UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

	For the Quarterly Period Ended December 31, 2008

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from to

Commission file number 0-19972

HF FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Delaware		46-0418532
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

225 South Main Avenue,
Sioux Falls, SD		57104
(Address of principal executive offices)		(ZIP Code)

(605) 333-7556

(Registrant’s telephone number, including area code)

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

Yes x No o

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company x

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

Yes o No x

As of February 6, 2009, there were 4,021,121 shares of the Registrant’s common stock outstanding.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands)

	December 31, 2008			June 30, 2008
	(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents	$	25,882		$	21,170
Securities available for sale	254,389			225,004
Federal Home Loan Bank stock	12,476			11,245
Loans held for sale	14,027			8,796

Loans and leases receivable	811,289			783,710
Allowance for loan and lease losses	(8,133		)	(5,933		)
Net loans and leases receivable	803,156			777,777

Accrued interest receivable	8,335			7,540
Office properties and equipment, net of accumulated depreciation	15,053			14,849
Foreclosed real estate and other properties	369			643
Cash value of life insurance	14,323			14,050
Servicing rights	11,412			11,189
Goodwill, net	4,951			4,951
Other assets	8,779			6,280
Total assets	$	1,173,152		$	1,103,494

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Deposits	$	772,917		$	784,237
Advances from Federal Home Loan Bank and other borrowings	252,769			198,454
Subordinated debentures payable to trusts	27,837			27,837
Advances by borrowers for taxes and insurance	10,988			10,795
Accrued expenses and other liabilities	16,981			17,968
Total liabilities	1,081,492			1,039,291

STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized, 25,000 shares issued at December 31, 2008	—			—
Series A Junior Participating Preferred Stock, $1.00 stated value, 50,000 shares authorized, none outstanding	—			—
Common stock, $.01 par value, 10,000,000 shares authorized, 6,104,822 and 6,035,447 shares issued at December 31, 2008 and June 30, 2008, respectively	61			60
Common stock subscribed for but not issued	—			95
Additional paid-in capital	47,792			21,905
Retained earnings, substantially restricted	78,951			76,041
Accumulated other comprehensive (loss), net of related deferred tax effect	(4,247		)	(3,001		)
Less cost of treasury stock, 2,083,455 and 2,083,455 shares at December 31, 2008 and June 30, 2008, respectively	(30,897		)	(30,897		)
Total stockholders’ equity	91,660			64,203
Total liabilities and stockholders’ equity	$	1,173,152		$	1,103,494

See accompanying notes to unaudited consolidated financial statements.

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HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, except share data)

(Unaudited)

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2008		2007		2008		2007
Interest, dividend and loan fee income:
Loans and leases receivable	$	12,646	$	13,879	$	25,664	$	27,999
Investment securities and interest-earning deposits	2,920		2,206		5,733		4,071
	15,566		16,085		31,397		32,070
Interest expense:
Deposits	4,132		6,913		8,709		14,411
Advances from Federal Home Loan Bank and other borrowings	2,427		2,176		4,992		3,995
	6,559		9,089		13,701		18,406
Net interest income	9,007		6,996		17,696		13,664

Provision for losses on loans and leases	—		295		387		620

Net interest income after provision for losses on loans and leases	9,007		6,701		17,309		13,044

Noninterest income:
Fees on deposits	1,518		1,355		3,069		2,768
Loan servicing income	534		542		1,091		1,047
Gain on sale of loans, net	285		439		536		698
Trust income	153		249		375		498
Gain on sale of securities, net	45		—		125		—
Other	394		381		782		770
	2,929		2,966		5,978		5,781
Noninterest expense:
Compensation and employee benefits	5,828		4,788		10,949		9,231
Occupancy and equipment	1,012		981		1,989		1,918
Check and data processing expense	652		608		1,274		1,221
Marketing	329		299		667		562
Foreclosed real estate and other properties, net	96		37		213		80
Other	1,259		995		2,487		1,840
	9,176		7,708		17,579		14,852

Income before income taxes	2,760		1,959		5,708		3,973

Income tax expense	914		708		1,887		1,375
Net income	$	1,846	$	1,251	$	3,821	$	2,598

Comprehensive income	$	1,031	$	1,539	$	2,574	$	3,603

Cash dividends declared per share	$	0.1125	$	0.1075	$	0.1125	$	0.2150

Earnings per common share:
Basic	$	0.46	$	0.32	$	0.96	$	0.65
Diluted	$	0.46	$	0.31	$	0.95	$	0.64

See accompanying notes to unaudited consolidated financial statements.

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HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	Six Months Ended December 31,
	2008			2007
Cash flows from operating activities
Net income	$	3,821		$	2,598
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for losses on loans and leases	387			620
Depreciation	842			850
Amortization of discounts and premiums on securities and other	955			787
Stock based compensation	194			375
Net change in loans held for resale	(4,695		)	3,938
(Gain) on sale of loans, net	(536		)	(698		)
Realized (gain) on sale of securities, net	(125		)	(75		)
Losses and provision for losses on sales of foreclosed real estate and other properties, net	17			15
Change in other assets and liabilities	(4,793		)	(4,436		)
Net cash provided by (used in) operating activities:	(3,933		)	3,974

Cash flows from investing activities
Loan participations purchased	(969		)	(4,911		)
Net change in loans outstanding	(25,209		)	10,833
Securities available for sale:
Sales and maturities and repayments	43,835			26,301
Purchases	(74,342		)	(46,430		)
Purchase of Federal Home Loan Bank stock	(5,565		)	(4,493		)
Redemption of Federal Home Loan Bank stock	4,334			1,149
Purchase of office properties and equipment	(1,046		)	(889		)
Purchase of servicing rights	(769		)	(955		)
Proceeds from sale of foreclosed real estate and other properties, net	405			209
Net cash (used in) investing activities:	(59,326		)	(19,186		)

Cash flows from financing activities
Net (decrease) in deposit accounts	(11,320		)	(43,968		)
Proceeds of advances from Federal Home Loan Bank and other borrowings	1,408,730			822,949
Payments on advances from Federal Home Loan Bank and other borrowings	(1,354,415		)	(761,092		)
Proceeds from issuance of subordinated debentures	—			5,000
Redemption of subordinated debentures	—			(5,000		)
Increase in advances by borrowers	193			616
Purchase of treasury stock	—			(1,243		)
Proceeds from issuance of preferred stock	25,000			—
Proceeds from issuance of common stock	694			364
Cash dividends paid	(911		)	(848		)
Net cash provided by financing activities:	67,971			16,778
Increase in cash and cash equivalents	4,712			1,566
Cash and cash equivalents
Beginning	21,170			22,476
Ending	$	25,882		$	24,042

Supplemental Disclosures of Cash Flows Information
Cash payments for interest	$	15,147		$	18,426
Cash payments for income and franchise taxes, net	1,669			1,850

See accompanying notes to unaudited consolidated financial statements.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Six Months Ended December 31, 2008 and 2007

(Unaudited)

NOTE 1. SELECTED ACCOUNTING POLICIES

Basis of presentation:

The consolidated financial information of HF Financial Corp. (the “Company”) and its wholly-owned subsidiaries included in this Quarterly Report on Form 10-Q is unaudited. However, in the opinion of management, adjustments (consisting of normal recurring adjustments) necessary for a fair presentation for the interim periods have been included. Results for any interim period are not necessarily indicative of results to be expected for the fiscal year. Interim consolidated financial statements and the notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2008 (“Fiscal 2008”), filed with the Securities and Exchange Commission. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practice within the industry.

The interim consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, Home Federal Bank (the “Bank”), HF Financial Group, Inc. (“HF Group”) and HomeFirst Mortgage Corp. (the “Mortgage Corp.”), and the Bank’s wholly-owned subsidiaries, Mid America Capital Services, Inc. (“Mid America Capital”), Hometown Investment Services, Inc. (“Hometown”), Home Federal Securitization Corp. (“HFSC”), Mid-America Service Corporation and PMD, Inc. The interim consolidated financial statements reflect the deconsolidation of the wholly-owned subsidiary trusts of the Company: HF Financial Capital Trust III (“Trust III”), HF Financial Capital Trust IV (“Trust IV”), HF Financial Capital Trust V (“Trust V”) and HF Financial Capital Trust VI (“Trust VI”). See Note 10 of “Notes to Consolidated Financial Statements.” All intercompany balances and transactions have been eliminated in consolidation.

NOTE 2. REGULATORY CAPITAL

The following table sets forth the Bank’s compliance with its minimum capital requirements for a well-capitalized institution at December 31, 2008:

	Amount		Percent
	(Dollars in Thousands)
Tier I (core) capital (to adjusted total assets):
Required	$	58,589	5.00	%
Actual	93,714		8.00
Excess over required	35,125		3.00

Total Risk-based capital (to risk-weighted assets):
Required	$	89,049	10.00	%
Actual	101,531		11.40
Excess over required	12,482		1.40

NOTE 3. EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period they were outstanding. The weighted average number of basic common shares outstanding for the three months ended December 31, 2008 and 2007 was 4,007,870 and 3,955,388, respectively. The weighted average number of basic common shares outstanding for the six months ended December 31, 2008 and 2007 was 3,989,962 and 3,984,376, respectively.

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Dilutive earnings per share is similar to the computation of basic earnings per share except the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive options outstanding had been exercised. The weighted average number of common and dilutive potential common shares outstanding for the three months ended December 31, 2008 and 2007 was 4,023,791 and 4,009,060, respectively. The weighted average number of common and dilutive potential common shares outstanding for the six months ended December 31, 2008 and 2007 was 4,019,280 and 4,043,022, respectively.

NOTE 4. INVESTMENTS IN SECURITIES

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

	December 31, 2008									December 31, 2007
			Gross									Gross
	Amortized		Unrealized					Fair		Amortized		Unrealized					Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
	(Dollars in Thousands)
Debt securities:
U.S. government agencies	$	6,373	$	435	$	—		$	6,808	$	10,054	$	122	$	—		$	10,176
Federal Home Loan Bank	1,500		23		—			1,523		12,457		215		—			12,672
Municipal bonds	13,862		145		(255		)	13,752		11,147		83		(99		)	11,131
Trust preferred securities	12,310		—		(5,336		)	6,974		10,931		—		(505		)	10,426
	34,045		603		(5,591		)	29,057		44,589		420		(604		)	44,405

Equity securities:
FNMA-common	8		—		(8		)	—		8		8		—			16
Farmer Mac-common	7		—		(5		)	2		7		2		—			9
Other investments	253		—		—			253		232		—		—			232
	268		—		(13		)	255		247		10		—			257

Mortgage-backed securities	224,443		2,881		(2,247		)	225,077		119,876		860		(1,046		)	119,690
	$	258,756	$	3,484	$	(7,851	)	$	254,389	$	164,712	$	1,290	$	(1,650	)	$	164,352

The following table presents the fair value and age of gross unrealized losses by investment category at December 31, 2008, in accordance with FASB Staff Position (“FSP”) No. FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments:

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	Less than 12 Months					12 Months or More					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		(Losses)			Value		(Losses)			Value		(Losses)
	(Dollars in Thousands)
Debt securities:
Municipal bonds	$	5,351	$	(165	)	$	1,124	$	(90	)	$	6,475	$	(255	)
Trust preferred securities	1,181		(662		)	5,793		(4,674		)	6,974		(5,336		)
	6,532		(827		)	6,917		(4,764		)	13,449		(5,591		)
Equity securities:
FNMA-common	—		(8		)	—		—			—		(8		)
Farmer Mac-common	2		(5		)	—		—			2		(5		)
	2		(13		)	—		—			2		(13		)
Mortgage-backed securities	47,722		(649		)	24,195		(1,598		)	71,917		(2,247		)
	$	54,256	$	(1,489	)	$	31,112	$	(6,362	)	$	85,368	$	(7,851	)

Management does not believe any individual unrealized losses as of December 31, 2008, represent an other-than-temporary impairment. The Company has the ability and intent to hold those investments until a recovery of fair value.

The unrealized losses reported for municipal bonds relate to 37 municipal general obligation or revenue bonds. The unrealized losses are primarily caused by market interest rate increases since the securities were originally acquired, rather than due to credit or other causes.

The unrealized losses reported for mortgage-backed securities relate to 70 securities issued by the Federal National Mortgage Association (“FNMA”), the Government National Mortgage Association (“GNMA”), or the Federal Home Loan Mortgage Corporation (“FHLMC”). These unrealized losses in total are primarily attributable to changes in interest rates and the contractual cash flows of those investments which are guaranteed by an agency of the U.S. government. Mortgage-backed securities also include one “private-label” collateralized mortgage obligation which has maintained its AAA rating as of December 31, 2008.

The unrealized losses reported for trust preferred securities are attributable to six rated pooled securities. There have been two rating downgrades regarding these investments during the current fiscal year. The investment grade securities have an amortized cost of $5.6 million rated AA, $2.0 million rated A, $0.6 million rated B3 and $4.0 million rated Caa2. The market for these securities is currently inactive. Based upon information available at financial statement date, management believes that it is not probable that all amounts due according to contractual terms will not be collected. Within this segment, five securities with amortized cost of $10.3 million are quarterly variable-rate securities tied to 3-month LIBOR.

NOTE 5. SEGMENT REPORTING

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

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

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	Three Months Ended December 31,
	2008									2007
	Banking			Other			Total			Banking			Other			Total
	(Dollars in Thousands)									(Dollars in Thousands)

Net interest income	$	9,460		$	(453	)	$	9,007		$	7,503		$	(507	)	$	6,996
Provision for losses on loans and leases	—			—			—			(295		)	—			(295		)
Noninterest income	2,847			82			2,929			2,923			43			2,966
Intersegment noninterest income	(26		)	(35		)	(61		)	(22		)	(22		)	(44		)
Noninterest expense	(8,723		)	(453		)	(9,176		)	(7,408		)	(300		)	(7,708		)
Intersegment noninterest expense	—			61			61			—			44			44
Income (loss) before income taxes	$	3,558		$	(798	)	$	2,760		$	2,701		$	(742	)	$	1,959

Total assets at December 31	$	1,148,150		$	25,002		$	1,173,152		$	1,016,060		$	4,589		$	1,020,649

	Six Months Ended December 31,
	2008									2007
	Banking			Other			Total			Banking			Other			Total
	(Dollars in Thousands)

Net interest income	$	18,578		$	(882	)	$	17,696		$	14,797		$	(1,133	)	$	13,664
Provision for losses on loans and leases	(387		)	—			(387		)	(620		)	—			(620		)
Noninterest income	5,778			200			5,978			5,692			89			5,781
Intersegment noninterest income	(64		)	(57		)	(121		)	(54		)	(34		)	(88		)
Noninterest expense	(16,773		)	(806		)	(17,579		)	(14,313		)	(539		)	(14,852		)
Intersegment noninterest expense	—			121			121			—			88			88
Income (loss) before income taxes	$	7,132		$	(1,424	)	$	5,708		$	5,502		$	(1,529	)	$	3,973

Total assets at December 31	$	1,148,150		$	25,002		$	1,173,152		$	1,016,060		$	4,589		$	1,020,649

NOTE 6. FAIR VALUE MEASUREMENT

Effective July 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. In accordance with the FASB Staff Position 157-2, Effective Date of SFAS No. 157, the Company has not applied the provisions of this statement to non-financial assets and liabilities. The Company adopted FASB Staff Position 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS 157 for a financial asset when the market for that financial asset is not active. SFAS 157 defines fair value and establishes a consistent framework for measuring fair value under GAAP and expands disclosure requirements for fair value measurements. Fair values represent the estimated price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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The table below presents the Company’s balances of financial instruments measured at fair value on a recurring basis by level within the hierarchy at December 31, 2008.

	December 31, 2008
	Quoted Prices		Significant Other			Significant
	In Active		Observable			Unobservable
	Markets		Inputs			Inputs
	(Level 1)		(Level 2)			(Level 3)		Total
	(Dollars in Thousands)

Securities available for sale	$	2	$	247,413		$	6,974	$	254,389
Interest rate swaps	—		(1,041		)	—		(1,041		)

The Company used the following methods and significant assumptions to estimate the fair value of items:

Securities available for sale: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The Company outsources valuation primarily to a third party provider which utilizes several sources for valuing fixed-income securities. Sources utilize evaluated pricing models that vary based by asset class and include available trade, bid, and other market information. Generally, methodology includes broker quotes, proprietary modes, vast descriptive terms and conditions databases, as well as extensive quality control programs. As further valuation sources, the third party provider uses a proprietary valuation Matrices model and capital markets trading staff. The Matrices model is used for valuing municipals. The model includes a separate curve structure for Bank-Qualified municipals. The grouping of municipals is further broken down according to insurer, credit support, state of issuance, and rating to incorporate additional spreads and municipal curves.

The securities shown in Level 3 relate to trust preferred securities which are currently part of an inactive market. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade, and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive as no new pooled trust preferred securities have been issued since 2007. Given conditions in the debt markets and the absence of observable orderly transactions in the secondary and new issue markets, management determined that an income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representatives of fair value than the market approach valuation technique.

The Company utilized trust preferred security valuations prepared by an independent third party. Their approach to determining fair value included these steps:

1.		The credit quality of the collateral is estimated using average probability of default values (adjusted for rating levels) for each issuer
2.		The default probabilities also considered the potential for correlation among issuers within the same industry
3.		The loss given default was assumed to be 95% (i.e. a 5% recovery)
4.		The cash flows were forecast for the underlying collateral and applied to each tranche to determine the resulting distribution among the securities
5.		The expected cash flows were discounted to calculate the present value of the security
6.		The calculations were modeled in several thousand scenarios using a Monte Carlo engine and the average price was used for valuation purposes

Interest Rate Swaps: The fair values of interest rate swaps relate to cash flow hedges of trust preferred debt securities issued by the Company. The fair value is estimated by a third party using inputs that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. These fair value estimations include primarily market observable inputs, such as yield curves, and include the value associated with counterparty credit risk.

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The following table reconciles the beginning and ending balances of the assets or liabilities of the Company that are measured at fair value on a recurring basis using significant unobservable inputs.

	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Three Months Ended					Six Months Ended
	December 31, 2008					December 31, 2008
	Securities					Securities
	Available			Interest Rate		Available			Interest Rate
	for Sale			Swaps		for Sale			Swaps
	(Dollars in Thousands)

Beginning balance	$	9,499		$	—	$	—		$	—
Total realized/unrealized gains (losses)
Included in earnings	—			—		—			—
Included in other comprehensive loss	(2,462		)	—		(2,462		)	—
Purchases, issuances, (paydowns) and (sales)	(63		)	—		(62		)	—
Transfers into or (out) of Level 3	—			—		9,498			—
Ending balance	$	6,974		$	—	$	6,974		$	—

The table below presents the Company’s balances of financial instruments measured at fair value on a nonrecurring basis by level within the hierarchy at December 31, 2008.

December 31, 2008

Quoted Prices

Significant Other

Significant

In Active

Observable

Unobservable

Markets

Inputs

(Level 1)

(Level 2)

(Level 3)

Total

(Dollars in Thousands)

Impaired loans

—

705

—

705

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value. Market value is measured based on the value of the collateral securing these loans. Collateral is primarily real estate and its fair value is generally determined based on real estate appraisals or other evaluations by qualified professionals. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. Impaired loans that are collateral dependent are written down to their fair value, less costs to sell, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeds the fair value. Valuation techniques consistent with the market approach, income approach, and/or cost approach were used to measure fair value and primarily included observable inputs for the individual nonaccrual loans being evaluated such as recent sales of similar assets or observable market data for operational or carrying costs.

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NOTE 7. DEFINED BENEFIT PLAN

The Company has a noncontributory (cash balance) defined benefit pension plan covering all employees of the Company and its wholly-owned subsidiaries who have attained the age of 21 and have completed 1,000 hours of service in a plan year. The benefits are based on 6% of each eligible participant’s annual compensation, plus income earned in the accounts at a rate determined annually based on 30-year Treasury note rates. The Company’s funding policy is to make the minimum annual required contribution plus such amounts as the Company may determine to be appropriate from time to time. The Company has adopted all plan provisions required by the Pension Protection Act of 2006. These provisions are effective with the plan year beginning July 1, 2008. Information relative to the components of net periodic benefit cost for the Company’s defined benefit plan is presented below:

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2008			2007			2008			2007

Service cost	$	118,602		$	111,830		$	237,204		$	223,660
Interest cost	119,983			109,260			239,966			218,520
Amortization of prior losses	15,499			—			30,998			—
Expected return on plan assets	(139,532		)	(121,791		)	(253,559		)	(243,582		)
Total costs recognized in expense	$	114,552		$	99,299		$	254,609		$	198,598

The Company previously disclosed in its consolidated financial statements for Fiscal 2008, which are included in Part II, Item 8 “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for Fiscal 2008, that it contributed $532,000 to fund its qualified pension plan. During the second quarter of the fiscal year ending June 30, 2009 (“Fiscal 2009”), the Company made contributions of $2.35 million to fund its qualified pension plan. The Company anticipates no additional contributions for Fiscal 2009.

NOTE 8. SELF-INSURED HEALTHCARE PLAN

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

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

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

Reported below is a summary of net healthcare costs by quarter during Fiscal 2009 and Fiscal 2008:

	Fiscal Years Ended June 30,
	2009		2008
	(Dollars in Thousands)

Quarter ended September 30	$	358	$	221
Quarter ended December 31	945		409
Quarter ended March 31	—		328
Quarter ended June 30	—		524
Net healthcare costs	$	1,303	$	1,482

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NOTE 9. STOCK-BASED COMPENSATION PLANS

The fair value of each incentive stock option and each stock appreciation right grant is estimated at the grant date using the Black-Scholes option-pricing model. The following assumptions were used for grants in the six months ended December 31, 2008 and 2007:

	Six Months Ended
	December 31,
	2008		2007

Expected volatility	19.00	%	22.00	%
Expected dividend yield	3.06		2.61
Risk-free interest rate	2.87		4.10
Expected term (in years)	5		4

Stock option activity for the six months ended December 31, 2008 is as follows:

	2008
					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Shares		Price		Term	Value

Beginning balance, July 1	203,554		$	12.48
Granted	—		—
Forfeited	(4,232	)	16.86
Exercised	(47,078	)	10.64

Ending balance	152,244		$	12.93	4.54	$	195

Vested and exercisable	152,244		$	12.93	4.54	$	195

Stock appreciation rights activity for the six months ended December 31, 2008, are as follows:

	2008
					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	SARs		Price		Term	Value

Beginning balance, July 1	44,622		$	16.06
Granted	47,051		14.71
Forfeited	(2,097	)	16.06
Exercised	—		—

Ending balance	89,576		$	15.35	9.04	$	—

Vested and exercisable	14,820		$	16.04	8.14	$	—

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The total intrinsic value of options exercised during the six months ended December 31, 2008 and 2007 was $174,000 and $106,000, respectively. Cash received from the exercise of options for the six months ended December 31, 2008, and 2007 was $501,000 and $271,000, respectively. The tax benefit realized for the tax deductions from cashless option exercises totaled $700 and $2,600 for the six months ended December 31, 2008, and 2007, respectively. The weighted-average grant date fair value of stock appreciation rights (SARs) granted during the six months ended December 31, 2008, and 2007 was $2.06 and $2.89, respectively. The total unrecognized compensation cost related to nonvested SARs awards at December 31, 2008 was $189,000. The cost is expected to be recognized over a weighted average period of 34 months.

Nonvested share activity for the six months ended December 31 follows:

	2008				2007
			Weighted				Weighted
			Average				Average
			Grant Date				Grant Date
	Shares		Fair Value		Shares		Fair Value

Nonvested balance, beginning	121,746		$	16.57	144,711		$	16.10
Granted	23,602		13.33		14,955		16.78
Vested	(48,982	)	16.43		(30,925	)	14.47
Forfeited	(1,305	)	16.95		(10,894	)	16.46

Nonvested balance, ending	95,061		$	15.83	117,847		$	16.58

Pretax compensation expense recognized for nonvested shares for the six months ended December 31, 2008, and 2007 was $179,000 and $216,000, respectively. The tax benefit for the six months ended December 31, 2008, and 2007 was $61,000 and $73,000, respectively. As of December 31, 2008, there was $853,000 of total unrecognized compensation cost related to nonvested shares granted under the Company’s 2002 Stock Option and Incentive Plan, as amended (“the Plan”). The cost is expected to be recognized over a weighted-average period of 20 months. The total fair value of shares vested during the six months ended December 31, 2008, and 2007 was $805,000 and $447,000, respectively.

In association with the 2002 Option Plan, awards of nonvested shares of the Company’s common stock are made to outside directors of the Company. Each outside director is entitled to all voting, dividend and distribution rights during the vesting period. During the second quarter of Fiscal 2009, 14,511 shares of nonvested stock were awarded. Nonvested shares vest on the first anniversary of the date of grant. As of December 31, 2008, there was $166,000 of total unrecognized compensation cost related to nonvested shares, which are expected to be recognized over the remaining 11 months. For the six months ended December 31, 2008 amortization expense was recorded in the amount of $71,000.

These stock option and incentive plans are described more fully in Part II, Item 8 “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for Fiscal 2008, under Note 16 of “Notes to Consolidated Financial Statements.”

NOTE 10. SUBORDINATED DEBENTURES PAYABLE TO TRUSTS

On July 5, 2007, the Company issued 5,000 shares totaling $5.0 million of Company Obligated Mandatorily Redeemable Preferred Securities of Trust VI. Trust VI was established and exists for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the Company. These subordinated debentures constitute the sole asset of Trust VI. The securities provide for cumulative cash distributions calculated at a rate based on three-month LIBOR plus 1.65%, adjusted quarterly. Refer to Note 10 in regards to the interest rate swap agreement, which converted the variable-rate Trust Preferred VI security into a fixed-rate security for a term of five years. The Company may, at one or more times, defer interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond October 1, 2037. At the end of the deferral period, all accumulated and unpaid distributions must be paid. The capital securities must be redeemed on October 1, 2037; however, the Company has the option to shorten the maturity date to a date not earlier than October 1, 2012. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of the payment to all of the Company’s indebtedness and senior to the Company’s capital stock.

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	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2008			2007			2008			2007
	(Dollars in Thousands)

Net income	$	1,846		$	1,251		$	3,821		$	2,598
Other comprehensive income (loss), net of tax:
Securities available for sale:
Net unrealized gains (losses)	(367		)	693			(1,031		)	1,904
Income tax benefit (expense)	138			(263		)	391			(723		)

Other comprehensive income (loss) on securities available for sale	(229		)	430			(640		)	1,181

Defined benefit plan:
Net unrealized (loss)	—			—			—			—
Income tax benefit	—			—			—			—

Other comprehensive (loss) on defined benefit plan	—			—			—			—

Derivatives and hedging activities:
Net unrealized (losses)	(888		)	(215		)	(920		)	(266		)
Income tax benefit	302			73			313			90

Other comprehensive (loss) on derivatives and hedging activities	(586		)	(142		)	(607		)	(176		)

Total other comprehensive income (loss)	(815		)	288			(1,247		)	1,005

Other comprehensive income	$	1,031		$	1,539		$	2,574		$	3,603

	December 31,
	2008			2007
	(Dollars in Thousands)
Cumulative other comprehensive (loss) balances were:

Unrealized loss on securities available for sale, net of related tax effect of $1,659 and $137	$	(2,707	)	$	(223	)
Unrealized loss on defined benefit plan, net of related tax effect of $523 and $60	(853		)	(98		)
Unrealized loss on derivatives and hedging activities, net of related tax effect of $354 and $90	(687		)	(176		)

	$	(4,247	)	$	(497	)

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NOTE 13. STOCKHOLDERS’ EQUITY

As referenced in the 8-K filed November 21, 2008, the Company entered into an agreement with the U.S. Department of the Treasury pursuant to which the Company issued and sold to the Treasury Department (i) 25,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share and having a liquidation preference of $1,000 per share, and (ii) a ten-year warrant to purchase up to 302,419 shares of the Company’s common stock, par value $0.01 per share, at an initial exercise price of $12.40 per share, for an aggregate purchase price of $25.0 million in cash. The securities were issued and sold in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Cumulative dividends on the Preferred Stock will accrue on the liquidation preference at a rate of 5.00% per annum for the first five years, and at a rate of 9.00% per annum thereafter, but will be paid only if, as and when declared by the Company’s Board of Directors. As the issuance of Preferred Stock included warrants for common stock, this transaction increased the weighted average number of diluted common shares outstanding by a total of 5,377 for the six month period ended December 31, 2008.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q and other reports issued by the Company, including reports filed with the Securities and Exchange Commission, contain “forward-looking statements” that deal with future results, expectations, plans and performance. In addition, the Company’s management may make forward-looking statements orally to the media, securities analysts, investors or others. These forward-looking statements might include one or more of the following:

·		Projections of income, loss, revenues, earnings or losses per share, dividends, capital expenditures, capital structure, tax benefit or other financial items.
·		Descriptions of plans or objectives of management for future operations, products or services, transactions, investments and use of subordinated debentures payable to trusts.
·		Forecasts of future economic performance.
·		Use and descriptions of assumptions and estimates underlying or relating to such matters.

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

Forward-looking statements about the Company’s expected financial results and other plans are subject to certain risks, uncertainties and assumptions. These include, but are not limited to, the risks discussed in Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for Fiscal 2008 and the following: possible legislative changes and adverse economic, business and competitive conditions and developments (such as shrinking interest margins and continued short-term rate environments); deposit outflows; reduced demand for financial services and loan products; changes in accounting policies or guidelines, or in monetary and fiscal policies of the federal government; changes in credit and other risks posed by the Company’s loan and lease portfolios; the ability or inability of the Company to manage interest rate and other risks; unexpected, continuing or excessive claims against the Company’s self-insured health plan; the Company’s use of trust preferred securities; the ability or inability of the Company to successfully enter into a definitive agreement for and close anticipated transactions; technological, computer-related or operational difficulties; adverse changes in securities markets; results of litigation; or other significant uncertainties.

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

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Executive Summary

The Company’s net income for the second quarter of Fiscal 2009 was $1.8 million, or $0.46 in diluted earnings per share, compared to $1.3 million, or $0.31 in diluted earnings per share, for the second quarter of Fiscal 2008. The Company’s net income for the six months ended December 31, 2008 was $3.8 million, or $0.95 in diluted earnings per share, compared to $2.6 million, or $0.64 in diluted earnings per share, for the first six months of Fiscal 2008. Return on average total equity was 10.48% for the first six months of Fiscal 2009 as compared to 8.18% in the prior year comparable period. Return on common equity, based upon net income available to common shareholders divided by equity excluding preferred equity, was 11.63% for the first six months of Fiscal 2009 as compared to 8.18% in the prior year comparable period.

The net interest margin on a fully taxable equivalent basis for the six months ended December 31, 2008 was 3.37%, compared to 2.96% for the same period a year ago, an increase of 41 basis points. The increase over the same period last year is primarily attributable to lower costs on liabilities and a higher volume of earning assets. During the first quarter of Fiscal 2008, there was $125,000 expense of unamortized debt issue costs related to the early redemption of the Trust II Trust Preferred Securities, causing a decrease of three basis points to the net interest margin for the six month comparison.

Net interest income for the first six months of Fiscal 2009 was $17.7 million, an increase of $4.0 million, or 29.5%, over the same period a year ago. For the six months ended December 31, 2008, average interest-earning assets and average interest-bearing liabilities increased 13.1% and 13.0%, respectively, compared to the same period a year ago. Yields on earning assets decreased to 5.88% in the first six months of Fiscal 2009, compared to 6.81% a year ago, a decrease of 93 basis points. For the same period, cost of funds decreased to 2.87%, compared to 4.38%, a decrease of 151 basis points.

Net interest margin ratio may vary due to many factors, including Federal Reserve policies for short-term interest rates, competitive and economic factors and customer preferences for various products and services. In the second quarter of Fiscal 2009, the Federal Reserve decreased the Fed Funds Target Rate by a total of 175 basis points on three separate increments, the first decrease in short-term interest rates since April 30, 2008. For Fiscal 2008, Fed Funds rates were cut 7 times between September 2007 and April 2008 for a total of 325 basis points.

The Company had previously issued trust preferred securities primarily to provide funding for stock repurchases and to repay other borrowings. Interest expense on the $27.8 million of trust preferred securities outstanding decreased to $916,000 for the six months ended December 31, 2008, compared to $1.2 million for the same period a year ago, a decrease of $283,000 or 23.6%. This decrease is due in part to the expense of $125,000 unamortized debt issue costs related to the early redemption of the Trust II Trust Preferred Securities in the first quarter of Fiscal 2008. The average rate paid on these securities decreased 190 basis points, from 8.57% at December 31, 2007 to 6.67% at December 31, 2008.

The allowance for loan and lease losses increased to $8.1 million at December 31, 2008, compared to $5.4 million at December 31, 2007, an increase of $2.7 million or 49.9%. The ratio of allowance for loan and lease losses to total loans and leases was 0.99% as of December 31, 2008 compared to 0.71% at December 31, 2007. Total nonperforming assets at December 31, 2008 were $4.5 million as compared to $3.7 million a year ago, an increase of $726,000 or 19.4%. The ratio of nonperforming assets to total assets increased to 0.38% at December 31, 2008, compared to 0.34% at December 31, 2007. The allowance for loan and lease losses is calculated based on loan and lease levels, loan and lease loss history, credit quality of the loan and lease portfolio, and environmental factors such as economic health of the region and management experience. This risk rating analysis is designed to give the Company a consistent and systematic methodology to determine proper levels for the allowance at a given time.

As referenced in the 8-K filed October 27, 2008, the Company was involved in a lawsuit as plaintiff which was settled for $2.8 million inclusive of the remaining amount of receivables from certain loan participation interests in the amount of $223,000. The settlement amount, less attorney fees of $292,000, was recorded as a recovery of loan and leases losses in the second quarter of Fiscal 2009. See Part II, Item 1 “Legal Proceedings” of this Form 10-Q for more details.

Total deposits at December 31, 2008 were $772.9 million, a decrease of $11.3 million, or 1.4%, from June 30, 2008. The $11.3 million decrease in deposits was due to decreases in public funds of $11.8 million which are categorized in multiple categories of deposits. Conversely, non-public funds increased from $628.0 million to $628.5 million for the six month period, net of a decrease of $4.6 million in out-of-market deposits. The primary factors affecting interest expense on deposits was the decrease in the average rates paid from the six month period ended December 31, 2007 of 4.13% compared to 2.52% for the six month period ended December 31, 2008.

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During the second quarter of Fiscal 2009, an increase in equity occurred with participation in the U.S. Treasury Department Capital Purchase Program (“CPP”). As referenced in the 8-K filed November 21, 2008, the Company entered into an agreement with the U.S. Department of the Treasury pursuant to which the Company issued and sold to the Treasury Department (i) 25,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share and having a liquidation preference of $1,000 per share, and (ii) a ten-year warrant to purchase up to 302,419 shares of the Company’s common stock, par value $0.01 per share, at an initial exercise price of $12.40 per share, for an aggregate purchase price of $25.0 million in cash. The securities were issued and sold in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Cumulative dividends on the Preferred Stock will accrue on the liquidation preference at a rate of 5.00% per annum for the first five years, and at a rate of 9.00% per annum thereafter, but will be paid only if, as and when declared by the Company’s Board of Directors. Since the transaction closing date, the Bank has continued to lend money on a prudent basis to businesses, farmers and individuals within its marketplace. New volume and renewals of existing credit since the closing of the CPP transaction totaled $64.4 million through December 31, 2008.

In January 2009, the Company announced it will pay a quarterly cash dividend of 11.25 cents per common share for the second quarter of the 2009 fiscal year. The dividend will be paid on February 12, 2009 to stockholders of record on February 5, 2009.

The Company also announced in January 2009, a quarterly cash dividend on its Fixed Rate Cumulative Perpetual Preferred Stock (Series A) issued to the U.S. Treasury Department under the CPP. The dividend amount is equal to $11.66 per preferred share. This amount is based on a rate per annum of 5.00%, and is pro-rated over the initial dividend period from the November 21, 2008 closing date through February 15, 2009 using 30-day months.

The total risk-based capital ratio of 11.40% at December 31, 2008, increased by 57 basis points from 10.83% at June 30, 2008. This continues to place the Bank in the “well capitalized” category within OTS regulation at December 31, 2008 and is consistent with the “well capitalized” OTS category in which the Company plans to operate. The Company historically has been able to manage the size of its assets through secondary market loan sales of single-family mortgages and student loans.

In conjunction with the Company’s participation in the CPP, the Company’s Board of Directors terminated the stock buyback program in the second quarter which had been in place through November 21, 2008, in which up to 10% of the common stock of the Company outstanding on May 1, 2008 could be acquired through April 30, 2009. See Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds” of this Form 10-Q for more details.

Non-interest income was $6.0 million for the six months ended December 31, 2008 as compared to $5.8 million for the same period in the prior fiscal year, an increase of $197,000, or 3.4%. Fees on deposits increased $301,000, or 10.9% for the six months ended December 31, 2008 as compared to the same period in the prior fiscal year primarily due to increased point-of-sale interchange revenue and fee schedule adjustments. Loan servicing income increased $44,000, or 4.2% primarily due to an increase of $38.0 million in the balances of loans serviced by the Bank from $1.03 billion at December 31, 2007 to $1.06 billion at December 31, 2008. Net gain on sale of securities increased $125,000 for the six months ended December 31, 2008 as compared to the same period in the prior fiscal year primarily due to the sale of securities, which did not occur in the prior year.

Non-interest expense was $17.6 million for the six months ended December 31, 2008 as compared to $14.9 million for the six months ended December 31, 2007, an increase of $2.7 million, or 18.4%. Employee compensation increased $562,000, or 9.1%, variable pay relating to employee incentives and commissions increased $480,000, or 58.1% and net healthcare costs increased $673,000, or 106.7%. Employee compensation increased due to annual raises awarded and sales-related personnel additions. Variable pay relating to employee incentive programs increased due to higher production activity and increased financial performance outcomes. Healthcare costs increased as a result of higher claim activity in the second quarter of Fiscal 2009. The Company has had a self-insured health plan since January 1994. Management continues to believe the current structure is a reasonable alternative to traditional healthcare plans over the long term. The level of healthcare costs which the Company incurs may vary from year to year. The increase in net healthcare costs does not necessarily indicate a trend. Other non-interest expense increased primarily to increases in federal deposit insurance premiums of $216,000, legal and professional expenses of $302,000, and community investment contributions of $52,000.

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

Loan and Lease Portfolio Composition

	December 31, 2008				June 30, 2008
	Amount		Percent		Amount		Percent
	(Dollars in Thousands)

One-to four-family (1)	$	92,972	11.46	%	$	99,989	12.76	%
Commercial business and real estate (2) (3)	307,458		37.90		303,415		38.72
Multi-family real estate	45,912		5.66		45,093		5.75
Equipment finance leases	18,985		2.34		19,288		2.46
Consumer direct (4)	112,688		13.89		105,719		13.49
Consumer indirect (5)	31,421		3.87		44,294		5.65
Agricultural	191,556		23.61		160,267		20.45
Construction and development	10,297		1.27		5,645		0.72
Total loans and leases receivable (6)	$	811,289	100.00	%	$	783,710	100.00	%

(1) Excludes $10,710 and $7,958 loans held for sale at December 31, 2008 and June 30, 2008, respectively.

(2) Includes $2,912 and $3,012 tax exempt leases at December 31, 2008 and June 30, 2008, respectively.

(3) Excludes $0 and $223 commercial loans held for sale at December 31, 2008 and June 30, 2008, respectively.

(4) Excludes $3,318 and $614 student loans held for sale at December 31, 2008 and June 30, 2008, respectively.

(5) The Company announced Consumer Indirect originations ceased during the first quarter of Fiscal 2008.

(6) Includes deferred loan fees and discounts and undisbursed portion of loans in process.

Deposit Composition

	December 31, 2008				June 30, 2008
	Amount		Percent		Amount		Percent
	(Dollars in Thousands)

Noninterest bearing checking accounts	$	88,762	11.48	%	$	90,598	11.55	%
Interest bearing checking accounts	87,486		11.32		90,125		11.49
Money market accounts	155,123		20.07		171,689		21.89
Savings accounts	73,518		9.51		78,575		10.02
In-market certificates of deposit	345,411		44.69		325,995		41.57
Out-of-market certificates of deposit	22,617		2.93		27,255		3.48
Total deposits	$	772,917	100.00	%	$	784,237	100.00	%

Analysis of Net Interest Income

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

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

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	Three Months Ended December 31,
	2008						2007
	Average		Interest				Average		Interest
	Outstanding		Earned/		Yield/		Outstanding		Earned/		Yield/
	Balance		Paid		Rate		Balance		Paid		Rate
	(Dollars in Thousands)
Interest-earning assets:
Loans and leases receivable (1) (3)	$	819,530	$	12,646	6.12	%	$	775,089	$	13,879	7.12	%
Investment securities (2) (3)	238,971		2,883		4.79	%	162,701		2,119		5.18	%
FHLB stock	12,069		37		1.22	%	7,703		87		4.48	%

Total interest-earning assets	1,070,570		$	15,566	5.77	%	945,493		$	16,085	6.77	%
Noninterest-earning assets	67,481						72,793
Total assets	$	1,138,051					$	1,018,286

Interest-bearing liabilities:
Deposits:
Checking and money market	$	236,596	$	559	0.94	%	$	265,510	$	2,077	3.11	%
Savings	64,029		127		0.79	%	47,416		274		2.30	%
Certificates of deposit	388,650		3,446		3.52	%	371,511		4,562		4.89	%
Total interest-bearing deposits	689,275		4,132		2.38	%	684,437		6,913		4.02	%
FHLB advances and other borrowings	233,474		1,947		3.31	%	135,817		1,642		4.81	%
Subordinated debentures payable to trusts (4)	27,837		480		6.84	%	27,837		534		7.63	%

Total interest-bearing liabilities	950,586		6,559		2.74	%	848,091		9,089		4.26	%
Noninterest-bearing deposits	72,626						80,806
Other liabilities	36,445						25,674
Total liabilities	1,059,657						954,571
Equity	78,394						63,715
Total liabilities and equity	$	1,138,051					$	1,018,286

Net interest income; interest rate spread (5)			$	9,007	3.03	%			$	6,996	2.51	%

Net interest margin (5) (6)					3.34	%					2.94	%

Net interest margin, TE (7)					3.40	%					3.00	%

(1) Includes loan fees and interest on accruing loans and leases 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 $125 in July 2007 for unamortized debt issuance costs.

(5) Percentages for the three months ended December 31, 2008 and December 31, 2007 have been annualized.

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

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

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	Six Months Ended December 31,
	2008						2007
	Average		Interest				Average		Interest
	Outstanding		Earned/		Yield/		Outstanding		Earned/		Yield/
	Balance		Paid		Rate		Balance		Paid		Rate
	(Dollars in Thousands)
Interest-earning assets:
Loans and leases receivable (1) (3)	$	812,657	$	25,664	6.26	%	$	775,583	$	27,999	7.18	%
Investment securities (2) (3)	234,450		5,575		4.72	%	153,949		3,923		5.07	%
FHLB stock	12,079		158		2.59	%	6,660		148		4.41	%

Total interest-earning assets	1,059,186		$	31,397	5.88	%	936,192		$	32,070	6.81	%
Noninterest-earning assets	66,864						70,686
Total assets	$	1,126,050					$	1,006,878

Interest-bearing liabilities:
Deposits:
Checking and money market	$	241,027	$	1,417	1.17	%	$	275,962	$	4,658	3.36	%
Savings	67,284		388		1.14	%	51,096		684		2.66	%
Certificates of deposit	376,546		6,904		3.64	%	367,672		9,069		4.91	%
Total interest-bearing deposits	684,857		8,709		2.52	%	694,730		14,411		4.13	%
FHLB advances and other borrowings	233,055		4,056		3.45	%	114,057		2,796		4.88	%
Subordinated debentures payable to trusts (4)	27,837		936		6.67	%	27,837		1,199		8.57	%

Total interest-bearing liabilities	945,749		13,701		2.87	%	836,624		18,406		4.38	%
Noninterest-bearing deposits	75,263						79,743
Other liabilities	32,706						27,349
Total liabilities	1,053,718						943,716
Equity	72,332						63,162
Total liabilities and equity	$	1,126,050					$	1,006,878

Net interest income; interest rate spread (5)			$	17,696	3.01	%			$	13,664	2.43	%

Net interest margin (5) (6)					3.31	%					2.90	%

Net interest margin, TE (7)					3.37	%					2.96	%

(1) Includes loan fees and interest on accruing loans and leases 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 $125 in July 2007 for unamortized debt issuance costs.

(5) Percentages for the six months ended December 31, 2008 and December 31,2007 have been annualized.

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

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

Rate/Volume Analysis of Net Interest Income

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

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	Three Months Ended December 31,									Six Months Ended December 31,
	2008 vs 2007									2008 vs 2007
	Increase			Increase						Increase			Increase
	(Decrease)			(Decrease)			Total			(Decrease)			(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)	$	808		$	(2,041	)	$	(1,233	)	$	1,366		$	(3,701	)	$	(2,335	)
Investment securities (2)	998			(234		)	764			2,064			(412		)	1,652
FHLB stock	49			(99		)	(50		)	121			(111		)	10

Total interest-earning assets	$	1,855		$	(2,374	)	$	(519	)	$	3,551		$	(4,224	)	$	(673	)

Interest-bearing liabilities:
Deposits:
Checking and money market	$	(227	)	$	(1,291	)	$	(1,518	)	$	(590	)	$	(2,651	)	$	(3,241	)
Savings	96			(243		)	(147		)	218			(514		)	(296		)
Certificates of deposit	213			(1,329		)	(1,116		)	222			(2,387		)	(2,165		)
Total interest-bearing deposits	82			(2,863		)	(2,781		)	(150		)	(5,552		)	(5,702		)
FHLB advances and other borrowings	1,186			(881		)	305			2,935			(1,675		)	1,260
Subordinated debentures payable to trusts	—			(54		)	(54		)	—			(263		)	(263		)

Total interest-bearing liabilities	$	1,268		$	(3,798	)	$	(2,530	)	$	2,785		$	(7,490	)	$	(4,705	)

Net interest income increase							$	2,011								$	4,032

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

(2) Includes federal funds sold.

Application of Critical Accounting Policies

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

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

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

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

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

The Company has included MSRs as a critical accounting policy because the use of estimates for determining fair value using present value concepts may produce results which may significantly differ from other fair value analysis perhaps even to the point of recording impairment. The risk to earnings is when the underlying mortgages pay off significantly faster than the assumptions used in the previously recorded amortization. Estimating future cash flows on the underlying mortgages is a difficult analysis and requires judgment based on the best information available. The Company looks at alternative assumptions and projections when preparing a reasonable and supportable analysis. Based on the Company’s quarterly analysis of MSRs, there was no impairment to the MSRs at December 31, 2008.

Self-Insurance - The Company has a self-insured healthcare plan for its employees up to certain limits. To mitigate a portion of these risks, the Company has a stop-loss insurance policy through a commercial insurance carrier for coverage in excess of $65,000 per individual occurrence with no maximum aggregate limitation. The estimate of self-insurance liability is based upon known claims and an estimate of incurred, but not reported (“IBNR”) claims. IBNR claims are estimated using historical claims lag information received by a third party claims administrator. Due to the uncertainty of health claims, the approach includes a process which may differ significantly from other methodologies and still produce an estimate in accordance with GAAP. Although management believes it uses the best information available to determine the accrual, unforeseen health claims could result in adjustments to the accrual. These adjustments could significantly affect net earnings if circumstances differ substantially from the assumptions used in estimating the accrual.

Asset Quality and Potential Problem Loans and Leases

Nonperforming assets (nonaccrual loans and leases, accruing loans and leases delinquent more than 90 days and foreclosed assets) increased to $4.5 million at December 31, 2008 from $3.7 million at June 30, 2008, an increase of $726,000, or 19.4%. Accruing loans and leases delinquent more than 90 days increased $1.4 million to $2.2 million at December 31, 2008 from $781,000 at June 30, 2008. Nonaccruing loans and leases decreased $385,000 to $1.9 million at December 31, 2008 from $2.3 million at June 30, 2008. Foreclosed assets decreased $273,000 to $370,000 at December 31, 2008, from $643,000 at June 30, 2008. In addition, the ratio of nonperforming assets to total assets, which is one indicator of credit risk exposure, was 0.38% at December 31, 2008, which is an increase from 0.34% as reported at June 30, 2008.

Nonaccruing loans and leases decreased 16.6%, or $385,000, to $1.9 million at December 31, 2008 compared to $2.3 million at June 30, 2008. Included in nonaccruing loans and leases at December 31, 2008 were eight loans totaling $441,000 secured by one- to four-family real estate, two loans totaling $438,000 secured by commercial real estate, seven loans totaling $201,000 secured by commercial business, three loans totaling $252,000 secured by agriculture, one lease totaling $21,000 and 37 consumer loans totaling $586,000.

The risk rating system in place is designed to identify and manage the nonperforming loans and leases. Commercial and agricultural loans and equipment finance leases will have specific reserve allocations based on collateral values or based on the present value of expected cash flows if the loans and leases are deemed impaired. Loans and leases that are not performing do not necessarily result in a loss.

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The following table sets forth the amounts and categories of the Company’s nonperforming assets for the periods indicated.

	Nonperforming Assets
	December 31, 2008			June 30, 2008
	(Dollars in Thousands)
Nonaccruing loans and leases:
One- to four-family	$	441		$	503
Commercial real estate	438			429
Commercial business	201			555
Equipment finance leases	21			27
Consumer	586			566
Agricultural	252			244
Total	1,939			2,324

Accruing loans and leases delinquent more than 90 days:
One- to four-family	281			306
Commercial real estate	988			24
Commercial business	278			71
Equipment finance leases	413			9
Consumer	94			119
Agricultural	111			252
Total	2,165			781

Foreclosed assets: (1)
One- to four-family	265			76
Equipment finance leases	25			443
Consumer	80			124
Total	370			643

Total nonperforming assets	$	4,474		$	3,748

Ratio of nonperforming assets to total assets	0.38		%	0.34		%

Ratio of nonperforming loans and leases to total loans and leases (2) (3)	0.50		%	0.39		%

(1) Total foreclosed assets do not include land or other real estate owned held for sale.

(2) Nonperforming loans and leases include both nonaccruing and accruing loans and leases delinquent more than 90 days.

(3) Total loans and leases include loans held for sale.

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

	Six Months Ended December 31,
	2008			2007
	(Dollars in Thousands)

Balance at beginning of period	$	5,933		$	5,872
Charge-offs:
One- to four-family	(1		)	(3		)
Commercial real estate	(9		)	—
Commercial business	(23		)	(620		)
Equipment finance leases	(34		)	(171		)
Consumer	(446		)	(421		)
Total charge-offs	(513		)	(1,215		)

Recoveries:
One- to four-family	2			—
Commercial business	2,217			8
Consumer	102			134
Agricultural	5			5
Total recoveries	2,326			147

Net recoveries (charge-offs)	1,813			(1,068		)

Additions charged to operations	387			620

Balance at end of period	$	8,133		$	5,424

Ratio of net (charge-offs) during the period to average loans and leases outstanding during the period	0.22		%	(0.14		)%

Ratio of allowance for loan and lease losses to total loans and leases at end of period (1)	0.99		%	0.71		%

Ratio of allowance for loan and lease losses to nonperforming loans and leases at end of period (2)	198.17		%	182.75		%

(1) Total loans and leases include loans held for sale.

(2) Nonperforming loans and leases include both nonaccruing and accruing loans and leases delinquent more than 90 days.

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The distribution of the Company’s allowance for loan and lease losses and impaired loss summary as required by FASB Statement No. 114, “Accounting by Creditors for Impairment of a Loan” are summarized in the following tables. The combination of FASB Statement No. 5 “Accounting for Contingencies” and FASB Statement No. 114 calculations comprise the Company’s allowance for loan and lease losses.

	Allowance		Impaired Loan		Allowance		Impaired Loan
	for Loan and		Valuation		for Loan and		Valuation
	Lease Losses		Allowance		Lease Losses		Allowance
Loan and Lease Type	December 31, 2008				June 30, 2008
	(Dollars in Thousands)

One- to four-family	$	384	$	—	$	294	$	—
Commercial real estate	1,022		60		740		—
Multi-family real estate	179		—		135		—
Commercial business	2,339		67		1,678		—
Equipment finance leases	503		—		496		—
Consumer	1,181		—		1,190		—
Agricultural	2,268		130		1,270		130
Total	$	7,876	$	257	$	5,803	$	130

Impaired Loan Summary

				Impaired						Impaired
	Number			Loan			Number			Loan
Loan	of Loan	Loan		Valuation			of Loan	Loan		Valuation
Balance	Customers	Balance		Allowance			Customers	Balance		Allowance
Loan and Lease Type	December 31, 2008						June 30, 2008
	(Dollars in Thousands)

Commercial real estate	3	$	445		$	60	—	$	—	$	—
Commercial business	2	155			67		—	—		—
Agricultural	2	362			130		2	316		130
Total	7	$	962		$	257	2	$	316	$	130

The allowance for loan and lease losses was $8.1 million at December 31, 2008, as compared to $5.4 million at December 31, 2007. The ratio of the allowance for loan and lease losses to total loans and leases was 0.99% at December 31, 2008, compared to 0.71% at December 31, 2007. The Company’s management has considered nonperforming loans and leases and potential problem loans and leases in establishing the allowance for loan and lease losses. The Company continues to monitor its allowance for probable loan and lease losses and make future additions or reductions in light of the level of loans and leases in its portfolio and as economic conditions dictate. The current level of the allowance for loan and lease losses is a result of management’s assessment of the risks within the portfolio based on the information revealed in credit reporting processes. The Company utilizes a risk-rating system on all commercial business, agricultural, construction and multi-family and commercial real estate loans, including purchased loans and leases. A periodic credit review is performed on all types of loans and leases to establish the necessary reserve based on the estimated risk within the portfolio. This assessment of risk takes into account the composition of the loan and lease portfolio, historical loss experience for each loan and lease category, previous loan and lease experience, concentrations of credit, current economic conditions and other factors that in management’s judgment deserve recognition.

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

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Although management believes it uses the best information available to determine the allowances, unforeseen market conditions could result in adjustments and net earnings being significantly affected if circumstances differ substantially from the assumptions used in making the final determinations. Future additions to the Company’s allowances may result from periodic loan, property or collateral reviews which cannot be predicted at this time.

Comparison of the Three Months Ended December 31, 2008, and December 31, 2007

General. The Company’s net income was $1.8 million, or $0.46 in basic and $0.46 in diluted earnings per share for the three months ended December 31, 2008, a $595,000 increase in earnings compared to $1.3 million, or $0.32 in basic and $0.31 in diluted earnings per share for the same period in the prior fiscal year. For the three months ended December 31, 2008, the return on average equity and the return on average assets were 9.34% and 0.64%, respectively, compared to 7.81% and 0.49%, respectively, for the same period in the prior fiscal year. As discussed in more detail below, the increases were due to a variety of key factors, with the increase in net interest income of $2.0 million contributing the most to the net increase. This increase was partially offset by an increase of non-interest expense of $1.5 million for the second quarter of Fiscal 2009 as compared to the second quarter of Fiscal 2008.

Interest, Dividend and Loan Fee Income. Interest, dividend and loan fee income was $15.6 million for the three months ended December 31, 2008 as compared to $16.1 million for the same period in the prior fiscal year, a decrease of $519,000 or 3.2%. This decrease was primarily the result of declining average yields on the interest earning assets. Loans and leases receivable had an average yield of 6.12% for the three months ended December 31, 2008, which is 100 basis points less than the average yield of 7.12% for the three months ended December 31, 2007. Investment securities also had a decline in average yield of 39 basis points when comparing the second quarter of Fiscal 2009 against the same period of the prior year. The average interest-earning assets for loans and leases receivables increased $44.4 million, or 5.7% to $819.5 million for the three months ended December 31, 2008, when compared to the three months ended December 31, 2007. Investment securities also increased in average balance by $76.3 million, or 46.9% to $239.0 million for the second quarter of Fiscal 2009, when compared to the average balance of the same quarter of the prior fiscal year. The net revenue decrease attributable to the overall declining yields was $2.4 million when comparing the three months ended December 31, 2008 against the same period ended December 31, 2007. This net revenue decrease was offset by $1.9 million of revenue increases from larger average assets invested for the second quarter of Fiscal 2009 as compared to the second quarter of Fiscal 2008.

Interest Expense. Interest expense was $6.6 million for the three months ended December 31, 2008 as compared to $9.1 million for the same period in the prior fiscal year, a decrease of $2.5 million or 27.8%. A $2.9 million decrease in interest expense was the result of a decrease in the average rate paid of 4.02% on interest-bearing deposits for the three months ended December 31, 2007 to an average rate paid of 2.38% for the three months ended December 31, 2008. An increase of 0.71% in the average volume on interest-bearing deposits for the three month period ended December 31, 2008, as compared to the three month period ended December 31, 2007, slightly offset the overall decrease in interest expense for interest-bearing deposits by $82,000. Offsetting the overall decrease in interest expense was an increase of $97.7 million or 71.9%, in the average volume of FHLB advances and other borrowings. This volume change resulted in an increase to interest expense in the amount of $1.2 million. The average yield of FHLB advances and other borrowings declined to 3.31% for the three months ended December 31, 2008 from 4.81% for the three month period ended December 31, 2007, resulting in a reduction in interest expense of $881,000. Interest expense for subordinated debentures payable to trusts also declined by $54,000 as a result of the yield declining from 7.63% to 6.84% during the same comparable quarters. The average rate paid on total interest-bearing liabilities was 2.74% for the three months ended December 31, 2008 as compared to 4.26% for the same period in the prior fiscal year.

Net Interest Income. The Company’s net interest income for the three months ended December 31, 2008 increased $2.0 million or 28.7%, to $9.0 million compared to $7.0 million for the same period in the prior fiscal year. The increase in net interest income was due primarily to decreases in the average rate paid on interest-bearing liabilities and increases in the average volume of interest-earning assets for the three months ended December 31, 2008 compared to the same period in the prior fiscal year. The Company’s net interest margin on a fully taxable equivalent basis was 3.40% for the three months ended December 31, 2008 as compared to 3.00% for the same period in the prior fiscal year.

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

During the three months ended December 31, 2008, the Company did not record a provision for losses on loans and leases due in part to a large loan loss recovery which increased the allowance for loan and lease losses during the quarter. In the three month period ended December 31, 2007, a provision of $295,000 was incurred, which results in the current year provision decreasing by $295,000 from the same period of Fiscal 2008. The Company previously announced a net loan loss recovery of $2.2 million from a settlement of a previously disclosed lawsuit against MetaBank. During the quarter, the Company bolstered its methodology for calculating the allowance for loan and lease losses to better capture the impact of the economic recession currently being experienced across the country. See “Asset Quality” for further discussion.

Non-interest Income. Non-interest income was $2.9 million for the quarter ended December 31, 2008 compared to $3.0 million at December 31, 2007, a decrease of $37,000 or 1.2%. Gain on sale of loans and trust income decreased $154,000 and $96,000, respectively, while fees on deposits and net gain on sale of securities increased $163,000 and $45,000, respectively, when compared to the same quarter of the prior fiscal year.

Gain on sale of loans decreased $154,000 to $285,000 for the three months ended December 31, 2008 from $439,000 for the three months ended December 31, 2007, primarily due to a decrease in pooled loan sales which occurred in the prior fiscal year. Trust income decreased to $153,000 for the three months ended December 31, 2008 from $249,000 for the three months ended December 31, 2007, due in part to a decrease in managed assets from falling financial market values. Fees on deposits increased $163,000 for the three months ended December 31, 2008 as compared to the same period in the prior fiscal year primarily due to increased point-of-sale interchange revenue and fee schedule adjustments. Net gain on sale of securities increased $45,000 for the three months ended December 31, 2008 as compared to the same period in the prior fiscal year primarily due to the sale of securities, which did not occur in the prior year.

Non-interest Expense. Non-interest expense was $9.2 million for the three months ended December 31, 2008 as compared to $7.7 million for the three months ended December 31, 2007, an increase of $1.5 million, or 19.0%. The increase in non-interest expense was primarily due to increases in compensation and employee benefits of $1.0 million, foreclosed real estate and other properties, net of $59,000, and other non-interest expense of $264,000.

Compensation and employee benefits increased $1.0 million, or 21.7%, from $4.8 million for the three months ended December 31, 2007 to $5.8 million for the three months ended December 31, 2008. Employee compensation increased $346,000, or 10.9%, variable pay relating to employee incentives and commissions increased $209,000, or 60.9% and net healthcare costs increased $537,000, or 131.1%. Management continues to believe the self-insured structure is a reasonable alternative to traditional healthcare plans over the long term. The level of healthcare costs which the Company incurs may vary from year to year, and the increase in net healthcare costs does not necessarily indicate a trend. Employee compensation increased due to annual raises awarded and additional personnel since the three month period ended December 31, 2007. Variable pay relating to employee incentive programs increased due to higher production and net income. Healthcare costs increased as a result of higher claim activity in the November and December of 2008.

Foreclosed real estate and other properties, net, increased $59,000 to $96,000 for the three months ended December 31, 2008 as compared to the same period in the prior fiscal year due to increased activity in repossessed equipment.

Other non-interest expenses rose $264,000 largely due to increases in federal deposit insurance premiums of $99,000, legal and professional expenses of $117,000, and community investment contributions of $74,000. Previously, the Company had credits to offset federal deposit insurance premiums. No future credits exist to offset this cost in the future. Legal and consulting costs increased due in part to a lawsuit which was settled in the second quarter of Fiscal 2009, in addition to legal review costs related to the participation in the CPP as mentioned earlier. Community investment contributions increased primarily due to the timing for which these investments were incurred. Some of the investments incurred were previously incurred in both the first and third quarters of Fiscal 2008. There has not been a large increase in new community investments from the prior fiscal year.

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Income tax expense. The Company’s income tax expense for the three months ended December 31, 2008 increased $206,000 or 29.1% to $914,000 compared to $708,000 for the same period in the prior fiscal year. The effective tax rate was 33.1% and 36.1% for the three months ended December 31, 2008 and 2007, respectively.

Comparison of the Six Months Ended December 31, 2008, and December 31, 2007

General. The Company’s net income was $3.8 million, or $0.96 in basic and $0.95 in diluted earnings per share for the three months ended December 31, 2008, a $1.2 million increase in earnings compared to $2.6 million, or $0.65 in basic and $0.64 in diluted earnings per share for the same period in the prior fiscal year. For the six months ended December 31, 2008, the return on average equity and the return on average assets were 10.48% and 0.67%, respectively, compared to 8.18% and 0.51%, respectively, for the same period in the prior fiscal year. As discussed in more detail below, the increases were due to a variety of key factors, including an increase in net interest income of $4.0 million and non-interest income of $197,000. These increases were offset by an increase of non-interest expense of $2.7 million for the six months ended December 31, 2008 as compared to the same period in Fiscal 2008.

Interest, Dividend and Loan Fee Income. Interest, dividend and loan fee income was $31.4 million for the six months ended December 31, 2008 as compared to $32.1 million for the same period in the prior fiscal year, a decrease of $673,000 or 2.1%. This decrease was primarily the result of declining average yields on the interest earning assets. Loans and leases receivable had an average yield of 6.26% for the six months ended December 31, 2008, which is 92 basis points less than the average yield of 7.18% for the six months ended December 31, 2007. Investment securities also had a decline in average yield of 35 basis points when comparing the first six months of Fiscal 2009 against the same period of the prior year. The average interest-earning assets for loans and leases receivable increased $37.1 million or 4.8%, to $812.7 million for the six months ended December 31, 2008. Investment securities also increased in average balance by $80.5 million or 52.3%, to $234.5 million for the first six months of Fiscal 2009, when compared to the average balance of the prior fiscal year. The interest income decrease attributable to the overall declining yields was $4.2 million when comparing the six months ended December 31, 2008 against the same period ended December 31, 2007. This interest income decrease was offset by $3.6 million of revenue increases from larger average assets invested for the first six months of Fiscal 2009 as compared to the first six months of Fiscal 2008.

Interest Expense. Interest expense was $13.7 million for the six months ended December 31, 2008 as compared to $18.4 million for the same period in the prior fiscal year, a decrease of $4.7 million or 25.6%. A $5.6 million decrease in interest expense was the result of a decrease in the average rate paid of 4.13% on interest-bearing deposits for the six months ended December 31, 2007 to an average rate paid of 2.52% for the six months ended December 31, 2008. A 1.4% decrease in the average volume on interest-bearing deposits contributed to $150,000 of the total decrease in interest expense. Offsetting the overall decrease in interest expense was an increase of $2.9 million in interest expense due to a 104.3% increase in the average volume of FHLB advances and other borrowings. This increase in average volume of FHLB advances and other borrowings was partially offset by a $1.7 million reduction in interest expense due to this cost of funding declining from 4.88% for the six months ended December 31, 2007 to 3.45% for the six months ended December 31, 2008. Interest expense for subordinated debentures payable to trusts also declined by $263,000 as a result of the yield declining from 8.57% to 6.67% during the same comparable six month periods. The average rate paid on total interest-bearing liabilities was 2.87% for the six months ended December 31, 2008 as compared to 4.38% for the same period in the prior fiscal year.

Net Interest Income. The Company’s net interest income for the six months ended December 31, 2008 increased $4.0 million, or 29.5%, to $17.7 million compared to $13.7 million for the same period in the prior fiscal year. The increase in net interest income was due primarily to decreases in the average rate paid on interest-bearing liabilities and increases in the average volume of interest-earning assets for the six months ended December 31, 2008 compared to the same period in the prior fiscal year. The Company’s net interest margin on a fully taxable equivalent basis was 3.37% for the six months ended December 31, 2008 as compared to 2.96% for the same period in the prior fiscal year.

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During the six months ended December 31, 2008, the Company recorded a provision for losses on loans and leases of $387,000 compared to $620,000 for the six months ended December 31, 2007, a decrease of $233,000. The reduction in the provision was due in part to a large loan loss recovery which increased the allowance for loan and lease losses during the second quarter of Fiscal 2009. The Company previously announced a net loan loss recovery of $2.2 million from a settlement of a previously disclosed lawsuit against MetaBank. During the second quarter, the Company bolstered its methodology for calculating the allowance for loan and lease losses to better capture the impact of the economic recession currently being experienced across the country. See “Asset Quality” for further discussion.

Non-interest Income. Non-interest income was $6.0 million for the six months ended December 31, 2008 as compared to $5.8 million for the same period in the prior fiscal year, an increase of $197,000, or 3.4%. The increase in non-interest income was attributable to increases of $301,000 in fees on deposits, $44,000 in loan servicing income, and $125,000 in net gain on sale of securities. These increases were partially offset by a decrease of $162,000 in net gain on sale of loans and a decrease of $123,000 in trust income for the six months ended December 31, 2008 as compared to the same period in the prior fiscal year.

Fees on deposits increased $301,000, or 10.9% for the six months ended December 31, 2008 as compared to the same period in the prior fiscal year primarily due to increased point-of-sale interchange revenue and fee schedule adjustments. Loan servicing income increased $44,000, or 4.2% primarily due to an increase of $38.0 million in the balances of loans serviced by the Bank from $1.03 billion at December 31, 2007 to $1.06 billion at December 31, 2008. Net gain on sale of securities increased $125,000 for the six months ended December 31, 2008 as compared to the same period in the prior fiscal year primarily due to the sale of securities, which did not occur in the prior year.

Non-interest Expense. Non-interest expense was $17.6 million for the six months ended December 31, 2008 as compared to $14.9 million for the six months ended December 31, 2007, an increase of $2.7 million, or 18.4%. The increase in non-interest expense was primarily due to increases in compensation and employee benefits of $1.7 million, marketing of $105,000, foreclosed real estate and other properties, net of $133,000, and other non-interest expense of $647,000.

Compensation and employee benefits increased $1.7 million, or 18.6%, from $9.2 million for the six months ended December 31, 2007 to $10.9 million for the six months ended December 31, 2008. Employee compensation increased $562,000, or 9.1%, variable pay relating to employee incentives and commissions increased $480,000, or 58.1% and net healthcare costs increased $673,000, or 106.7%. Employee compensation increased due to annual raises awarded and additional personnel since the six month period ended December 31, 2007. Variable pay relating to employee incentive programs increased due to higher production and net income. Healthcare costs increased as a result of higher claim activity in the second quarter of Fiscal 2009. Management continues to believe the self-insured structure is a reasonable alternative to traditional healthcare plans over the long term. The level of healthcare costs which the Company incurs may vary from year to year, and the increase in net healthcare costs does not necessarily indicate a trend.

Marketing increased $105,000 from $562,000 for the six months ended December 31, 2007 to $667,000 for the six months ended December 31, 2008 due to increased promotional activities.

Foreclosed real estate and other properties, net, increased by $133,000 to $213,000 for the six months ended December 31, 2008 as compared to the same period in the prior fiscal year due to increased activity in repossessed equipment.

Other non-interest expenses rose $647,000 largely due to increases in federal deposit insurance premiums of $216,000, legal and professional expenses of $302,000, and community investment contributions of $52,000. Previously, the Company had credits to offset federal deposit insurance premiums. No future credits exist to offset this cost in the future. Legal and consulting costs increased due in part to a lawsuit, which was settled in the second quarter of Fiscal 2009, in addition to legal review costs related to the participation in the CPP as mentioned earlier. Community investment contributions increased primarily due to the timing for which these investments were incurred. Some of the investments incurred were previously incurred in third quarter of Fiscal 2008. There has not been a large increase in new community investments from the prior fiscal year.

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Income tax expense. The Company’s income tax expense for the six months ended December 31, 2008 increased $512,000 or 37.2% to $1.9 million compared to $1.4 million for the same period in the prior fiscal year. The effective tax rate was 33.1% and 34.6% for the six months ended December 31, 2008 and 2007, respectively.

Liquidity and Capital Resources

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

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

The Bank anticipates it will have sufficient funds available to meet current loan commitments. At December 31, 2008, the Bank had outstanding commitments to originate and purchase mortgage and commercial loans of $29.0 million. In addition, the Bank had outstanding commitments to sell mortgage loans of $20.1 million. Commitments by the Bank to originate loans are not necessarily executed by the customer. The Bank monitors the ratio of commitments to funding for use in liquidity management. At December 31, 2008, the Bank had no outstanding commitments to purchase investment securities available for sale and no commitments to sell investment securities available for sale.

Although in-market deposits are the Bank’s primary source of funds, the Bank’s policy has been to utilize borrowings where the funds can be invested in either loans or securities at a positive rate of return or to use the funds for short-term liquidity purposes. The Bank has unsecured federal funds accommodations totaling $15.0 million with correspondent banks. In addition, the Company has a revolving line of credit totaling $6.0 million with a correspondent bank. There were no funds drawn on either line of credit at December 31, 2008. Additionally, as of December 31, 2008, the Bank had $22.6 million in out-of-market certificates of deposit. The Bank may also seek other sources of contingent liquidity including additional federal funds purchased lines with correspondent banks and lines of credit with the Federal Reserve Bank.

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

Savings institutions insured by the Federal Deposit Insurance Corporation are required by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 to meet three regulatory capital requirements. If a requirement is not met, regulatory authorities may take legal or administrative actions, including restrictions on growth or operations or, in extreme cases, seizure. Institutions not in compliance may apply for an exemption from the requirements and submit a recapitalization plan. At December 31, 2008, the Bank met all current regulatory capital requirements.

The minimum OTS Tier 1 (core) capital requirement for well-capitalized institutions is 5.00% of total adjusted assets for thrifts. The Bank had Tier 1 (core) capital of 8.00% at December 31, 2008. The minimum OTS total risk-based capital requirement for well-capitalized institutions is 10.00% of risk-weighted assets. The Bank had total risk-based capital of 11.40% at December 31, 2008.

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Impact of Inflation and Changing Prices

The unaudited consolidated financial statements and notes thereto presented in this Quarterly Report on Form 10-Q have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Bank’s operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact on the Bank’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Recent Accounting Pronouncements

In September 2006, FASB issued Statement of Financial Accounting Standards No. 157 (SFAS 157), “Fair Value Measurements.” SFAS 157 provides a common definition of fair value and a framework for measuring assets and liabilities at fair values when a particular standard prescribes it. In addition, the Statement expands disclosures about fair value measurements. The Company adopted SFAS No. 157 effective July 1, 2008, and the adoption did not have a material impact on its results of operations, financial position, and liquidity.

In February 2007, FASB issued Statement of Financial Accounting Standards No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” SFAS 159 allows companies the choice to measure many financial instruments and certain other items at fair value. This gives a company the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted SFAS No. 159 effective July 1, 2008, and the adoption did not have a material impact on its results of operations, financial position, and liquidity. The Company did not adopt fair value for any additional financial instruments or other items.

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

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

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

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). This statement makes the hierarchy explicitly and directly applicable to preparers of financial statements, a step that recognizes preparers’ responsibilities for selecting the accounting principles for their financial statements. SFAS 162 provides for slight modifications to the current hierarchy in place by adding FASB Staff Positions, Statement 133 Implementation Issues, and EITF D-Topics to it. The Company adopted SFAS No. 162 effective November 15, 2008, and the adoption did not have a material impact on its results of consolidated financial condition, results of operations or cash flow.

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

In October 2008, the FASB issued SFAS No. 157-3, which clarifies the application of SFAS 157, Fair Value Measurements, in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. The FSP states that an entity should not automatically conclude that a particular transaction price is determinative of fair value. In a dislocated market, judgment is required to evaluate whether individual transactions are forced liquidations or distressed sales. When relevant observable market information is not available, a valuation approach that incorporates management’s judgments about the assumptions that market participants would use in pricing the asset in a current sale transaction would be acceptable. The FSP also indicates that quotes from brokers or pricing services may be relevant inputs when measuring fair value, but are not necessarily determinative in the absence of an active market for the asset. The FSP is effective immediately and applies to prior periods for which financial statements have not been issued, including interim or annual periods ending on or before September 30, 2008. Accordingly, we adopted the FSP beginning July 1, 2008. The adoption of the FSP did not have a material impact on our financial results or fair value determinations.

In December 2008, the FASB issued Staff Position No. FAS 132(R)-1, amending the disclosure guidance in FASB Statement No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. The FSP states that the purpose is to increase the transparency in the disclosure of Postretirement Benefit Plan Assets and to provide users an understanding of the following: investment allocation decision-making, including the factors that are pertinent to the investment policies and strategies; the major categories of plan assets; the valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and significant concentrations of risk with plan assets. FAS 132(R)-1 is effective for annual reporting for the fiscal year beginning July 1, 2009. The Company is in the process of assessing the impact on its results of operations, financial position, and cash flow.

In December 2008, the FASB issued Staff Position No. FAS 140-4, amending FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. It also amends FASB Interpretation No. 46 “Consolidation of Variable Interest Entities” to require public enterprises to provide additional disclosures about their involvement with variable interest entities. FAS 140-4 is effective immediately and management does not expect the adoption of this statement to have a material impact on the Company’s consolidated financial condition, results of operations or cash flow.

In January 2009, the FASB issued Staff Position No. EITF 99-20-1, amending the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” (EITF 99-20-1). For debt securities that are not within the scope of Issue 99-20, SFAS No. 115 applies. SFAS No. 115 does not require exclusive reliance on market participant assumptions about future cash flows. Rather, SFAS No. 115 permits the use of reasonable management judgment of the probability that the holder will be unable to collect all amounts due. The FSP is effective immediately and the application of the FSP did not have a material impact on our financial results or fair value determinations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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In an attempt to manage its exposure to change in interest rates, management monitors the Company’s interest rate risk. The Company’s Asset/Liability Committee meets periodically to review the Company’s interest rate risk position and profitability, and to recommend adjustments for consideration by executive management. Management also reviews the Bank’s securities portfolio, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner. In managing market risk and the asset/liability mix, the Bank has placed its emphasis on developing a portfolio in which, to the extent practicable, assets and liabilities reprice within similar periods. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty which may have an adverse effect on net income.

The Company adjusts its asset/liability position to mitigate the Company’s interest rate risk. At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, management may increase the Company’s interest rate risk position in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long- and short-term interest rates.

As set forth below, the volatility of a rate change, the change in asset or liability mix of the Company or other factors may produce a decrease in net interest margin in an upward moving rate environment even as the net portfolio value (“NPV”) estimate indicates an increase in net value. The inverse situation may also occur. One approach used by the Company to quantify interest rate risk is an NPV analysis. This analysis calculates the difference between the present value of the liabilities and the present value of expected cash flows from assets and off-balance sheet contracts. The following tables set forth, at December 31, 2008 and 2007, respectively, an analysis of the Company’s interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve. Management does not believe that the Company has experienced any material changes in its market risk position from that disclosed in the Company’s Annual Report on Form 10-K for Fiscal 2008 or that the Company’s primary market risk exposures and how those exposures were managed during the six months ended December 31, 2008 changed significantly when compared to June 30, 2008.

Even if interest rates change in the designated amounts, there can be no assurance that the Company’s assets and liabilities would perform as set forth below. In addition, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause significantly different changes to the NPV than indicated below.

December 31, 2008
			Estimated Increase
Change in	Estimated		(Decrease) in NPV
Interest Rates	NPV Amount		Amount			Percent
Basis Points	(Dollars in Thousands)

+300	$	106,719	$	(6,122	)	(5	)%
+200	111,462		(1,379		)	(1	)
+100	114,871		2,030			2
—	112,841		—			—
-100	105,266		(7,575		)	(7	)

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December 31, 2007
			Estimated Increase
Change in	Estimated		(Decrease) in NPV
Interest Rates	NPV Amount		Amount			Percent
Basis Points	(Dollars in Thousands)

+300	$	100,026	$	(23,435	)	(19	)%
+200	109,065		(14,396		)	(12	)
+100	117,085		(6,376		)	(5	)
—	123,461		—			—
-100	125,554		2,093			2
-200	124,386		925			1

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

Item 4. Controls and Procedures

The Company’s management has evaluated, under the supervision and with the participation of the Company’s Chairman, President and Chief Executive Officer and the Company’s Executive Vice President, Chief Financial Officer and Treasurer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e), and have concluded that, as of the end of the period covered by this Quarterly Report, the Company’s disclosure controls and procedures are effective for gathering, analyzing and disclosing information the Company is required to disclose in its periodic reports filed under the Exchange Act. There were no significant changes in the Company’s internal control over financial reporting during the period covered by the Quarterly Report that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

On June 26, 2006, the Company filed a $3.8 million lawsuit against MetaBank and two individuals, J. Tyler Haahr and Daniel A. Nelson, for their role in a participation loan, alleging fraud, breach of fiduciary duty, conspiracy and negligent misrepresentation. These damages were the result of a failure by the lead bank to make disclosures regarding an investigation of the commercial customer by the Iowa Attorney General at the time the Bank agreed to an extension of loan participation agreements. As referenced in the 8-K filed October 27, 2008, the lawsuit was settled for $2.8 million inclusive of the remaining amount of receivables from certain loan participation interests of $223,000. The settlement amount, less attorney fees of $292,000, was recorded as a net loan loss recovery of $2.2 million in the second quarter of Fiscal 2009. No further action or expense relating to this matter is expected in the future.

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

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Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in Part 1, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for Fiscal 2008.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth the purchases by the Company of its common stock and the remaining amount that can be purchased in the current program during the quarterly period ended December 31, 2008:

	Total			Total Number	Maximum Number of
	Number	Average		of Shares Purchased	Shares that May Yet
	of Shares	Price Paid		as Part of Publicly	Be Purchased Under
Period	Purchased	per Share		Announced Programs	the Current Program
October 1 - 31, 2008	—	$	0.00	—	388,794
November 1 - 21, 2008	—	$	0.00	—	388,794
Nov. 22 - Dec. 31, 2008	TERMINATION OF PROGRAM-NO SHARES AVAILABLE				0
2nd Quarter Total	—	$	0.00	—

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

At the Company’s Annual Meeting of Stockholders held on November 19, 2008, (the “Annual Meeting”), the stockholders elected the three individuals nominated to serve as Class III directors until 2011 or until their respective successors are elected and qualified, as set forth in Proposal 1 in the Company’s Proxy Statement relating to the Annual Meeting. The three individuals elected, and the number of votes cast for, or withheld, with respected to each of them, is as follows:

Curtis L. Hage	For: 2,920,856	Vote Withheld: 192,221
Christine E. Hamilton	For: 2,938,563	Vote Withheld: 174,513
Thomas L. Van Wyhe	For: 2,942,957	Vote Withheld: 170,121

The following directors continue to serve on the Board of Directors following the Annual Meeting: Curtis J. Bernard, Charles T. Day, Robert L. Hanson and Wm. G. Pederson.

The Company also voted and approved the ratification of the re-appointment of Eide Bailly, LLP as the Company’s auditors for fiscal year ending June 30, 2009. The number of votes for ratification and the related percentage of votes actually cast are as follows:

For:	3,077,299	Actually Cast:	98.85%
Against:	17,100	Actually Cast:	0.55%
Abstain:	18,679	Actually Cast:	0.60%

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

					HF Financial Corp.

					(Registrant)

Date:	February 12, 2009	By:		/s/ Curtis L. Hage
			Curtis L. Hage, Chairman, President
			and Chief Executive Officer
			(Principal Executive Officer)

Date:	February 12, 2009	By:		/s/ Darrel L. Posegate
			Darrel L. Posegate, Executive Vice President,
			Chief Financial Officer and Treasurer
			(Principal Financial and Accounting Officer)

Exhibit Number
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

		Page Number
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Consolidated Statements of Financial Condition At December 31, 2008 and June 30, 2008	1

	Consolidated Statements of Income for the Three and Six Months Ended December 31, 2008 and 2007	2

	Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2008 and 2007	3

	Notes to Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34

Item 4.	Controls and Procedures	36

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 4.	Submission of Matters to a Vote of Security Holders	37

Item 6.	Exhibits	38

Form 10-Q	Signature Page	39