 | ) |
| Net change in unrealized gain (loss) before income  taxes                    |       | **1,707**                               | ** ** | (2,620 | ) | 833 |   |
| Income (taxes) benefit                                                       |       | **(649**                                | **)**      | 996 |   | (317 | ) |
| Other  comprehensive income—net change in unrealized gain (losses) |       | **$**                                   | **1,058**  | ** ** | $ | (1,624 | ) | $ | 516 |   |

 

Proceeds from the sale of securities available forsale in fiscal 2007 were $3,542 and resulted in gross gains of $0. Proceedsfrom the sale of securities available for sale in fiscal 2006 were $14,061 and resultedin gross gains of $3. Proceeds from the sale of securities available for salein fiscal 2005 were $17,174 and resulted in gross gains of $20.

At June 30, 2007 and 2006,securities with a fair value of $120,734 and $131,254, respectively, werepledged as collateral for public deposits and other purposes. 

84

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**HF FINANCIAL CORP.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006  (DOLLARS IN THOUSANDS, except share data)**

**NOTE 4—LOANSAND LEASES RECEIVABLE**

Loansand leases receivable at June 30, 2007 and 2006 consist of the following:

| ** **                                                      | ** ** | **2007**    | ** **  | **2006**   | ** ** |
|-----------------------------------------------------------------|------------|-------------|-------------|------------|------------|
| Loans secured by  real estate                                   |       |        |        |       |       |
| Residential                                                     |       |        |        |       |       |
| One-to-four family                                              |       | **$**       | **117,235** | ** ** | $          | 101,362 |   |
| Multi-family                                                    |       | **34,126**  | ** **  | 34,161     |       |
| Commercial                                                      |       | **181,121** | ** **  | 147,873    |       |
| Agriculture                                                     |       | **48,030**  | ** **  | 31,484     |       |
| Construction and development                                    |       | **18,674**  | ** **  | 33,596     |       |
| Business,  consumer and other                                   |       | ** **  | ** **  |       |       |
| Commercial business                                             |       | **100,013** | ** **  | 99,964     |       |
| Automobile                                                      |       | **98,238**  | ** **  | 106,900    |       |
| Junior liens on real estate                                     |       | **79,113**  | ** **  | 84,898     |       |
| Agriculture                                                     |       | **69,608**  | ** **  | 57,985     |       |
| Equipment financing leases                                      |       | **22,267**  | ** **  | 29,343     |       |
| Other loans                                                     |       | **7,079**   | ** **  | 6,932      |       |
| Loans on savings accounts                                       |       | **1,772**   | ** **  | 1,553      |       |
|                                                            |       | **777,276** | ** **  | 736,051    |       |
| Add (less)                                                      |       | ** **  | ** **  |       |       |
| Undisbursed portion of loans in process                         |       | **(10,387** | **)**       | (9,674     | )          |
| Deferred loan fees and unamortized discounts and  premiums, net |       | **582**     | ** **  | 883        |       |
| Allowance for loan and lease losses                             |       | **(5,872**  | **)**       | (5,657     | )          |
|                                                            |       | **$**       | **761,599** | ** ** | $          | 721,603 |   |

 

Loans held for sale totaling $8,776 at June 30, 2007consist of $8,290 one-to-four family fixed-rate loans, $223 of commercial loansand $263 of student loans.Loans held for sale totaling $7,623 at June 30, 2006consist of $6,980 one-to-four family fixed-rate loans, $223 of commercial loansand $420 of student loans.

Activityin the allowance for loan losses included in continuing operations issummarized as follows for the fiscal years ended June 30: 

| ** **                  | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005** | ** ** |
|-----------------------------|------------|------------|------------|------------|------------|----------|------------|
| Balance,  beginning         |       | **$**      | **5,657**  | ** ** | $          | 5,076    |       | $ | 3,605 |   |
| Provision charged to income |       | **1,198**  | ** ** | 5,279      |       | 2,681    |       |
| Charge-offs                 |       | **(1,292** | **)**      | (5,123     | )          | (1,545   | )          |
| Recoveries                  |       | **309**    | ** ** | 425        |       | 335      |       |
| Balance, ending             |       | **$**      | **5,872**  | ** ** | $          | 5,657    |       | $ | 5,076 |   |

 

85

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**HF FINANCIAL CORP.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006  (DOLLARS IN THOUSANDS, except share data)**

**Thefollowing is a summary of information pertaining to impaired loans andnonaccrual loans as of and for the fiscal years ended June 30, 2007, 2006, and2005:**

| ** **                                              | ** ** | **2007**  | ** ** | **2006**   | ** ** | **2005** | ** ** |
|---------------------------------------------------------|------------|-----------|------------|------------|------------|----------|------------|
| Impaired loans  without a valuation allowance           | ** ** | **$**     | **962**    | ** ** | $          | 325      |       | $ | 98 |   |
| Impaired loans  with a valuation allowance              | ** ** | **519**   | ** ** | —     |       | 4,115    |       |
| Total impaired loans                                    | ** ** | **$**     | **1,481**  |       | $          | 325      |       | $ | 4,213 |   |
| Valuation allowance related to impaired loans           | ** ** | **$**     | **385**    | ** ** | $          | —   |       | $ | 1,750 |   |
| Nonaccruing loans and leases                            | ** ** | **$**     | **2,190**  | ** ** | $          | 1,035    |       | $ | 5,322 |   |
| Accruing loans  and leases delinquent more than 90 days | ** ** | **1,308** | ** ** | 2,330      |       | 1,609    |       |
| Average  investment in impaired loans                   | ** ** | **966**   | ** ** | 2,604      |       | 529      |       |
| Interest income  recognized on impaired loans           | ** ** | **6**     | ** ** | 7          |       | 16       |       |

 

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

**NOTE 5—LOANSERVICING**

**Mortgage loans serviced for others(primarily the South Dakota Housing Development Authority) are not included inthe accompanying consolidated statements of financial condition. The unpaidprincipal balances of mortgage loans serviced for others were $970,188 and$557,992 at June 30, 2007 and 2006, respectively.**

**Custodial balances maintained inconnection with mortgage loan servicing, and included in advances by borrowersfor taxes and insurance, were approximately $9,210 and $6,006, at June 30, 2007and 2006, respectively.**

**The carrying values of mortgage andconsumer servicing rights were $10,871 and $5,648 at June 30, 2007 and 2006,respectively. The fair values of these rights were $15,740 and $9,102 at June30, 2007 and 2006, respectively. The fair values of the servicing rights wereestimated as the present value of the expected future cash flows using adiscount rate of 10%. During fiscal years 2007 and 2006, servicing rightsapproximating $6,341 and $1,194, respectively, were capitalized. Fiscal 2007servicing rights include the purchase of $4,956 rights from Great Western Bank.The Company recognized expense for amortization of the cost of servicing rightsin the amount of $1,117, $757 and $566 for the fiscal years ended June 30,2007, 2006, and 2005, respectively.**

**Novaluation allowances were provided for servicing rights capitalized during thefiscal years ended June 30, 2007 and 2006.**

86

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**HF FINANCIAL CORP.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006  (DOLLARS IN THOUSANDS, except share data)**

**NOTE 6—OFFICE PROPERTIES AND EQUIPMENT**

| ** **                                      | ** ** | **2007**    | ** ** | **2006**   | ** ** |
|-------------------------------------------------|------------|-------------|------------|------------|------------|
| Land                                            | ** ** | **$**       | **1,920**  | ** ** | $          | 2,001 |   |
| Buildings and  improvements                     | ** ** | **19,025**  | ** ** | 17,936     |       |
| Leasehold  improvements                         | ** ** | **2,199**   | ** ** | 2,023      |       |
| Furniture,  fixtures, equipment and automobile  | ** ** | **15,374**  | ** ** | 14,542     |       |
|                                            | ** ** | **38,518**  | ** ** | 36,502     |       |
| Less accumulated  depreciation and amortization | ** ** | **(22,688** | **)**      | (22,043    | )          |
|                                            | ** ** | **$**       | **15,830** | ** ** | $          | 14,459 |   |

 

**TheCompany leases numerous telephone and office equipment, which require minimumrentals totaling $227 through the year ending June 30, 2011. In addition, theCompany has leased property under various operating lease agreements, whichexpire at various times. The total rental commitments at June 30, 2007under the leases are as follows:**

| 2008       | ** ** | **$**     | **732**    | ** ** |
|------------|------------|-----------|------------|------------|
| 2009       | ** ** | **694**   | ** ** |
| 2010       | ** ** | **619**   | ** ** |
| 2011       | ** ** | **454**   | ** ** |
| 2012       | ** ** | **268**   | ** ** |
| Thereafter | ** ** | **1,534** | ** ** |
|       | ** ** | **$**     | **4,301**  | ** ** |

 

**NOTE 7—DEPOSITS**

Depositsat June 30, 2007 and 2006 consist of the following: 

| ** **                             | ** ** | **2007**    | ** **  | **2006**   | ** ** |
|----------------------------------------|------------|-------------|-------------|------------|------------|
| Noninterest  bearing checking accounts | ** ** | **$**       | **86,679**  | ** ** | $          | 84,757 |   |
| Interest bearing  accounts             | ** ** | **87,030**  |        | 54,862     |       |
| Money market  accounts                 | ** ** | **212,546** |        | 232,471    |       |
| Savings accounts                       | ** ** | **66,235**  |        | 76,695     |       |
| Certificates of  deposit               | ** ** | **363,374** |        | 320,217    |       |
|                                   | ** ** | **$**       | **815,864** | ** ** | $          | 769,002 |   |

 

87

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**HF FINANCIAL CORP.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006  (DOLLARS IN THOUSANDS, except share data)**

Scheduled maturities of certificates of deposit are asfollows: 

Maturingin fiscal year:

| 2008       |   | $      | 316,088 |   |
|------------|--------|--------|---------|--------|
| 2009       |   | 26,429 |    |
| 2010       |   | 12,550 |    |
| 2011       |   | 3,709  |    |
| 2012       |   | 4,396  |    |
| Thereafter |   | 202    |    |
|       |   | $      | 363,374 |   |

 

Non-IRA deposit accountsare insured up to $100 by the Savings Association Insurance Fund (SAIF) undermanagement of the Federal Deposit Insurance Corporation (FDIC). IRA depositaccounts are insured up to $250 by the Savings Association Insurance Fund(SAIF) under management of the FDIC. The aggregate amount of jumbo certificatesof deposit with a minimum denomination of $100 was approximately $162,953 and$127,155 at June 30, 2007 and 2006, respectively. Deposits at June 30, 2007 and2006 include $73,286 and $68,950, respectively, of deposits from one localgovernmental entity, the majority of which are savings accounts.

**NOTE 8—ADVANCESFROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS**

Advancesfrom the Federal Home Loan Bank of Des Moines (FHLB) and Other borrowings atJune 30, 2007 and 2006, are summarized as follows: 

| ** **                                                    | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| Fixed-rate  advances (with rates ranging from 2.95% to 6.36%) |       | **$**      | **68,500** | ** ** | $          | 90,500 |   |
| Variable-rate  advances (with rate of 5.6%)                   |       | **—** | ** ** | 1,120      |       |
| Other  borrowings(1)                                          |       | **100**    | ** ** | —     |       |
|                                                          |       | **$**      | **68,600** | ** ** | $          | 91,620 |   |

----

(1)          The Bank is aparticipating lender in the South Dakota Housing Development Authority programfor flood victims in the north-eastern part of the state of South Dakota, as ofMay 2007. The money is provided to the Bank at a zero percent interest rate to beused in making loans to such flood victims. This is a revolving line of credit,in which the participating lender may borrow, prepay and re-borrow for a termof 10 years. 

Aggregate maturities of advances, computed based oncall date, are as follows: FYE 2008 $6,500 FYE 2009 $2,500 FYE 2010$32,500 FYE 2011 $12,000 FYE 2012 $5,000 FYE 2013 $5,000 and FYE 2014 $5,000. Prepaymentof the callable advances results in a prepayment fee as negotiated between theBank and the FHLB. 

Advances with the FHLB are secured by stock in theFHLB, which is comprised of membership stock and activity-based stock. Themembership stock requirement is based as a percentage of total assets as of 

88

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**HF FINANCIAL CORP.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006  (DOLLARS IN THOUSANDS, except share data)**

the preceding December 31.At June 30, 2007, the Bank held $1,212 in membership stock. The activity-basedstock requirement is based on 4.45% of advances outstanding. At June 30, 2007,the Bank held $3,846 in activity-based stock. 

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

Advances with the Federal Reserve Bank are secured bycommercial business loans.

Convertibleadvances without a strike rate are subject to be called at the FHLB’sdiscretion. Convertible advances tied to LIBOR strike rates may only be calledif the three-month LIBOR rate is equal to or greater than the indicated strikerate.

The Bank currently has a$15,000 unsecured line of federal funds with First Tennessee Bank, NA. OnOctober 4, 2006 the Bank also reaffirmed a $10,000 Fed Funds accommodation fromNorthern Trust. In addition, the Company has a line of credit for $6,000 withFirst Tennessee Bank, NA for liquidity needs of the Company. There were nofunds drawn on any line of credit at June 30, 2007.

**NOTE 9—SUBORDINATEDDEBENTURES PAYABLE TO TRUSTS**

On November 28, 2001, the Company issued 10,000 sharestotaling $10,000 of Company Obligated Mandatorily Redeemable PreferredSecurities of Trust I. Trust I was established and exists for the sole purposeof issuing trust preferred securities and investing the proceeds insubordinated debentures of the Company. These subordinated debenturesconstitute the sole asset of Trust I. The securities provide for cumulativecash 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 interestpayments 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, allaccumulated and unpaid distributions must be paid. The capital securities mustbe redeemed on December 8, 2031; however, the Company has the option to shortenthe maturity date to a date not earlier than December 8, 2006. The capitalsecurities have no voting rights, are unsecured, and rank junior in priority ofthe payment to all of the Company’s indebtedness and senior to the Company’scapital stock. 

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

On July 11, 2002, the Company issued 5,000 sharestotaling $5,000 of Company Obligated Mandatorily Redeemable PreferredSecurities of Trust II. Trust II was established and exists for the solepurpose of issuing trust preferred securities and investing the proceeds insubordinated debentures of the Company. These subordinated debenturesconstitute the sole asset of Trust II. The securities provide for cumulativecash distributions calculated at a rate based on three-month LIBOR plus 3.65%adjusted quarterly. The Company may, at one or more times, defer interestpayments on the capital securities for up to 20 consecutive quarterly periods,but not beyond October 7, 2032. The capital securities must be redeemed onOctober 7, 2032; however, the Company has the option to shorten the maturitydate to a date 

89

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**HF FINANCIAL CORP.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006  (DOLLARS IN THOUSANDS, except share data)**

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 indebtednessand senior to the Company’s capital stock. 

On December 19, 2002, the Company issued 5,000 sharestotaling $5,000 of Company Obligated Mandatorily Redeemable PreferredSecurities of Trust III. Trust III was established and exists for the solepurpose of issuing trust preferred securities and investing the proceeds insubordinated debentures of the Company. These subordinated debenturesconstitute the sole asset of Trust III. The securities provide for cumulativecash distributions calculated at a rate based on three-month LIBOR plus 3.35%adjusted quarterly. The Company may, at one or more times, defer interestpayments on the capital securities for up to 20 consecutive quarterly periods,but not beyond January 7, 2033. At the end of the deferral period, allaccumulated and unpaid distributions must be paid. The capital securities mustbe redeemed on January 7, 2033; however, the Company has the optionto shorten the maturity date to a date not earlier than January 7, 2008.Holders of the capital securities have no voting rights, are unsecured, andrank junior in priority of the payment to all of the Company’s indebtedness andsenior to the Company’s capital stock.

On September 25, 2003, the Company issued 7,000 sharestotaling $7,000 of Company Obligated Mandatorily Redeemable PreferredSecurities of Trust IV. Trust IV was established and exists for the solepurpose of issuing trust preferred securities and investing the proceeds insubordinated debentures of the Company. These subordinated debenturesconstitute the sole asset of Trust IV. The securities provide for cumulativecash distributions calculated at a rate based on three-month LIBOR plus 3.10%adjusted quarterly. The Company may, at one or more times, defer interestpayments on the capital securities for up to 20 consecutive quarterly periods,but not beyond October 8, 2033. At the end of the deferral period, allaccumulated and unpaid distributions must be paid. The capital securities mustbe redeemed on October 8, 2033; however, the Company has the option to shortenthe maturity date to a date not earlier than October 8, 2008. Holders ofthe capital securities have no voting rights, are unsecured, and rank junior inpriority of the payment to all of the Company’s indebtedness and senior to theCompany’s capital stock. 

On December 7, 2006, theCompany issued 10,000 shares totaling $10,000 of Company Obligated MandatorilyRedeemable Preferred Securities of Trust V. Trust V was established and existsfor the sole purpose of issuing trust preferred securities and investing theproceeds in subordinated debentures of the Company. These subordinateddebentures constitute the sole asset of Trust V. The securities provide forcumulative cash distributions calculated at a rate based on three-month LIBORplus 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 securitiesfor up to 20 consecutive quarterly periods, but not beyond March 1, 2037. Atthe end of the deferral period, all accumulated and unpaid distributions mustbe paid. The capital securities must be redeemed on March 1, 2037; however, theCompany has the option to shorten the maturity date to a date not earlier thanMarch 1, 2012. Holders of the capital securities have no voting rights, areunsecured, and rank junior in priority of the payment to all of the Company’sindebtedness and senior to the Company’s capital stock. 

**NOTE 10—INCOMETAX MATTERS**

The Company and subsidiaries file a consolidatedfederal income tax return on a fiscal year basis. The Bank is allowed bad debtdeductions based on actual charge-offs. 

90

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**HF FINANCIAL CORP.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006  (DOLLARS IN THOUSANDS, except share data)**

Theconsolidated provision for income taxes from continuing operations consists ofthe following for the years ended June 30, 2007, 2006, and 2005:

| ** **       | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005** | ** ** |
|------------------|------------|------------|------------|------------|------------|----------|------------|
| Current          |       | ** ** | ** ** |       |       |     |       |
| Federal          |       | **$**      | **2,516**  | ** ** | $          | 2,475    |       | $ | 2,786 |   |
| State            |       | **613**    | ** ** | 296        |       | 481      |       |
| Deferred expense |       | **(485**   | **)**      | (557       | )          | (836     | )          |
|             |       | **$**      | **2,644**  | ** ** | $          | 2,214    |       | $ | 2,431 |   |

 

**Incometax expense is different from that calculated at the statutory federal incometax rate to pretax income from continuing operations. The reasons for thisdifference in the tax expense are as follows:**

| ** **                                          | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Computed “expected”  tax expense          | ** ** | **$**      | **2,810**  |     | $          | 2,352    |       | $ | 2,659 |   |
| Increase  (decrease) in income taxes resulting from | ** ** | ** ** | ** ** |     |       |     |       |
| Tax exempt income                                   | ** ** | **(353**   | **)**      | (237     | )          | (172     | )          |
| State taxes, net of federal benefit                 | ** ** | **392**    |       | 165      |       | 331      |       |
| Increase in cash surrender value of life insurance  | ** ** | **(177**   | **)**      | (169     | )          | (168     | )          |
| Stock Options                                       | ** ** | **32**     |       | (19      | )          | —   |       |
| Benefit of income taxed at lower rates              | ** ** | **(58**    | **)**      | (52      | )          | (61      | )          |
| Change in valuation allowance                       | ** ** | **(1**     | **)**      | (3       | )          | (1       | )          |
| Other, net                                          | ** ** | **(1**     | **)**      | 177      |       | (157     | )          |
|                                                | ** ** | **$**      | **2,644**  |     | $          | 2,214    |       | $ | 2,431 |   |

 

 

91

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

Thecomponents of the net deferred tax asset (liability) as of June 30, 2007 and2006 are as follows:

| ** **                                           | ** ** | **2007**  | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|-----------|------------|----------|------------|
| Deferred tax assets                                  |       |      |       |     |       |
| Allowance for loan and lease losses                  | ** ** | **$**     | **1,986**  |     | $          | 1,950 |   |
| Accrued expenses                                     | ** ** | **360**   |       | 253      |       |
| Net unrealized loss on securities available for sale | ** ** | **860**   |       | 1,509    |       |
| Pension Cost                                         | ** ** | **60**    |       | —   |       |
| Other                                                | ** ** | **412**   |       | 437      |       |
|                                                 | ** ** | **3,678** |       | 4,149    |       |
| Less valuation allowance                             | ** ** | **(1**    | **)**      | (2       | )          |
|                                                 | ** ** | **3,677** |       | 4,147    |       |
| Deferred tax  liabilities                            |       |      |       |     |       |
| Property and equipment                               | ** ** | **1,155** |       | 1,583    |       |
| Mortgage servicing rights                            | ** ** | **388**   |       | 352      |       |
| Other assets                                         | ** ** | **208**   |       | 201      |       |
| Other                                                | ** ** | **29**    |       | 10       |       |
|                                                 | ** ** | **1,780** |       | 2,146    |       |
|                                                 | ** ** | **$**     | **1,897**  |     | $          | 2,001 |   |

 

Retained earnings at June30, 2007 and 2006, include approximately $4,805 related to the pre-1987allowance for loan losses for which no deferred federal income tax liabilityhas been recognized. These amounts represent an allocation of income to baddebt deductions for tax purposes only. If the Bank no longer qualifies as abank, or in the event of a liquidation of the Bank, income would be created fortax purposes only, which would be subject to the then current corporate incometax rate. The unrecorded deferred income tax liability on the above amount forfinancial statement purposes was approximately $1,634. 

**NOTE 11—REGULATORYCAPITAL**

**The Bank is subject to variousregulatory capital requirements administered by federal banking agencies.Failure to meet minimum capital requirements can initiate certain mandatory—andpossibly additional discretionary—actions by regulators that, if undertaken,could have a direct material effect on the Bank’s financial statements. Undercapital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Bank must meet specific capital guidelines that involvequantitative measures of the Bank’s assets, liabilities, and certainoff-balance sheet items as calculated under regulatory accounting practices.The Bank’s capital amounts and classification are also subject to qualitativejudgments by the regulators about components, risk weightings, and otherfactors.**

**Quantitative measures establishedby regulation to ensure capital adequacy require the Bank to maintain minimumamounts and ratios (set forth in the following table) of total and Tier Icapital (as defined in the regulations) to risk-weighted assets (as defined)and of Tier I capital (as defined) to adjusted**

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

**totalassets (as defined). Management believes, as of June 30, 2007 and 2006, thatthe Bank meets all capital adequacy requirements to which it is subject.**

**As of June 30, 2007, the Office ofThrift Supervision (OTS) categorized the Bank as “well capitalized” under theregulatory framework. To be categorized as well capitalized, the Bank mustmaintain minimum total risk-based, Tier I risk-based, and Tier I (core) capitalratios as set forth in the table. There are no conditions or events since thatnotification that management believes have unfavorably changed the Bank’scategory.**

**Thefollowing table summarizes the Bank’s compliance with its regulatory capitalrequirements at June 30, 2007 and 2006:**

| ** **                                         | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **  | ** ** | **To Be Well Capitalized**      | ** ** |
|----------------------------------------------------|------------|------------|------------|-----------------|------------|----------------------------|------------|-------------|------------|------------------------------------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **  | ** ** | **Under Prompt Corrective**          | ** ** |
| ** **                                         | ** ** | **Actual** | ** ** | **Requirement** | ** ** | **Action Provisions** | ** ** |
| ** **                                         | ** ** | **Amount** | ** ** | **Percent**     | ** ** | **Amount**                 | ** ** | **Percent** | ** ** | **   Amount   ** | ** ** | **   Percent   ** | ** ** |
| As of June 30, 2007                                |       |       |       |            |       |                       |       |        |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Tier 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/A |   |   |
| Tier I (core) capital (to risk-weighted assets)    |       | 82,824     |       |            | 10.37      | %                          |       | N/A         |       |                                           | N/A        |   |   |   | 47,950 |   |   |   | 6.00 | % |   |
| As of June 30,  2006                               |       |       |       |            |       |                       |       |        |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Tier I (core) capital (to adjusted total assets)   |       | $          | 77,667     |            |       | 8.10                       | %          |        | $          | 38,344                                         |       |   | 4.00 | % |   |   | $ | 47,931 |   |   |   | 5.00 | % |   |
| Total risk-based capital (to risk-weighted assets) |       | 83,324     |       |            | 10.65      | %                          |       | 62,615      |       |                                           | 8.00       | % |   |   | 78,269 |   |   |   | 10.00 | % |   |
| Tangible capital (to tangible assets)              |       | 77,667     |       |            | 8.10       | %                          |       | 14,379      |       |                                           | 1.50       | % |   |   | N/A |   |   |   | N/A |   |   |
| Tier I (core)  capital (to risk-weighted assets)   | ** ** | 77,667     |       |            | 9.92       | %                          |       | N/A         |       |                                           | N/A        |   |   |   | 46,961 |   |   |   | 6.00 | % |   |

 

**NOTE 12—STOCKHOLDERS’EQUITY**

**The Company currently has in effecta publicly announced stock buy-back program in which up to 10% of the commonstock of the Company outstanding on May 1, 2007, may be acquired through April30, 2008. As of June 30, 2007, the Company has not repurchased any shares ofcommon stock pursuant to this current program. Pursuant to a series of stockbuy-back programs initiated by the Company since 1996, the Company haspurchased an aggregate of 1,977,836 shares of common stock through June 30,2007 As of June 30, 2007, the maximum number of shares that may yet bepurchased under the current program was 399,141 shares.**

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

**The Company also has preferredshare purchase rights (Rights). Each Right entitles the registered holder topurchase from the Company one one-hundredth of a share of Series A JuniorParticipating Preferred Stock at a price of $65 per one-hundredth of apreferred share, subject to the complete terms as stated in the RightsAgreement. The Rights become exercisable immediately after the earlier of (i)ten business days following a public announcement that a person or group hasacquired beneficial ownership of 20% or more of the outstanding common sharesof the Company (subject to certain exclusions), (ii) ten business days following the commencement or announcement of anintention to make a tender offer or exchange offer, the consummation of whichwould result in the beneficial ownership by a person or group of 20% or more ofsuch outstanding common shares. The Rights expired on October 22, 2006 and werenot renewed by the Company.**

**Undercurrent regulations, the Bank is not permitted to pay dividends on its stock ifits regulatory capital would reduce below (i) the amount required for theliquidation account established to provide a limited priority claim to theassets of the Bank to qualifying depositors (Eligible Account Holders) at March31, 1992, who continue to maintain deposits at the Bank after its conversionfrom a federal mutual savings and loan association to a federal stock savingsbank pursuant to its Plan of Conversion adopted August 21, 1991, or (ii) theBank’s regulatory capital requirements. Capital distributions are limited tothe greater of 100% of net income for the year to date plus 50% of the amountof which the lesser of the institution’s tangible core or risk-based capitalexceeds its capital requirement for such capital commitment, as measured at thebeginning of the calendar year or up to 75% of net income over the most recentfour quarter period. Subsequent to June 30, 2007 the Bank sent writtennotification to the OTS of its intention to pay dividends for each quarter inthe year ending June 30, 2008, to the Company, while maintaining its capitalrequirements.**

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

**NOTE 13—EARNINGSPER SHARE**

**Areconciliation of the income and common stock share amounts used in thecalculation of basic and diluted EPS for the fiscal years ended June 30, 2007,2006 and 2005, follow:**

| ** **                                                                                                        | ** ** | **2007**      | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------|------------|------------|------------|
| **Net  income**                                                                                                   | ** ** | **$**         | **5,383**  | ** ** | $          | 4,508      |       | $ | 5,165 |   |
| ***Basic  EPS:***                                                                                                 | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average number of common shares outstanding                                                              | ** ** | **3,978,571** |       | 3,914,952  |       | 3,885,297  |       |
| Earnings per common share                                                                                         | ** ** | **$**         | **1.35**   | ** ** | $          | 1.15       |       | $ | 1.33 |   |
| ***Diluted  EPS:***                                                                                               | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average number of common shares outstanding                                                              | ** ** | **3,978,571** |       | 3,914,952  |       | 3,885,297  |       |
| Common share equivalents—stock options / Stock  Appreciation Rights (SARs) under employee compensation plans | ** ** | **78,155**    |       | 85,126     |       | 115,793    |       |
| Weighted average number of common shares and common  share equivalents                                            | ** ** | **4,056,726** |       | 4,000,078  |       | 4,001,089  |       |
| Earnings per  common share                                                                                        | ** ** | **$**         | **1.33**   | ** ** | $          | 1.13       |       | $ | 1.29 |   |

 

During the third quarter of fiscal 2006, the Companydeclared 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 toshareholders of record as of April 10, 2006. All per share data and number ofcommon shares outstanding have been retroactively adjusted for all periodspresented as a result of the stock split. 

Options outstanding ofapproximately 30,800 shares of common stock at a weighted average share priceof $17.27 during the fiscal year ended June 30, 2006 , were not included in thecomputation of diluted earnings per share because the exercise price of thoseinstruments exceeded the average market price of the common shares during theyear. All options outstanding were included in the computation for the yearsended June 30, 2007 and June 30, 2005. 

**NOTE 14—DEFINEDBENEFIT PLAN**

The Company has a noncontributory (cash balance)defined benefit pension plan covering all employees of the Company and itswholly-owned subsidiaries who have attained the age of 21 and have completed1,000 hours in a plan year. The benefits are based on 6% of each eligibleparticipant’s annual compensation, plus income earned in the accounts at a ratedetermined annually based on 30-year treasury note rates. The Company’s fundingpolicy is to make the minimum annual required contribution plus such amounts asthe Company may determine to be appropriate from time to time. One hundredpercent vesting occurs after five years with a retirement age of the later ofage 65 or 5 years of participation. 

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

Statement of Financial Accounting Standards No. 158(SFAS 158) was issued in September 2006 entitled “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans—an amendment of FASBStatements No. 87, 88, 106 and 132R.” SFAS 158 requires recognition of theoverfunded or underfunded status of pension and other postretirement benefitplans on the balance sheet. Under SFAS 158, gains and losses, prior servicecosts and credits and any remaining transition amounts under SFAS 87 and SFAS106 that have not yet been recognized through net periodic benefit cost will berecognized in accumulated other comprehensive income, net of tax effects, untilthey are amortized as a component of net periodic cost. Also, the measurementdate—the date at which the benefit obligation and plan assets are measured—isrequired to be the company’s fiscal year-end. As required by SFAS 158, theCompany adopted the balance sheet recognition provisions at June 30th, 2007 andwill adopt the year-end measurement date in 2009. The following summarizes theimpact of the initial adoption of SFAS 158, as of June 30, 2007. 

Theincremental effect of applying SFAS 158 on the following balance sheet items isas follows:

| ** **                                     | ** ** | **Impact of SFAS 158** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                     | ** ** | **Before**                            | ** ** | **Adjustment** | ** ** | **After** | ** ** |
| ** **                                     | ** ** | **Dollars in thousands**    | ** ** |
| Prepaid Expenses  and Other Assets             | ** ** | $                                     | 4,453      |   |   | $ | (158 | ) |   | $ | 4,295 |   |
| Deferred Income  Taxes                         | ** ** | 1,955                                 |       |   | 60 |   |   | 2,015 |   |
| Total Assets                                   | ** ** | 1,001,552                             |       |   | (98 | ) |   | 1,001,454 |   |
| Accumulated Other  Comprehensive Income (loss) | ** ** | (1,404                                | )          |   | (98 | ) |   | (1,502 | ) |
| Total Stockholder’s  Equity               | ** ** | 62,368                                |       |   | (98 | ) |   | 62,270 |   |
|                                                |            |                                       |            |  |  |  |  |  |  |  |  |  |

 

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**Informationrelative to the components of net periodic benefit cost measured as of April30, 2007 and April 30, 2006 for the Company’s defined benefit plan is presentedbelow.**

| ** **                             | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|
| Changes in benefit  obligations        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefit obligations, beginning         | ** ** | **$**      | **5,353**  | ** ** | $          | 5,021 |   |
| Service cost                           | ** ** | **466**    | ** ** | 466        |       |
| Interest cost                          | ** ** | **391**    | ** ** | 365        |       |
| Benefits paid                          | ** ** | **(579**   | **)**      | (143       | )          |
| Actuarial (gain) loss                  | ** ** | **(25**    | **)**      | (356       | )          |
| Benefit obligations, ending            | ** ** | **$**      | **5,606**  | ** ** | $          | 5,353 |   |
| Changes in plan  assets                | ** ** | ** ** | ** ** |       |       |
| Fair value of plan assets, beginning   | ** ** | **$**      | **5,387**  | ** ** | $          | 4,240 |   |
| Actual return on plan assets           | ** ** | **470**    | ** ** | 680        |       |
| Company contributions                  | ** ** | **621**    | ** ** | 610        |       |
| Benefits paid                          | ** ** | **(579**   | **)**      | (143       | )          |
| Fair value of plan assets, ending      | ** ** | **$**      | **5,899**  | ** ** | $          | 5,387 |   |
| Funded status at  end of year          | ** ** | ** ** | ** ** |       |       |
| Plan assets (deficient) of obligations | ** ** | **$**      | **293**    | ** ** | $          | 34 |   |
| Unrecognized losses                    | ** ** | **158**    | ** ** | 216        |       |
| Prepaid benefit cost at end of year    | ** ** | **$**      | **451**    | ** ** | $          | 250 |   |
| Accumulated  benefit obligation        | ** ** | **$**      | **4,714**  | ** ** | $          | 4,455 |   |

 

Thecomponents of pension cost for the fiscal years ended June 30, consist of thefollowing:

| ** **                         | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005** | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Service cost                       | ** ** | **$**      | **466**    |       | $          | 466      |       | $ | 454 |   |
| Interest cost                      | ** ** | **391**    |       | 365        |       | 366      |       |
| Expected return  on plan assets    | ** ** | **(436**   | **)**      | (373       | )          | (370     | )          |
| Amortization of  prior losses      | ** ** | **—** |       | —     |       | 33       |       |
| Amortization of  transition asset  | ** ** | **—** |       | 11         |       | 12       |       |
| Total costs  recognized in expense | ** ** | **$**      | **421**    | ** ** | **$**      | **469**  |       | $ | 495 |   |

 

**Thecomponents in the balance sheet consist of:**

| ** **                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Prepaid benefit  cost                                 | ** ** | **$**    | **451**    |     | $          | 250 |   |
| Net asset  recorded in the consolidated balance sheet | ** ** | **$**    | **451**    |     | $          | 250 |   |

 

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

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

| ** **                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Discount rate—pre-retirement  | ** ** | **7.50** | **%**      | 7.50     | %          |
| Discount rate—post-retirement | ** ** | **4.82** | **%**      | 4.58     | %          |
| Rate of compensation  increase     | ** ** | **4.00** | **%**      | 4.00     | %          |

 

**Theweighted-average assumptions used to determine net periodic benefit cost forfiscal years ended June 30, are as follows:**

| ** **                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Discount rate—pre-retirement         | ** ** | **7.50** | **%**      | 7.50     | %          |
| Discount rate—post-retirement        | ** ** | **4.58** | **%**      | 4.55     | %          |
| Expected  long-term return on plan assets | ** ** | **8.00** | **%**      | 8.00     | %          |
| Rate of compensation  increase            | ** ** | **4.00** | **%**      | 4.00     | %          |

 

**The overall expected long-term rateof return on assets is based on economic forecasts and projected assetallocation.**

**TheCompany’s pension plan weighted-average asset allocations by asset category areas follows:**

| ** **                   | ** ** | **2007**   | ** ** |
|------------------------------|------------|------------|------------|
| ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Actual Asset** | ** ** | **Target Asset** | ** ** |
| ** **                   | ** ** | **Market** | ** ** | **Unrealized** | ** ** | **Mix as a % of** | ** ** | **Mix as a % of** | ** ** |
| **Investment Category** | ** ** | ** ** | ** ** | **Value** | ** ** | **Gain/(Loss)** | ** ** | **Market Value** | ** ** | **Market Value** | ** ** |
| Equities                     |       | $          | 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 | % |   |
|                              |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                   | ** ** | **2006**   | ** ** |
|------------------------------|------------|------------|------------|
| ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Actual Asset** | ** ** | **Target Asset** | ** ** |
| ** **                   | ** ** | **Market** | ** ** | **Unrealized** | ** ** | **Mix as a % of** | ** ** | **Mix as a % of** | ** ** |
| **Investment Category** | ** ** | ** ** | ** ** | **Value** | ** ** | **Gain/(Loss)** | ** ** | **Market Value** | ** ** | **Market Value** | ** ** |
| Equities                     |       | $          | 3,677      |   |   | $ | 743 |   |   |   | 68.3 | % |   |   | 65.0 | % |   |
| Fixed                        |       | 1,312      |       |   | (18 | ) |   |   | 24.3 | % |   |   | 30.0 | % |   |
| Cash and cash  equivalents   |       | 398        |       |   | — |   |   |   | 7.4 | % |   |   | 5.0 | % |   |
| Total pension  plan assets   |       | $          | 5,387      |   |   | $ | 725 |   |   |   | 100.0 | % |   |   | 100.0 | % |   |
|                              |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The objective of the pension plan investment policyfor equities is to pursue a growth strategy that results in capitalappreciation. The objective of the pension plan investment policy for fixedrate instruments and cash equivalents is to ensure safety of principal andinterest.

The Company expects to contribute $562 to its pensionplan in fiscal 2008.

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

EstimatedFuture Benefit Payments: The following benefit payments which reflect expectedfuture service, as appropriate, are expected to be paid during the years endedJune 30:

| 2008              |   | $     | 287    |   |
|-------------------|--------|-------|--------|--------|
| 2009              |   | 438   |   |
| 2010              |   | 1,045 |   |
| 2011              |   | 354   |   |
| 2012              |   | 586   |   |
| Years 2013 - 2017 |   | 2,426 |   |

 

**NOTE 15—RETIREMENTSAVINGS PLAN**

**TheCompany has a retirement savings plan covering all employees of the Company whohave attained age 21 and completed one expected year of service during whichthey worked at least 1,000 hours. The plan is intended to be a qualified profitsharing plan with a cash or deferred arrangement pursuant to IRS Code Section401(k) and regulations issued there under. The plan allows voluntarycontributions by eligible employees, and also allows discretionarycontributions by the Company as determined annually by the Board of Directors.The total compensation cost charged to expense related to the plan was $286,$265 and $275, for 2007, 2006, and 2005, respectively.**

**NOTE 16—STOCK-BASEDCOMPENSATION PLANS**

During fiscal 2003, the Company established the 2002Stock 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 todirectors and employees of the Bank. Options granted under the Option Plan maybe either options that qualify as Incentive Stock Options, as defined in theCode, or options that do not qualify. Options granted may have a maximum termof 10 years. The 2002 Option Plan also provides for the award of stockappreciation rights, limited stock appreciation rights and restricted stock. 

The Company has a long-term incentive plan, whichprovides for the grant of restricted stock awards and for stock appreciationrights (SARs) settled in stock under the option plans if the Company achievescertain performance levels. For fiscal years 2007, 2006 and 2005, the Companymet a performance level in the plan and, accordingly, for fiscal 2007restricted stock with a value of $82 and SARs with a value of $82 will beissued in fiscal 2008. During fiscal years 2007 and 2006, 4,078 and 76,091shares, respectively of restricted stock were issued and 20,953 SARs wereissued in fiscal 2007 under the 2002 Option Plan. The 2007 issued restrictedshares and SARs vest 25% in each of the first through fourth anniversaries ofthe date of grant. The 2006 issued shares vest 331¤3% after 3years, 662¤3%after 4 years, and 100% after 5 years of continued employment. The issuancevalue of the restricted shares was $65 and $1,314 for 2007 and 2006,respectively, and is being amortized over the vesting period of four and fiveyears respectively, with the unamortized balance included in additional paid incapital in the consolidated statements of financial condition. During fiscalyears 2007, 2006 and 2005, $388, $388 and $195, respectively, were recorded asamortization expense. The issuance value of the 2007 SARs was $65 and is beingamortized over the vesting period of four years. During fiscal year 2007, $11was recorded as amortization expense. 

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

In connection with meeting a performance level of thelong-term incentive plan, 4,815 shares of restricted stock and 26,320 stockappreciation rights (“SARs”) were issued in fiscal 2008 under the plan. Boththe restricted shares and SARs issued in fiscal 2008 will have a four-yearvesting period in which 25% of the stock vests in each of the first throughfourth anniversaries of the date of grant.

During fiscal 2004, the Company created a pool of12,100 restricted shares for grants under the 2002 Option Plan (2002 Pool). Thekey provisions of the 2002 Pool include: outright grant of shares withrestrictions as to sale, transfer, and pledging; during the restriction period,the grantee receives dividends and has voting rights related to the sharesawarded; and all nonvested shares are forfeited upon termination. During fiscalyears 2007 and 2006, 1,747 and 4,657 restricted shares, respectively, wereawarded under the Pool. The issuance value of these restricted shares was $31and $80 in 2007 and 2006, respectively, and is being amortized over theirvesting periods with the unamortized balance included in additional paid incapital in the consolidated balance sheet. During fiscal years 2007, 2006, and2005, $30, $37 and $29, respectively, were recorded as amortization expense. 

Thefair value of each incentive stock option and each stock appreciation rightgrant is estimated at the grant date using the Black-Scholes option pricingmodel. The following assumptions were used for grants in fiscal years 2007,2006 and 2005:

| ** **               | ** ** | **2007**  | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Expected  volatility     | ** ** | **23.00** | **%**      | 24.00    | %          | 24.00    | %          |
| Expected dividend  yield | ** ** | **2.63**  | **%**      | 2.75     | %          | 2.69     | %          |
| Risk-free  interest rate | ** ** | **4.61**  | **%**      | 4.09     | %          | 3.73     | %          |
| Expected term (in years) | ** ** | **4**     | ** ** | 7        |       | 7        |       |

 

Stockoption/SARs activity for the fiscal years ended June 30, are as follows:

| ** **                 | ** ** | **2007**   | ** ** |
|----------------------------|------------|------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **Average** | ** ** | **Remaining** | ** ** | **Aggregate** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                 | ** ** | **Shares** | ** ** | **Price** | ** ** | **Term** | ** ** | **Value** | ** ** |
| Balance,  beginning July 1 |       | 318,977    |       |   | $ | 12.77 |   |   |   |   |   |   |   |   |   |   |
| Granted                    |       | 20,953     |       |   | 16.00 |   |   |   |   |   |   |   |   |   |   |
| Forfeited                  |       | (15,146    | )          |   | 16.43 |   |   |   |   |   |   |   |   |   |   |
| Exercised                  |       | (60,283    | )          |   | 13.06 |   |   |   |   |   |   |   |   |   |   |
| Balance, ending June 30    |       | 264,501    |       |   | $ | 12.75 |   |   |   | 5.42 |   |   |   | $ | 1,262 |   |   |
| Exercisable at  June 30    |       | 237,898    |       |   | $ | 12.35 |   |   |   | 5.03 |   |   |   | $ | 1,230 |   |   |

 

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

| ** **                      | ** ** | **2006**   | ** ** |
|---------------------------------|------------|------------|------------|
| ** **                      | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| Balance,  beginning July 1 |       | 325,422    |       |   | $ | 12.22 |   |   |   |   |   |   |   |   |   |   |
| Granted                         |       | 30,769     |       |   | 17.27 |   |   |   |   |   |   |   |   |   |   |
| Forfeited                       |       | (3,277     | )          |   | 14.86 |   |   |   |   |   |   |   |   |   |   |
| Exercised                       |       | (33,937    | )          |   | 11.39 |   |   |   |   |   |   |   |   |   |   |
| Balance, ending June 30    |       | 318,977    |       |   | $ | 12.77 |   |   |   | 5.80 |   |   |   | $ | 1,386 |   |   |
| Exercisable at  June 30    |       | 269,628    |       |   | $ | 12.20 |   |   |   | 5.28 |   |   |   | $ | 1,321 |   |   |

 

| ** **                      | ** ** | **2005**   | ** ** |
|---------------------------------|------------|------------|------------|
| ** **                      | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| Balance,  beginning July 1 |       | 331,917    |       |   | $ | 10.20 |   |   |   |   |   |   |   |   |   |   |
| Granted                         |       | 93,016     |       |   | 14.88 |   |   |   |   |   |   |   |   |   |   |
| Forfeited                       |       | (22,899    | )          |   | 11.80 |   |   |   |   |   |   |   |   |   |   |
| Exercised                       |       | (76,612    | )          |   | 9.42 |   |   |   |   |   |   |   |   |   |   |
| Balance, ending June 30    |       | 325,422    |       |   | $ | 12.22 |   |   |   | 6.42 |   |   |   | $ | 2,486 |   |   |
| Exercisable at  June 30    |       | 259,163    |       |   | $ | 11.54 |   |   |   | 5.74 |   |   |   | $ | 2,156 |   |   |

 

The weighted-average grant date fair value of optionsgranted during the fiscal years 2006 and 2005 was $3.83 and $3.46,respectively. The weighted-average grant date fair value of stock appreciationrights during the fiscal year 2007 was $3.11. The total intrinsic value ofoptions exercised during the fiscal years 2007, 2006 and 2005, was $269, $194and $800, respectively. During fiscal years 2007 and 2006, $101 and $188,respectively, were recorded as amortization expense. As of June 30, 2007,there was $49 of total unrecognized compensation cost related to nonvestedstock option and SAR awards. The cost is expected to be recognized over aperiod of 2 years for stock option awards and 3 years for SAR awards. Cashreceived from the exercise of options for the fiscal years 2007, 2006 and 2005,was $787, $386 and $721, respectively. The tax benefit realized for the taxdeductions from cashless option exercises totaled $61, $41 and $53 for thefiscal years 2007, 2006 and 2005, respectively. The company generally usestreasury shares to satisfy stock option exercises. 

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

Restrictedshare activity for the fiscal years ended June 30 follows:

| ** **                    | ** ** | **2007**    | ** ** | **2006**            | ** ** | **2005**   | ** ** |
|-------------------------------|------------|-------------|------------|---------------------|------------|------------|------------|
| ** **                    | ** ** | ** **  | ** ** | **Weighted**        | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                    | ** ** | ** **  | ** ** | **Average**         | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                    | ** ** | ** **  | ** ** | **Grant Date** | ** ** | ** ** | ** ** | **Grant Date** | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                    | ** ** | **Shares**  | ** ** | **Fair Value** | ** ** | **Shares** | ** ** | **Fair Value** | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Nonvested  Balance, beginning |       | **158,159** | ** ** | ** **          | **$**      | **15.85**  |       |   | 91,888 |   |   | $ | 13.62 |   |   | 58,037 |   |   | $ | 12.44 |   |   |
| Granted                       |       | **11,884**  | ** ** | ** **          | **16.78**  |       |       | 85,572 |   |   | 17.42 |   |   | 55,568 |   |   | 14.68 |   |   |
| Vested                        |       | **(17,890** | **)**      | ** **          | **13.82**  |       |       | (15,955 | ) |   | 11.37 |   |   | (15,360 | ) |   | 13.57 |   |   |
| Forfeited                     |       | **(7,442**  | **)**      | ** **          | **15.11**  |       |       | (3,346 | ) |   | 15.85 |   |   | (6,357 | ) |   | 12.24 |   |   |
| Nonvested  Balance, ending    |       | **144,711** | ** ** | ** **          | **$**      | **15.42**  |       |   | 158,159 |   |   | $ | 15.85 |   |   | 91,888 |   |   | $ | 13.62 |   |   |

 

Pretax compensation expense recognized for restrictedshares for the fiscal years 2007, 2006 and 2005, was $418, $425 and $224,respectively. The tax benefit for the fiscal years 2007, 2006 and 2005 was$142, $144 and $76 respectively. As of June 30, 2007, there was $1,429 oftotal unrecognized compensation cost related to restricted shares granted underthe Plan. That cost is expected to be recognized over a period of 4 years. Thetotal fair value of shares vested during the fiscal years 2007, 2006 and 2005was $247, $181 and $208, respectively. 

The Company has a DirectorRestricted Stock Plan which provides that awards of restricted shares of theCompany’s common stock be made to outside directors of the Company. The plan isdesigned to allow for payment of the annual retainer fee in shares of theCompany’s common stock, with the inclusion of an annual cost of livingadjustment based on the Consumer Price Index. Each outside director is entitledto all voting, dividend and distribution rights during the restriction period.The effective date of the plan was July 1, 1997. The plan has 90,750shares allocated to it and is in effect for a period of ten years. Duringfiscal years 2007, 2006 and 2005, 6,041, 4,824 and 6,571, shares were awardedand $103, $96 and $90 of expense was incurred under the plan, respectively, asthe annual retainer for the Company’s Board of Directors. The DirectorRestricted Stock Plan expired on December 31, 2006.

**NOTE 17—ACCUMULATED OTHER COMPREHENSIVE LOSS**

Thecomponents of accumulated other comprehensive loss as of June 30, are asfollows: 

| ** **                                                                                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrealized loss  on securities available for sale net of related tax effect of $(860) and $(1,509) |       | **$**    | **(1,404** | **)**    | $          | (2,462 | ) |
| Unrecognized loss on pension benefits net of related  tax effect of ($60)                                    |       | **(98**  | **)**      | —   |       |
|                                                                                                         |       | **$**    | **(1,502** | **)**    | $          | (2,462 | ) |

 

**NOTE 18—FINANCIAL INSTRUMENTS**

The Bank is a party to financial instruments withoff-balance-sheet risk in the normal course of business to meet the financingneeds of its customers. These financial instruments include commitments toextend credit, standby letters of credit and financial guarantees. Thoseinstruments involve, to varying 

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

degrees, elements ofcredit and interest-rate risk in excess of amounts recognized in theconsolidated statements of financial condition. The contract or notionalamounts of those instruments reflect the extent of the Bank’s involvement inparticular classes of financial instruments.

The Bank’s exposure to credit loss in the event ofnonperformance by the other party to the financial instrument for commitmentsto extend credit, standby letters of credit, and financial guarantees writtenis represented by the contractual notional amount of those instruments. TheBank uses the same credit policies in making commitments and conditionalobligations as it does for on-balance-sheet instruments. 

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

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

Cash and cash equivalents—The carrying amountsreported in the statements of financial condition for cash and cash equivalentsapproximate their fair values. 

Securities—Fair values for investment securities arebased on quoted market prices, except for stock in the Federal Home Loan Bankfor which fair value is assumed to equal cost. 

Loans and leases—Approximately 50% of loans arevariable-rate loans that reprice at various frequencies and have no significantchange in interest rate risk. Fair values on these loans will therefore closelyapproximate their carrying values. The fair values for fixed-rate loans areestimated using discounted cash flow analyses, using interest rates currentlybeing offered for loans with similar terms and credit quality. Leases arestated at cost which equals fair value. 

Accrued interest receivable—The carrying value ofaccrued interest receivable approximates its fair value. 

Servicing rights—Fair values are estimated usingdiscounted cash flows based on current market rates of interest. 

Off-statement-of-financial-condition instruments—Fairvalues for the Company’s off-statement-of-financial-condition instruments(unused lines of credit and letters of credit), which are based upon feescurrently charged to enter into similar agreements taking into account theremaining terms of the agreements and counterparties’ credit standing, are notsignificant. 

Deposits—The fair values for deposits with no definedmaturities equal their carrying amounts, which represent the amount payable ondemand. Fair values for fixed-rate certificates of deposit are estimated usinga discounted cash flow calculation that applies interest rates currently beingoffered on a comparably termed wholesale funding alternative (i.e., FHLBborrowings). 

Borrowed funds—The carrying amounts reported forvariable rate advances approximate their fair values. Fair values forfixed-rate advances and other borrowings are estimated using a discounted cashflow calculation that applies interest rates currently being offered onadvances and borrowings with corresponding maturity dates. 

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

Subordinated debentures payable to trusts—The carryingamounts for subordinated debentures payable to trusts approximate their fairvalues. 

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

Estimatedfair values of the Company’s financial instruments are as follows atJune 30: 

| ** **                                                                       | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                       | ** ** | **2007**          | ** ** | **2006** | ** ** |
| ** **                                                                       | ** ** | **Carrying**      | ** ** | **Fair** | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                                                       | ** ** | **Amount**        | ** ** | **Value** | ** ** | **Amount** | ** ** | **Value** | ** ** |
| Financial assets                                                                 |       |              |       |   |   |   |   |   |   |
| Cash and cash  equivalents                                                       |       | $                 | 22,476     |   | $ | 22,476 |   | $ | 27,037 |   | $ | 27,037 |   |
| Securities                                                                       |       | 142,223           |       | 142,223 |   | 145,518 |   | 145,518 |   |
| Federal Home Loan Bank  stock                                                    |       | 5,058             |       | 5,058 |   | 5,647 |   | 5,647 |   |
| Loans and leases                                                                 |       | 776,247           |       | 763,209 |   | 729,226 |   | 706,249 |   |
| Accrued interest  receivable                                                     |       | 8,495             |       | 8,495 |   | 6,880 |   | 6,880 |   |
| Servicing rights                                                                 |       | 10,871            |       | 15,740 |   | 5,648 |   | 9,102 |   |
| Financial liabilities                                                            |       |              |       |   |   |   |   |   |   |
| Deposits                                                                         |       | 815,864           |       | 813,985 |   | 769,002 |   | 764,359 |   |
| Borrowed funds                                                                   |       | 68,500            |       | 67,570 |   | 91,620 |   | 89,096 |   |
| Subordinated debentures  payable to trusts                                       |       | 27,837            |       | 27,837 |   | 27,837 |   | 27,837 |   |
| Accrued interest payable  and advances by borrowers for taxes and insurance |       | 15,989            |       | 15,989 |   | 11,187 |   | 11,187 |   |
|                                                                                  |            |                   |            |  |  |  |  |  |  |  |  |  |  |

 

**NOTE 19—COMMITMENTS, CONTINGENCIES AND CREDIT RISK**

The Bank originates first mortgage, consumer and otherloans primarily in eastern South Dakota and holds residential and commercialreal estate loans which were purchased from other originators of loans locatedthroughout the United States. Collateral for substantially all consumer loansare security agreements and/or Uniform Commercial Code (UCC) filings on thepurchased asset. Unused lines of credit amounted to $73,851 and $110,256 atJune 30, 2007 and 2006, respectively. Unused letters of credit amounted to$7,861 and $6,530 at June 30, 2007 and 2006, respectively. The lines ofcredit and letters of credit are collateralized in substantially the samemanner as loan receivable.

The Bank had outstanding commitments to originate orpurchase loans of $20,456 and to sell loans of approximately $11,081 atJune 30, 2007. The portion of commitments to originate or purchase fixedrate loans totaled $10,745 with a range in interest rates of 4.75% to 8.125%.No losses are expected to be sustained in the fulfillment of any of thesecommitments.

The Company is involved in various claims and legalactions arising in the ordinary course of business. In the opinion ofmanagement, based upon consultation with legal counsel, the ultimatedisposition of these matters will not have a material adverse effect on theCompany’s consolidated financial position.

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

**NOTE 20—CASH FLOW INFORMATION**

Changesin other assets and liabilities for the years ended June 30, 2007, 2006,and 2005, consist of:

| ** **                                                      | ** ** | **2007**  | ** ** | **2006**   | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------|------------|-----------|------------|------------|------------|----------|------------|
| (Increase)  decrease in accrued interest receivable             | ** ** | **$**     | **(1,615** | **)**      | $          | (1,793   | )          | $ | (1,031 | ) |
| Earnings on cash  value of life insurance                       | ** ** | **(506**  | **)**      | (483       | )          | (561     | )          |
| Increase  (decrease) in net deferred loan fees and other assets | ** ** | **(600**  | **)**      | 884        |       | 750      |       |
| Increase  (decrease) in accrued expenses and other liabilities  |       | **6,738** |       | 732        |       | 352      |       |
|                                                            | ** ** | **$**     | **4,017**  | ** ** | $          | (660     | )          | $ | (490 | ) |

 

**NOTE 21—SUBSEQUENT EVENTS**

On July 7, 2007, the Company exercised its optionto redeem the 5,000 shares totaling $5,000 of Company Obligated MandatorilyRedeemable Preferred Securities of Trust II

On July 7, 2007  the Company, in return,  purchased 5,000 shares totaling $5,000 ofCompany Obligated Mandatorily Redeemable Preferred Securities of Trust VIresulting in reduced interest expense

**NOTE 22—FINANCIAL INFORMATION OF HF FINANCIAL CORP. (PARENTONLY)**

The Company’s condensedbalance sheets as of June 30, 2007 and 2006 and related condensedstatements of income and cash flows for each of the years in the three-yearperiod ended June 30, 2007, are as follows:

**CondensedBalance Sheets**

| ** **                   | ** ** | **2007**   | ** ** | **2006** | ** ** |
|------------------------------|------------|------------|------------|----------|------------|
| Assets                       |       |       |       |     |       |
| Cash primarily with the Bank | ** ** | **$**      | **2,727**  |     | $          | 2,081 |   |
| Investments in subsidiaries  | ** ** | **86,292** |       | 80,175   |       |
| Investment securities        | ** ** | **181**    |       | 67       |       |
| Other                        | ** ** | **1,483**  |       | 1,786    |       |
|                         | ** ** | **$**      | **90,683** |     | $          | 84,109 |   |
| Liabilities                  |       |       |       |     |       |
| Other borrowings             | ** ** | **$**      | **27,837** |     | $          | 27,837 |   |
| Other liabilities            | ** ** | **576**    |       | 214      |       |
| Stockholders’ equity    | ** ** | **62,270** |       | 56,058   |       |
|                         | ** ** | **$**      | **90,683** |     | $          | 84,109 |   |

 

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

**CondensedStatements of Income**

| ** **                                      | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Dividends from  subsidiaries                    |       | **$**      | **2,950**  | ** ** | $          | 1,500    |       | $ | 3,716 |   |
| Interest and  other income                      |       | **129**    | ** ** | 3,697      |       | 98       |       |
| Expenses                                        |       | **(3,245** | **)**      | (2,669     | )          | (2,207   | )          |
| Income tax  benefit                             |       | **1,034**  | ** ** | (389       | )          | 736      |       |
| Equity in  undistributed income of subsidiaries |       | **4,515**  | ** ** | 2,369      |       | 2,822    |       |
| Net income                                      |       | **$**      | **5,383**  | ** ** | $          | 4,508    |       | $ | 5,165 |   |

 

**ConsolidatedCash Flows**

| ** **                                                                         | ** ** | **2007**    | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|
| Cash Flows From  Operating Activities                                              |       |        |       |       |       |
| Net income                                                                         |       | **$**       | **5,383**  | ** ** | $          | 4,508 |   |
| Adjustments to  reconcile net income to net cash provided by operating  activities |       | ** **  | ** ** |       |       |
| Amortization                                                                       |       | **317**     | ** ** | 34         |       |
| (Gain) on sale of land                                                             |       | **—**  | ** ** | (3,557     | )          |
| Equity in (earnings) of subsidiaries                                               |       | **(7,465**  | **)**      | (3,869     | )          |
| Cash dividends received from subsidiaries                                          |       | **2,950**   | ** ** | 1,500      |       |
| Increase (decrease) in liabilities                                                 |       | **362**     | ** ** | (886       | )          |
| Other, net                                                                         |       | **(21**     | **)**      | (281       | )          |
| Net cash provided  by (used in) operating activities                               |       | **1,526**   | ** ** | (2,551     | )          |
| Cash Flows From  Investing Activities                                              |       | ** **  | ** ** |       |       |
| Purchase of investment securities                                                  |       | **(116**    | **)**      | (28        | )          |
| Proceeds from sale of land                                                         |       | **—**  | ** ** | 4,863      |       |
| Capital contribution to the Bank                                                   |       | ** **  | ** ** | (950       | )          |
| Net cash provided  by (used in) investment activities                              |       | **(116**    | **)**      | 3,885      |       |
| Cash Flows From  Financing Activities                                              |       | ** **  | ** ** |       |       |
| Cash dividends paid                                                                |       | **(1,662**  | **)**      | (1,596     | )          |
| Proceeds from issuance of common stock                                             |       | **904**     | ** ** | 2,052      |       |
| Proceeds from issuance of subordinated debentures                                  |       | **10,000**  | ** ** | —     |       |
| Redemption of subordinated debentures                                              |       | **(10,000** | **)**      | —     |       |
| Payments on other borrowings                                                       |       | **—**  | ** ** | (705       | )          |
| Payments of debt issue costs                                                       |       | **(6**      | **)**      | (7         | )          |
| Net cash provided  by (used in) financing activities                               |       | **(764**    | **)**      | (256       | )          |
| Increase (decrease) in cash                                                        |       | **646**     | ** ** | 1,078      |       |
| Cash at beginning of period                                                        |       | **2,081**   | ** ** | 1,003      |       |
| Cash at end of  period                                                             |       | **$**       | **2,727**  | ** ** | $          | 2,081 |   |

 

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**HF FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2007 AND 2006 (DOLLARS IN THOUSANDS, except share data)**

**NOTE 23—QUARTERLYFINANCIAL INFORMATION (UNAUDITED)**

| ** **                                | ** ** | **1st**                                           | ** ** | **2nd**     | ** ** | **3rd**     | ** ** | **4th**     | ** ** |
|-------------------------------------------|------------|---------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                | ** ** | **Quarter**                                       | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands except per share  data)** | ** ** |
| *Fiscal Year 2007*                        |       |                                              |       |        |       |        |       |        |       |
| Total interest income                     |       | $                                                 | 15,078     |        | $          | 15,663      |       | $           | 15,360     |   | $ | 15,773 |   |
| Net interest  income                      |       | 6,418                                             |       | 6,060       |       | 6,403       |       | 6,753       |       |
| Provision for  losses on loans and leases |       | 291                                               |       | 461         |       | 34          |       | 412         |       |
| Net income                                |       | 1,097                                             |       | 2,111       |       | 1,034       |       | 1,141       |       |
| Basic earnings per share                  |       | $                                                 | 0.28       |        | $          | 0.53        |       | $           | 0.26       |   | $ | 0.28 |   |
| Diluted earnings  per share               |       | 0.27                                              |       | 0.52        |       | 0.25        |       | 0.27        |       |
| *Fiscal  Year 2006*                       |       |                                              |       |        |       |        |       |        |       |
| Total interest income                     |       | $                                                 | 12,472     |        | $          | 13,143      |       | $           | 13,466     |   | $ | 14,330 |   |
| Net interest  income                      |       | 6,335                                             |       | 6,393       |       | 6,382       |       | 6,539       |       |
| Provision for  losses on loans and leases |       | 462                                               |       | 3,630       |       | 418         |       | 769         |       |
| Net income                                |       | 1,023                                             |       | 1,299       |       | 1,250       |       | 936         |       |
| Basic earnings per share                  |       | $                                                 | 0.26       |        | $          | 0.33        |       | $           | 0.32       |   | $ | 0.24 |   |
| Diluted earnings per  share               |       | 0.26                                              |       | 0.33        |       | 0.31        |       | 0.23        |       |

 

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

Not applicable.

**Item 9A.**                *Controls and Procedures*

As of June 30, 2007,an evaluation was performed by the Company’s management, including theCompany’s Chairman, President and Chief Executive Officer and the Company’sExecutive Vice President, Chief Financial Officer and Treasurer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act). Based upon, and as of the date of that evaluation, theCompany’s Chairman, President and Chief Executive Officer and the Company’sExecutive Vice President, Chief Financial Officer and Treasurer concluded thatthe Company’s disclosure controls and procedures were effective, in allmaterial respects, to ensure that information required to be disclosed in thereports the Company files and submits under the Exchange Act is recorded,processed, summarized and reported as and when required. There were nosignificant changes in the Company’s internal control over financial reportingor identified in the above-referenced evaluation that materially affected, orare reasonably likely to materially effect, the Company’s internal control overfinancial reporting.

**Item 9B.**               *Other Information*

None.

**PART III**

**Item 10.**                 *Directors, Executive Officers and Corporate Governance*

**Compliance withSection 16(a) of the Exchange Act**

Information regardingcompliance 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 theCompany’s definitive Proxy Statement for the Annual Meeting of Stockholders tobe held in 2007, a copy of which will be filed not later than 120 days afterJune 30, 2007 (the “2007 Proxy Statement”).

**Code of Ethics**

Information regarding theCompany’s Code of Conduct and Ethics is incorporated by reference to thediscussion under the heading “Code of Conduct and Ethics” in the Company’s 2007Proxy Statement.

**Directors**

Information regardingDirectors of the Company is incorporated by reference to the discussion underthe heading “Information with Respect to Nominees and Continuing Directors” inProposal 1 of the Company’s 2007 Proxy Statement.

**Audit Committee andAudit Committee Financial Expert**

Information regarding theCompany’s Audit Committee, including identification of each committee memberand the audit committee financial expert, is incorporated by reference to thediscussion under the heading “Meetings of the Board of Directors, Compensationof Directors, Committees of the Board of Directors and Independent Directors”in Proposal 1 of the Company’s 2007 Proxy Statement.

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**DirectorNominations**

Information regardingmaterial changes, if any, to the procedures by which the Company’s stockholdersmay recommend nominees to the Company’s Board of Directors is incorporated byreference to the discussion under the heading “Director Nominations” in Proposal1 of the Company’s 2007 Proxy Statement.

**Executive Officers**

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

**Item 11.**                 *Executive Compensation*

Information concerningexecutive compensation is incorporated by reference to the discussion under theheading “Executive Compensation” in the Company’s 2007 Proxy Statement.Information contained under the headings “Report of the Board CompensationCommittee on Executive Compensation” and “Stockholder Return PerformancePresentation” is not incorporated herein.

**Item 12.**                 *Security Ownership of Certain Beneficial Owners and Management*

Information concerning security ownership of certainbeneficial owners, directors and certain executive officers is incorporated byreference from the discussion under the heading “Security Ownership of CertainBeneficial Owners and Management” in the Company’s 2007 Proxy Statement.

See “Equity CompensationPlan” under Part II, Item 5 “Market for Registrant’s Common Equity andRelated Stockholder Matters” of this Form 10-K for more informationon equity compensation.

**Item 13.**                 *Certain Relationships and Related Transactions, and DirectorIndependence*

Information concerningcertain relationships and related transactions is incorporated by referencefrom the discussion under the heading “Executive Compensation—CertainTransactions” in the Company’s 2007 Proxy Statement.

**Item 14.**                 *Principal Accounting Fees and Services*

Information concerning the fees for professionalservices rendered by the Company’s principal accountant is incorporated byreference from the discussion under the heading “Executive Compensation—Reportof the Audit Committee—Audit Fees, Audit Related Fees, Tax Fees and All OtherFees” in the Company’s 2007 Proxy Statement. Information concerning thepre-approval policies and procedures of the Company’s Audit Committee isincorporated by reference from the discussion under the heading “AuditCommittee Pre-Approval Policies” in Proposal 1 of the Company’s 2007 ProxyStatement.

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**PART IV**

**Item 15.**                 *Exhibits and Financial Statement Schedules*

(a)           The following documentsare as part of this Form 10-K:

(1)         See “HF Financial Corp.Index to Consolidated Financial Statements” under Item 8, “Financial Statementsand Supplementary Data” of this report.

(2)         All supplementalschedules are omitted because of the absence of conditions under which they arerequired or because the information is shown in the Consolidated FinancialStatements or notes thereto.

(3)         Exhibits
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                              | ** ** | **Identification of Exhibit** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|
| 3.1*             |       | Articles of Incorporation.                                                                                                                                                                                                                                                              |
| 3.2*             |       | By-Laws.                                                                                                                                                                                                                                                                                |
| 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).   |
| 10.5             |       | 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  July 18, 2007, between HF Financial Corp. and First Tennessee Bank, NA.                                                                                                                                                                                    |

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| 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.                                                                                                                                                                                                                                           |
| 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).                                                                        |
| 10.19#  |   | 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). |

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| 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). |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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.                                                                                                                                                                                        |

----

*                    Filedherewith.

#                 Management or compensatoryplan or arrangements required to be filed.

All of such previously filed documents are herebyincorporated in this Annual Report on Form 10-K by reference inaccordance with Item 601 of Regulation S-K.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
|        | HF FINANCIAL  CORP. |
|--------|---------------------|
|   | By                  |    /s/ CURTIS L. HAGE |
|   |                | Curtis L. Hage, *Chairman, President and* |
|   |                | *Chief Executive Officer* |
|   |                | *(Duly Authorized Representative)* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons in the capacities and on the datesindicated.
|    /s/ CURTIS L. HAGE                                   |                |                                                                            |    /s/ DARREL L. POSEGATE    |
|------------------------------------------------------------------------|---------------------|---------------------------------------------------------------------------------|---------------------------------------------|
| Curtis L. Hage, *Chairman, President and*                              |                | Darrel L. Posegate, *Executive  Vice President, Chief*                          |
| *Chief Executive Officer (Principal Executive and Operating  Officer)* |                | *Financial Officer and Treasurer (Principal  Financial and Accounting Officer)* |
| Date:                                                                  | September 28,  2007 |                                                                            |                                        | Date: | September 28, 2007 |   |
|    /s/ THOMAS L. VAN WYHE                               |                |                                                                            |    /s/ ROBERT L. HANSON      |   |
| Thomas L. Van Wyhe, *Director*                                         |                | Robert L. Hanson, *Director*                                                    |                                        |
| Date:                                                                  | September 28,  2007 |                                                                            |                                        | Date: | September 28, 2007 |   |
|    /s/ STEVEN R. SERSHEN                                |                |                                                                            |    /s/ WILLIAM G. PEDERSON   |   |
| Steven R. Sershen, *Director*                                          |                | William. G. Pederson, *Director*                                                |                                        |
| Date:                                                                  | September 28,  2007 |                                                                            |                                        | Date: | September 28, 2007 |   |
|    /s/ CURTIS J. BERNARD                                |                |                                                                            |    /s/ CHRISTINE E. HAMILTON |   |
| Curtis J. Bernard, *Director*                                          |                | Christine E. Hamilton, *Director*                                               |                                        |
| Date:                                                                  | September 28,  2007 |                                                                            |                                        | Date: | September 28, 2007 |   |

 

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**Indexto Exhibits**

| Exhibit  Number | ** ** | ** **                                                                                                                                   | ** ** | ** ** |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 3.1             |       | Articles of  Incorporation                                                                                                                   |
| 3.2             |       | By-Laws                                                                                                                                      |
| 10.10           |       | Letter Agreement  dated July 18, 2007 between HF Financial Corp. and First Tennessee  Bank, NA                                          |
| 10.16           |       | Form of HF  Financial Corp. 2002 Stock Option and Incentive Plan Stock Option Agreement                                                      |
| 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 |

 

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