10-Q 1 a06-9905_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period ended March 31, 2006

Commission File Number: 0-19972

HF FINANCIAL CORP.

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

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

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

(605) 333-7556

(Registrant’s telephone number, including area code)

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

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

LARGE ACCELERATED FILER o

ACCELERATED FILER o

NON-ACCELERATED FILER ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of May 11, 2006 there were 3,944,829 issued and outstanding shares of the Registrant’s Common Stock, with $.01 par value per share.

HF FINANCIAL CORP.

Form 10-Q

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.		Financial Statements (Unaudited):

		Consolidated Statements of Financial Condition As of March 31, 2006 and June 30, 2005

		Consolidated Statements of Income for the Three Months and Nine Months Ended March 31, 2006 and 2005

		Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2006 and 2005

		Notes to Consolidated Financial Statements

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

Item 3.		Quantitative and Qualitative Disclosures about Market Risk

Item 4.		Controls and Procedures

PART II – OTHER INFORMATION

Item 1.		Legal Proceedings

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

Item 6.		Exhibits

Form 10-Q		Signature Page

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands)

	March 31, 2006			June 30, 2005
	(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents	$	17,426		$	18,248
Securities available for sale	143,226			142,429
Federal Home Loan Bank stock	6,489			7,699
Loans held for sale	9,243			10,238
Loans and leases receivable	698,838			675,657
Allowance for loan and lease losses	(5,369		)	(5,076		)
Net loans and leases receivable	693,469			670,581
Accrued interest receivable	6,288			5,087
Office properties and equipment, net of accumulated depreciation	13,947			12,978
Foreclosed real estate and other properties	1,336			1,387
Cash value of life insurance	12,891			12,530
Servicing rights	5,612			5,211
Goodwill, net	4,951			4,951
Other assets	6,371			6,535
Total assets	$	921,249		$	897,874

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits	$	705,265		$	681,216
Advances from Federal Home Loan Bank and other borrowings	114,515			119,664
Subordinated debentures payable to trusts	27,837			27,837
Advances by borrowers for taxes and insurance	9,486			6,446
Accrued expenses and other liabilities	8,456			9,076
Total liabilities	865,559			844,239

STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized, none outstanding	—			—
Series A Junior Participating Preferred Stock, $1.00 stated value, 50,000 shares authorized, none outstanding	—			—
Common stock, $.01 par value, 10,000,000 shares authorized, 5,918,191 and 5,462,066 shares issued at March 31, 2006 and June 30, 2005, respectively	59			55
Common stock subscribed for but not issued, 73,308 shares at June 30, 2005	—			1,266
Additional paid-in capital	19,181			19,190
Retained earnings, substantially restricted	67,650			65,267
Deferred compensation	—			(2,140		)
Accumulated other comprehensive income (loss), net of related deferred tax effect	(2,033		)	(836		)
Less cost of treasury stock, 1,977,836 and 1,977,836 shares at March 31, 2006 and June 30, 2005, respectively	(29,167		)	(29,167		)
Total stockholders’ equity	55,690			53,635
Total liabilities and stockholders’ equity	$	921,249		$	897,874

See accompanying notes to unaudited consolidated financial statements.

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2006		2005		2006		2005

Interest, dividend and loan fee income:
Loans and leases receivable	$	11,829	$	9,882	$	34,543	$	29,820
Investment securities and interest-earning deposits	1,637		1,108		4,538		3,109
	13,466		10,990		39,081		32,929
Interest expense:
Deposits	5,239		3,259		14,328		8,971
Advances from Federal Home Loan Bank and other borrowings	1,845		1,449		5,643		4,332
	7,084		4,708		19,971		13,303
Net interest income	6,382		6,282		19,110		19,626
Provision for losses on loans and leases	418		129		4,510		504
Net interest income after provision for losses on loans and leases	5,964		6,153		14,600		19,122

Noninterest income:
Gain on sale of land, net	—		—		3,557		—
Fees on deposits	1,029		1,008		3,375		3,255
Loan servicing income	118		308		805		963
Gain on sale of loans, net	280		207		688		669
Trust income	214		179		609		510
Gain on sale of securities, net	2		—		2		13
Other	434		424		1,415		1,253
	2,077		2,126		10,451		6,663
Noninterest expense:
Compensation and employee benefits	4,044		3,924		12,559		12,051
Occupancy and equipment	861		766		2,470		2,315
Other	1,520		1,613		4,762		4,707
	6,425		6,303		19,791		19,073
Income before income taxes	1,616		1,976		5,260		6,712
Income tax expense	366		632		1,688		2,260
Net income	$	1,250	$	1,344	$	3,572	$	4,452
Comprehensive income	$	799	$	860	$	2,375	$	4,686
Cash dividends declared per share	$	0.1023	$	0.1000	$	0.3045	$	0.2977

Earnings per share:(1)
Basic	$	0.32	$	0.35	$	0.91	$	1.14
Diluted	$	0.31	$	0.33	$	0.89	$	1.11

(1) Retroactively adjusted for the 10% stock dividend paid on April 24, 2006 to shareholders of record as of April 10, 2006

See accompanying notes to unaudited consolidated financial statements.

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended March 31,
	2006			2005
Cash flows from operating activities
Net income	$	3,572		$	4,452
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for losses on loans and leases	4,510			504
Depreciation	1,127			1,061
Amortization of discounts and premiums on securities and other	1,446			1,124
Stock based compensation	409			281
Deferred income taxes (credits)	(544		)	110
Loans originated for resale	(71,516		)	(57,825		)
Proceeds from the sale of loans	73,199			60,903
(Gain) on sale of loans, net	(688		)	(669		)
Realized (gain) on sale of securities, net	(2		)	(13		)
(Gain) on sale of land	(3,557		)	—
Losses and provision for losses on sales of foreclosed real estate and other properties, net	33			24
Loss on disposal of office properties and equipment, net	20			6
Change in other assets and liabilities	(2,541		)	(153		)
Net cash provided by operating activities	5,468			9,805
Cash flows from investing activities
Loan participations purchased	(2		)	(12,801		)
Loan participations sold	6,123			—
Loans and leases originated and held	(291,782		)	(153,955		)
Principal collected on loans and leases	258,009			164,282
Proceeds from sale of land	4,863			—
Securities available for sale:
Sales and maturities and repayments	35,816			40,123
Purchases	(39,362		)	(45,397		)
Purchase of Federal Home Loan Bank stock	(3,031		)	(3,541		)
Redemption of Federal Home Loan Bank stock	4,241			3,381
Proceeds from sale of office properties and equipment	2			2
Purchase of office properties and equipment	(2,118		)	(1,185		)
Purchase of servicing rights	(840		)	(766		)
Proceeds from sale of foreclosed real estate and other properties, net	580			568
Net cash (used in) investing activities	(27,501		)	(9,289		)

See accompanying notes to unaudited consolidated financial statements.

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended March 31,
	2006			2005

Cash flows from financing activities
Net increase (decrease) in deposit accounts	$	24,049		$	(7,991	)
Proceeds of advances from Federal Home Loan Bank and other borrowings	366,973			402,383
Payments on advances from Federal Home Loan Bank and other borrowings	(372,122		)	(391,923		)
Increase in advances by borrowers	3,040			2,167
Purchase of treasury stock	—			(2,007		)
Proceeds from issuance of common stock	460			456
Cash dividends paid	(1,189		)	(1,163		)
Net cash provided by financing activities	21,211			1,922

Increase (decrease) in cash and cash equivalents	(822		)	2,438

Cash and cash equivalents
Beginning	18,248			20,474
Ending	$	17,426		$	22,912

Supplemental Disclosures of Cash Flows Information
Cash payments for interest	$	18,777		$	13,109
Cash payments for income and franchise taxes, net	3,513			1,326

See accompanying notes to unaudited consolidated financial statements.

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Nine Months Ended March 31, 2006 and 2005

(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, 2005 (“Fiscal 2005”), 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 Insurors, Inc. (“Hometown”), Home Federal Securitization Corp. (“HFSC”), Mid-America Service Corporation and PMD, Inc. The interim consolidated financial statements reflect the deconsolidation of the subsidiary trusts of the Company, HF Financial Capital Trust I (“Trust I”), HF Financial Capital Trust II (“Trust II”), HF Financial Capital Trust III (“Trust III”) and HF Financial Capital Trust IV (“Trust IV”). All intercompany balances and transaction have been eliminated in consolidation.

Stock-based compensation: In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” which requires all companies to measure compensation cost for all share-based payments (including stock options) at fair value and to record such expense in their consolidated financial statements. SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”.

The Company adopted SFAS No. 123R effective as of July 1, 2005, using the Black-Scholes option-pricing model and the modified prospective method in which compensation cost is recognized for all awards granted subsequent to the Company’s adoption of this statement as well as for the unvested portion of awards outstanding as of the Company’s adoption of this statement. Prior to July 1, 2005, the Company accounted for stock-based compensation in accordance with APB No. 25 and related interpretations. As such, no stock-based employee compensation cost was recognized for grants under the Company’s stock option and incentive plans, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. 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 2005, under Note 17 of “Notes to Consolidated Financial Statements.”

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123R to stock-based employee compensation for the three and nine months ended March 31, 2005.

	Three Months Ended March 31,					Nine Months Ended March 31,
	2006		2005			2006		2005

Net income, as reported (1)	$	1,250	$	1,344		$	3,572	$	4,452
Add: Total stock-based employee compensation expense included in reported net income, net of related tax effects			61					158
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (2)			(125		)			(326		)
Pro forma net income	$	1,250	$	1,280		$	3,572	$	4,284

Basic earnings per share: (3)
As reported	$	0.32	$	0.35		$	0.91	$	1.14
Pro forma			0.33					1.10

Diluted earnings per share: (3)
As reported	0.31		0.33			0.89		1.11
Pro forma			0.32					1.07

(1) Includes expense related to stock-based employee compensation for the three and nine months ended March 31, 2006 due to the adoption of SFAS No. 123R.

(2) Includes expense related to restricted stock reported in net income.

(3) Retroactively adjusted for the 10% stock dividend paid on April 24, 2006 to shareholders of record on April 10, 2006.

NOTE 2. REGULATORY CAPITAL

The following table sets forth the Bank’s compliance with its minimum capital requirements for a well-capitalized institution at March 31, 2006:

	Amount		Percent
	(Dollars in Thousands)
Tier I (core) capital (to adjusted total assets):
Required	$	45,885	5.00	%
Actual	75,698		8.25
Excess over required	29,813		3.25

Risk-based capital (to risk-weighted assets):
Required	$	75,014	10.00	%
Actual	81,067		10.81
Excess over required	6,053		0.81

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 that they were outstanding. The weighted average number of basic common shares outstanding for the three months ended March 31, 2006 and 2005 was 3,937,219 and 3,893,863, respectively. The weighted average number of basic common shares outstanding for the nine months ended March 31, 2006 and 2005 was 3,904,871 and 3,896,614, respectively.

Dilutive earnings per share is similar to the computation of basic earnings per share except that 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 March 31, 2006 and 2005 was 4,025,351 and 4,012,538, respectively. The weighted average number of common and dilutive potential common shares outstanding for the nine months ended March 31, 2006 and 2005 was 3,991,112 and 3,999,380, respectively.

All earnings per share data and number of common shares outstanding have been retroactively adjusted for the 10% stock dividend paid on April 24, 2006 to shareholders of record as of April 10, 2006. See Note 10 of the “Notes to Consolidated Financial Statements.”

NOTE 4. CONSUMER AUTOMOBILE LOAN SECURITIZATION

On January 31, 2003, the Bank securitized and sold motor vehicle installment loans with principal balances totaling $50.0 million through HFSC and Home Federal Automobile Securitization Trust 2003-A (“Automobile Securitization Trust”). As part of the sales transaction, the Bank retained servicing responsibilities. In addition, the Bank retained the rights to cash flows remaining after investors in the Automobile Securitization Trust received their contractual payments and pledged a $1.5 million reserve fund to the Automobile Securitization Trust. These retained interests are subordinated to investors’ interests. The investors and Automobile Securitization Trust have no recourse to the Bank’s other assets for failure of debtors to pay when due. The pass through rate to investors is 2.65%.

The gain recognized on the sale of these loans was determined by allocating the carrying amount of the loans between the loans sold and the interests retained. The Bank determined that 50 basis points of the 100 basis points servicing contract represented was excess servicing and was capitalized as part of the transaction utilizing a market discount rate of 10.0%. This asset is amortized in proportion to, and over the period of, estimated net servicing income.

The Company had the option to execute a cleanup call when the total outstanding balance was at 10% or less of the original pool balance, or $5.0 million. On November 9, 2005, the Bank exercised its option to execute a cleanup call by purchasing the outstanding principal balances of the securitized motor vehicle installment loans.

NOTE 5. 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:

	March 31, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
	(Dollars in Thousands)

Debt securities:
U.S. government agencies	$	9,513	$	—	$	(129	)	$	9,384
Federal Home Loan Bank	8,977		—		(139		)	8,838
Municipal bonds	3,510		—		(75		)	3,435
Preferred Term Securities	11,019		73		(123		)	10,969
	33,019		73		(466		)	32,626

Equity securities:
FNMA	8		12		—			20
Federal Ag Mortgage	7		4		—			11
Other Investments	38		—		—			38
	53		16		—			69

Mortgage-backed securities	113,433		1		(2,903		)	110,531
	$	146,505	$	90	$	(3,369	)	$	143,226

	March 31, 2005
	Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
	(Dollars in Thousands)

Debt securities:
U.S. government agencies	$	5,000	$	—	$	(59	)	$	4,941
Federal Home Loan Bank	1,500		—		(18		)	1,482
Municipal bonds	2,650		1		(18		)	2,633
Preferred Term Securities	9,000		57		—			9,057
	18,150		58		(95		)	18,113

Equity securities:
FNMA	8		14		—			22
Federal Ag Mortgage	7		1		(2		)	6
Other Investments	25		—		—			25
	40		15		(2		)	53

Mortgage-backed securities	111,289		14		(1,766		)	109,537
	$	129,479	$	87	$	(1,863	)	$	127,703

The following table presents the fair value and age of gross unrealized losses by investment category at March 31, 2006 in accordance with Emerging Issues Task Force Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.”

	Less than 12 Months					12 Months or More					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		(Losses)			Value		(Losses)			Value		(Losses)
	(Dollars in Thousands)
Debt securities:
U.S. government agencies	$	3,985	$	(28	)	$	5,400	$	(101	)	$	9,385	$	(129	)
Federal Home Loan Bank	8,838		(139		)	—		—			8,838		(139		)
Municipal bonds	2,106		(63		)	1,329		(12		)	3,435		(75		)
Preferred term securities	1,896		(123		)						1,896		(123		)
Mortgage-backed securities	43,745		(940		)	66,698		(1,963		)	110,443		(2,903		)
	$	60,570	$	(1,293	)	$	73,427	$	(2,076	)	$	133,997	$	(3,369	)

Management does not believe any individual unrealized losses as of March 31, 2006 represent an other-than-temporary impairment. The unrealized losses reported for mortgage-backed securities relate to securities issued by the Federal National Mortgage Association (“FNMA”), the Government National Mortgage Association and the Federal Home Loan Mortgage Corporation (“FHLMC”). These unrealized losses are primarily attributable to changes in interest rates and as a group were less than 2.5% of its respective amortized cost basis at March 31, 2006. The Company has the ability to hold the securities to maturity or for a time necessary to recover the amortized cost.

The Company invests in investment securities issued by FNMA and FHLMC. FNMA and FHLMC are government-sponsored enterprises (“GSEs”). GSE, as defined in the Omnibus Budget Reconciliation Act of 1990, refers to a private corporation that operates under a charter granted by Congress. The majority of the members of the board of directors of a GSE must be elected by the private shareholders, though some portion may be appointed by Congress or the President. The central function of a GSE is to serve as a financial intermediary, making loans or issuing loan guarantees to borrowers or sectors identified in the enabling legislation. A GSE may raise funds in a variety of ways, but in no case are the liabilities of the GSE to be backed by the full faith and credit of the federal government. The legislation specifically states that a GSE does not have the power to tax or regulate and cannot make financial commitments in the name of the federal government and that members of its staff are not employees of the federal government. However, management believes that GSEs are generally perceived by the credit markets to have an implicit federal government guarantee backing its obligations.

Management cannot predict the role of GSEs in the future or how Congress would respond to accounting or credit issues that may affect GSEs. Management presently expects to continue to invest in investment securities issued by FNMA and FHLMC in the normal course of business. If Congress would ever eliminate the implicit guarantee associated with securities issued by GSEs, the outcome would most likely be adverse to the Company.

NOTE 6. 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.

Three Months Ended March 31, 2006	Banking			Other			Total
	(Dollars in Thousands)

Net interest income	$	7,171		$	(789	)	$	6,382
Intersegment interest income	(279		)	279			—
Provision for losses on loans and leases	(418		)	—			(418		)
Noninterest income	2,262			(185		)	2,077
Intersegment noninterest income	(45		)	45			—
Noninterest expense	(6,347		)	(78		)	(6,425		)
Intersegment noninterest expense	1			(1		)	—
Income (loss) before income taxes	$	2,345		$	(729	)	$	1,616

Total assets at March 31, 2006	$	919,427		$	1,822		$	921,249

Three Months Ended March 31, 2005	Banking			Other			Total
	(Dollars in Thousands)

Net interest income	$	7,021		$	(739	)	$	6,282
Intersegment interest income	(315		)	315			—
Provision for losses on loans and leases	(129		)	—			(129		)
Noninterest income	2,141			(15		)	2,126
Intersegment noninterest income	(73		)	73			—
Noninterest expense	(6,117		)	(186		)	(6,303		)
Intersegment noninterest expense	1			(1		)	—
Income (loss) before income taxes	$	2,529		$	(553	)	$	1,976

Total assets at March 31, 2005	$	850,394		$	3,616		$	854,010

Nine Months Ended March 31, 2006	Banking			Other			Total
	(Dollars in Thousands)

Net interest income	$	21,535		$	(2,425	)	$	19,110
Intersegment interest income	(878		)	878			—
Provision for losses on loans and leases	(4,510		)	—			(4,510		)
Noninterest income	7,098			3,353			10,451
Intersegment noninterest income	(141		)	141			—
Noninterest expense	(19,324		)	(467		)	(19,791		)
Intersegment noninterest expense	4			(4		)	—
Income (loss) before income taxes	$	3,784		$	1,476		$	5,260

Total assets at March 31, 2006	$	919,427		$	1,822		$	921,249

Nine Months Ended March 31, 2005	Banking			Other			Total
	(Dollars in Thousands)

Net interest income	$	21,663		$	(2,037	)	$	19,626
Intersegment interest income	(849		)	849			—
Provision for losses on loans and leases	(504		)	—			(504		)
Noninterest income	6,740			(77		)	6,663
Intersegment noninterest income	(245		)	245			—
Noninterest expense	(18,337		)	(736		)	(19,073		)
Intersegment noninterest expense	3			(3		)	—
Income (loss) before income taxes	$	8,471		$	(1,759	)	$	6,712

Total assets at March 31, 2005	$	850,394		$	3,616		$	854,010

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 in a plan year. The benefits are based on 6% of each eligible participant’s annual compensation, plus income earned in the accounts at a rate determined annually based on 30-year treasury note rates. The Company’s funding policy is to make the minimum annual required contribution plus such amounts as the Company may determine to be appropriate from time to time. One hundred percent vesting occurs after five years with a normal retirement age of 65. Information relative to the components of net periodic benefit cost for the Company’s defined benefit plan is presented below:

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2006			2005			2006			2005

Service cost	$	116,367		$	113,535		$	349,101		$	340,606
Interest cost	91,239			91,585			273,715			274,754
Expected return on plan assets	(93,185		)	(92,629		)	(279,555		)	(277,887		)
Amortization of prior losses	—			8,297			—			24,891
Accretion of prior service cost	—			—			—			—
Amortization of transition asset	2,907			2,908			8,722			8,723
Total costs recognized in expense	$	117,328		$	123,696		$	351,983		$	371,087

The Company previously disclosed in its consolidated financial statements for Fiscal 2005, 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 2005, that it contributed $662,000 to fund its qualified pension plan. During the first quarter ended September 30, 2005, the Company made contributions of $610,000 to fund its qualified pension plan. The Company anticipates no additional contributions for the fiscal year ending June 30, 2006 (“Fiscal 2006”).

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.

Total 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 for the fiscal years ended June 30, 2003, 2004, 2005 and 2006.

	Fiscal Years Ended June 30,
	2006		2005		2004		2003
	(Dollars in Thousands)

Quarter ended September 30	$	419	$	381	$	594	$	307
Quarter ended December 31	409		213		273		538
Quarter ended March 31	382		379		678		204
Quarter ended June 30			282		244		780
Net healthcare costs	$	1,210	$	1,255	$	1,789	$	1,829

NOTE 9. FASB STATEMENT NO. 140

During the third quarter of Fiscal 2006, the Company completed a line item change of its income recorded on originated mortgage servicing rights for loans sold to South Dakota Housing Development Authority. This process was done upon a fuller interpretation of Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” as issued by the FASB. All periods presented have been revised in presentation to reflect this line item and there was no change to net income, earnings per share, or recorded value of servicing rights as a result of this line item change. The following table reflects the effects of the line item change on the Company’s consolidated statements of income for the three and nine months ended March 31, 2006 and 2005.

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2006			2005			2006			2005
	(Dollars in Thousands)

Loan servicing income	$	(66	)	$	(43	)	$	(159	)	$	(169	)
Gain on sale of loans, net	66			43			159			169

Net income change	$	—		$	—		$	—		$	—

NOTE 10. PAYMENT OF 10% STOCK DIVIDEND

During the third quarter of Fiscal 2006, the Company declared a 1-1/10-for-1 stock split of all of the common stock of the Company outstanding, payable in the form of a 1/10-for-1 stock dividend. The 10% stock dividend was paid on April 24, 2006 to stockholders of record as of April 10, 2006.

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 that they do not relate strictly to historical or current facts. They often include words such as “optimism,” “look-forward,” “bright,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.”

Forward-looking statements about the Company’s expected financial results and other plans are subject to certain risks, uncertainties and assumptions. These include, but are not limited to the 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 portfolios; the ability or inability of the Company to manage interest rate and other risks; unexpected or continuing claims against the Company’s self-insured health plan; the Company’s use of trust preferred securities; the ability or inability of the Company to successfully enter into a definitive agreement for and close anticipated transactions; technological, computer-related or operational difficulties; adverse changes in securities markets; results of litigation; or other significant uncertainties.

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

Executive Summary

The Company’s net income for the third quarter of Fiscal 2006 was $1.3 million, or $0.31 per diluted share, compared to $1.3 million, or $0.33 per diluted share, for the third quarter of Fiscal 2005. For the first nine months of Fiscal 2006, net income was $3.6 million, or $0.89 per diluted share, compared to $4.5 million, or $1.11 per diluted share, for the first nine months of Fiscal 2005. On a pro forma basis, if the Company had applied the fair value recognition provisions of SFAS 123R to stock-based employee compensation in Fiscal 2005, the Company’s net income per diluted share for the third quarter of Fiscal 2005 and the first nine months of Fiscal 2005 would have been $0.32 and $1.07, respectively. Return on average equity was 8.74% at March 31, 2006 compared to 11.12% at March 31, 2005.

The Company adopted SFAS 123R effective as of July 1, 2005. As a result, the Company recognized $138,000 in stock option expense for the nine months ended March 31, 2006 compared to no expense recognized for stock options granted under the Company’s stock option and incentive plans for the same period a year ago. The Company also recognized $313,000 in restricted stock expense for the nine months ended March 31, 2006, compared to $159,000 for the same period a year ago.

On March 24, 2006, the Company announced a 10% stock dividend paid on April 24, 2006 to stockholders of record as of April 10, 2006. The Company expects this stock dividend, along with its ongoing business strategies, to enhance long-term stockholder value and liquidity. The Board of Directors believes the increase in market value for the Company over the last two years warrants the payment of this stock dividend.

The allowance for loan and lease losses increased to $5.4 million at March 31, 2006, compared to $5.1 million at June 30, 2005, an increase of $293,000 or 5.8%. The ratio of allowance for loan and lease losses to total loans and leases was 0.76% as of March 31, 2006 compared to 0.74% at June 30, 2005. Total nonperforming assets at March 31, 2006 were $4.7 million as compared to $7.0 million at June 30, 2005. The ratio of nonperforming assets to total assets decreased to 0.51% at March 31, 2006, compared to 0.78% at June 30, 2005. The allowance for loan and lease losses is calculated based on loan and lease levels, loan and lease loss history, credit quality of the loan and lease portfolio, and environmental factors such as economic health of the region and management experience. This risk rating analysis is designed to give the Company a consistent and systematic methodology to determine proper levels for the allowance at a given time.

As of March 31, 2006, the Company continued to record a receivable in the amount of $659,000 from the sale of certain loan participation interests in December 2005. The balance of this receivable represents the remaining amount the Company expects to be paid by the lead bank. The Company requested payment from the lead bank and currently is expecting to receive such payment over the next few months.

The net interest margin for the three months ended March 31, 2006 was 3.03%, compared to 3.28% for the same period a year ago. For the first nine months of Fiscal 2006, the net interest margin was 3.01%, compared to 3.33% for the same period a year ago. The flattening of the treasury yield curve caused by increasing short-term rates and lagging long-term rates continued to affect the Company’s net interest margin ratio during the quarter. Variability of the net interest margin ratio may be affected by many aspects, including Federal Reserve policies for short-term interest rates, competitive and global economic factors and customer preferences for various products and services. From March 31, 2005 to March 31, 2006, the Federal Reserve increased short-term interest rates eight times at 25 basis points each, for a total increase of 200 basis points.

Net interest margin in dollars for the first nine months of Fiscal 2006 was $19.1 million, which decreased by $516,000, or 2.6%, over the same period a year ago. Net interest margin in dollars increased $100,000, or 1.6%, to $6.4 million for the three months ended March 31, 2006 from $6.3 million for same period in the prior fiscal year. The change in net interest margin in dollars for the three and nine months

ended March 31, 2006 as compared to the same period a year ago was due in large part to the recent increases in the national prime rate. In addition, the Company’s average interest-earning assets in volume through the first nine months of Fiscal 2006 have increased 8.0% from the same period a year ago. For the same time period, average interest-bearing liabilities increased in volume by 8.6%.

Total deposits at March 31, 2006 were $705.3 million, an increase of $54.5 million, or 8.4%, from $650.7 million at March 31, 2005. Interest expense on these deposits was $14.3 million for the nine months ended March 31, 2006, an increase of $5.4 million, or 59.7%, over the same period a year ago. In-market deposits increased from $632.2 million at March 31, 2005 to $661.6 million at March 31, 2006, an increase of $29.4 million, or 4.7%. For the same period, out-of-market deposits increased from $18.5 million to $43.7 million, respectively. Out-of-market deposits are used as a funding source along with other funding when there is a gap in the availability of in-market deposits to fund asset growth. The primary factor affecting interest expense has been the increase in volume of money market accounts. The volume of money market accounts increased by $15.0 million, or 7.1%, from March 31, 2005, to March 31, 2006. Interest expense for these accounts, which are primarily indexed to the 91-day Treasury bill, also increased by $2.3 million, or 76.6%, compared to the same period in the prior fiscal year. With the actions taken by the Federal Reserve, the 91-day Treasury bill has risen significantly from 2.77% at March 31, 2005 to 4.60% at March 31, 2006, an increase of 183 basis points.

In April 2006, the Company announced the renewal of its annual stock buyback program for the period of May 2006 through April 2007. During the third quarter ended March 31, 2006, the Company acquired no shares under its stock buyback program which expired on April 30, 2006. Through the first nine months of Fiscal 2006, the Company acquired no shares under such stock buyback program. A total of 47,300 shares of common stock were purchased pursuant to such program, all of which were purchased in the open market during May and June 2005.

The total risk-based capital ratio of 10.81% at March 31, 2006 is below the 11.02% at March 31, 2005, a decrease of 21 basis points. Despite the decrease, this ratio remains above the 10.66% at the end of Fiscal 2005. This performance continues to place the Bank in the “well capitalized” category within OTS regulation at March 31, 2006 and is consistent within the “well capitalized” OTS category in which the Company plans to operate. The Company historically has been able to manage the size of its assets through secondary market loan sales of single-family mortgages and student loans and a loan securitization.

The Company focuses on balancing operating costs with operating revenue levels in order to provide better efficiency ratios over time and continues to review its operations for ways to reduce its cost structure while continuing to support long-term revenue enhancements. Noninterest expense was $6.4 million for the quarter ended March 31, 2006 compared to $6.3 million at March 31, 2005, an increase of $122,000 or 1.9%. Compensation and employee benefits expense accounted for an increase of $120,000 due to increases in employee compensation and net healthcare costs. In addition, noninterest income was $2.1 million for the quarter ended March 31, 2006 compared to $2.1 million for the quarter ended March 31, 2005, a decrease of $49,000 or 2.3%. This decrease was primarily attributable to lower volume activity on servicing of loans.

The operating efficiency ratio at March 31, 2006 was 71.63%, compared to 69.36% for the same time period a year ago, an increase of 227 basis points. The operating efficiency ratio excludes the impact of interest expense on the variable priced trust preferred securities and the one-time gain on sale of land. The Company has 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 increased to $1.6 million for the nine months ended March 31, 2006, compared to $1.2 million for the same period a year ago, an increase of $418,000 or 34.6%. The average rate paid on these securities increased 200 basis points, from 5.78% at March 31, 2005 to 7.78% at March 31, 2006. The total efficiency ratio was 66.95% at March 31, 2006. Excluding the gain from sale of land, the total efficiency ratio at March 31, 2006 was 76.11%, compared to 72.55% for the same period a year ago, an increase of 356 basis points. Factors contributing to this increase in the efficiency ratio from a year ago include a $516,000 reduction in net interest income and an increase of $718,000 in noninterest expenses for the nine months ended March 31, 2006 compared to the same period in the prior fiscal year.

General

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

Financial Condition Data

At March 31, 2006, the Company had total assets of $921.2 million, an increase of $23.4 million from the level at June 30, 2005. The increase in assets was due primarily to increases in net loans and leases receivable of $22.9 million, office properties and equipment of $969,000 and securities available for sale of $797,000 offset by a decrease in stock in the Federal Home Loan Bank of Des Moines (“FHLB”) of $1.2 million. The increase in liabilities of $21.3 million from June 30, 2005 to March 31, 2006 was primarily due to an increase in deposits of $24.0 million offset by a decrease in advances from the FHLB and other borrowings of $5.1 million. In addition, stockholders’ equity increased $2.1 million to $55.7 million at March 31, 2006 from $53.6 million at June 30, 2005, primarily due to net income of $3.6 million.

The increase in net loans and leases receivable of $22.9 million was due primarily to an increase in purchases and originations over sales, amortization and repayments of principal. In addition, net deferred (fees), costs and discounts decreased $257,000 from the levels at June 30, 2005 to $1.0 million at March 31, 2006. This decrease was primarily due to a decrease of $274,000 in indirect automobile loan costs that include prepaid dealer reserves offset by a decrease in multi-family deferred loan fees.

The increase in office properties and equipment of $969,000 was primarily due to improvements to the main branch offices. In addition, a $192,000 increase was the result of land purchased for a new branch location.

The increase in securities available for sale of $797,000 was primarily the result of purchases of $39.4 million exceeding sales, maturities and repayments of $35.8 million. The purchases of $39.4 million included variable-rate, mortgage-backed securities of $12.1 million.

The decrease in stock in the FHLB of $1.2 million was primarily the result of a $5.1 million decrease in advances from the FHLB and other borrowings.

The $24.0 million increase in deposits was due to increases in in-market certificates of deposit of $23.3 million, money market accounts of $18.2 million, out-of-market certificates of deposit of $7.9 million and interest-bearing checking accounts of $4.1 million offset by decreases in savings accounts of $19.1 million and noninterest-bearing checking accounts of $10.4 million.

Advances from the FHLB and other borrowings decreased $5.1 million, which was primarily due to paydowns of FHLB borrowings of $371.4 million exceeding new borrowings of $367.0 million. The overall decrease in FHLB borrowings was primarily the result of a $24.0 million increase in deposits.

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

	At March 31, 2006				At June 30, 2005
			Percent of				Percent of
			Loans in				Loans in
	Amount		Each Category		Amount		Each Category
	(Dollars in Thousands)
One-to four-family (1)	$	96,264	13.78	%	$	96,496	14.28	%
Commercial business and real estate (2) (3)	233,215		33.37	%	223,638		33.10	%
Multi-family real estate	33,175		4.75	%	34,123		5.05	%
Equipment finance leases	31,983		4.58	%	33,170		4.91	%
Consumer Direct (4) (5)	110,796		15.85	%	111,210		16.46	%
Consumer Indirect	91,458		13.09	%	93,984		13.91	%
Agricultural	82,486		11.80	%	74,010		10.95	%
Construction and development	19,461		2.78	%	9,026		1.34	%
Total Loans and Leases Receivable (6)	$	698,838	100.00	%	$	675,657	100.00	%

(1) Excludes $5,294 and $9,838 loans held for sale at March 31, 2006 and June 30, 2005, respectively.

(2) Includes $3,477 and $3,563 tax exempt leases at March 31, 2006 and June 30, 2005, respectively.

(3) Excludes $659 commercial loans held for sale at March 31, 2006.

(4) Includes mobile home loans.

(5) Excludes $3,290 and $400 student loans held for sale at March 31, 2006 and June 30, 2005, respectively.

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

	At March 31, 2006				At June 30, 2005
			Percent of				Percent of
			Deposits in				Deposits in
	Amount		Each Category		Amount		Each Category
	(Dollars in Thousands)

Noninterest bearing checking accounts	$	75,291	10.68	%	$	85,705	12.58	%
Interest bearing accounts	54,191		7.68	%	50,120		7.36	%
Money market accounts	227,302		32.23	%	209,116		30.70	%
Savings accounts	44,175		6.26	%	63,235		9.28	%
Certificates of deposit	304,306		43.15	%	273,040		40.08	%
Total Deposits	$	705,265	100.00	%	$	681,216	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. Average balances consist of daily average balances for the Bank with simple average balances for all other companies. The average balances include nonaccruing loans and leases. The yields on loans and leases include origination fees, net of costs, which are considered adjustments to yield.

	THREE MONTHS ENDED MARCH 31,
	2006						2005
	Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate		Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate
	(Dollars in Thousands)
Interest-earning assets:
Loans and leases receivable (1) (3)	$	701,325	$	11,829	6.84	%	$	652,245	$	9,882	6.14	%
Investment securities (2) (3)	147,910		1,589		4.36	%	118,375		1,059		3.63	%
FHLB stock	6,334		48		3.07	%	5,633		49		3.53	%

Total interest-earning assets	855,569		$	13,466	6.38	%	776,253		$	10,990	5.74	%
Noninterest-earning assets	68,562						63,507
Total assets	$	924,131					$	839,760

Interest-bearing liabilities:
Deposits:
Checking and money market	$	274,445	$	2,111	3.12	%	$	263,712	$	1,330	2.05	%
Savings	53,818		320		2.41	%	51,321		173		1.37	%
Certificates of deposit	306,466		2,808		3.72	%	254,828		1,756		2.79	%
Total interest-bearing deposits	634,729		5,239		3.35	%	569,861		3,259		2.32	%
FHLB advances and other borrowings	111,937		1,274		4.62	%	97,509		1,016		4.23	%
Subordinated debentures payable to trusts	27,837		571		8.32	%	27,837		433		6.31	%

Total interest-bearing liabilities	774,503		7,084		3.71	%	695,207		4,708		2.75	%
Noninterest-bearing deposits	74,359						72,900
Other liabilities	19,907						17,438
Total liabilities	868,769						785,545
Equity	55,362						54,215
Total liabilities and equity	$	924,131					$	839,760

Net interest income; interest rate spread (4)			$	6,382	2.67	%			$	6,282	2.99	%

Net interest margin (4) (5)					3.03	%					3.28	%

Net interest margin, TE (6)					3.06	%					3.32	%

(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) Percentages for the three months ended March 31, 2006 and March 31, 2005 have been annualized.

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

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

	NINE MONTHS ENDED MARCH 31,
	2006						2005
	Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate		Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate
	(Dollars in Thousands)
Interest-earning assets:
Loans and leases receivable (1) (3)	$	692,707	$	34,543	6.64	%	$	662,446	$	29,820	6.00	%
Investment securities (2) (3)	147,542		4,423		3.99	%	116,137		2,976		3.41	%
FHLB stock	6,866		115		2.23	%	6,029		133		2.94	%

Total interest-earning assets	847,115		$	39,081	6.15	%	784,612		$	32,929	5.59	%
Noninterest-earning assets	69,433						64,808
Total assets	$	916,548					$	849,420

Interest-bearing liabilities:
Deposits:
Checking and money market	$	271,898	$	5,885	2.88	%	$	262,884	$	3,302	1.67	%
Savings	51,325		817		2.12	%	49,095		390		1.06	%
Certificates of deposit	293,528		7,626		3.46	%	259,397		5,279		2.71	%
Total interest-bearing deposits	616,751		14,328		3.09	%	571,376		8,971		2.09	%
FHLB advances and other borrowings	121,392		4,017		4.41	%	106,422		3,124		3.91	%
Subordinated debentures payable to trusts	27,837		1,626		7.78	%	27,837		1,208		5.78	%
Total interest-bearing liabilities	765,980		19,971		3.47	%	705,635		13,303		2.51	%
Noninterest-bearing deposits	76,791						73,145
Other liabilities	19,278						17,272
Total liabilities	862,049						796,052
Equity	54,499						53,368
Total liabilities and equity	$	916,548					$	849,420

Net interest income; interest rate spread (4)			$	19,110	2.68	%			$	19,626	3.08	%

Net interest margin (4) (5)					3.01	%					3.33	%

Net interest margin, TE (6)					3.04	%					3.36	%

(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) Percentages for the nine months ended March 31, 2006 and March 31, 2005 have been annualized.

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

(6) 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 that are due to the levels and volatility of interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

	Three Months Ended March 31,								Nine Months Ended March 31,
	2006 vs 2005								2006 vs 2005
	Increase Due to Volume		Increase (Decrease) Due to Rate			Total Increase (Decrease)			Increase Due to Volume		Increase (Decrease) Due to Rate			Total Increase (Decrease)
	(Dollars in Thousands)
Interest-earning assets:
Loans and leases receivable (1)	$	744	$	1,203		$	1,947		$	1,362	$	3,361		$	4,723
Investment securities (2)	264		266			530			805		642			1,447
FHLB stock	6		(7		)	(1		)	18		(36		)	(18		)

Total interest-earning assets	$	1,014	$	1,462		$	2,476		$	2,185	$	3,967		$	6,152

Interest-bearing liabilities:
Deposits:
Checking and money market	$	54	$	727		$	781		$	113	$	2,470		$	2,583
Savings	8		139			147			18		409			427
Certificates of deposit	356		696			1,052			695		1,652			2,347
Total interest-bearing deposits	418		1,562			1,980			826		4,531			5,357
FHLB advances and other borrowings	150		108			258			439		454			893
Subordinated debentures payable to trusts	—		138			138			—		418			418

Total interest-bearing liabilities	$	568	$	1,808		$	2,376		$	1,265	$	5,403		$	6,668

Net interest income (decrease)						$	100							$	(516	)

(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 that may be uncertain at the time the estimate was made and a different method of estimating could have been reasonably made that could have a material impact on the presentation of the Company’s financial condition, changes in financial condition or results of operations.

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

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

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

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

Due to the substantial decline in interest rates over the last several fiscal years, the Company has included MSRs as a critical accounting policy because the use of estimates for determining fair value using present value concepts may produce results which may significantly differ from other fair value analysis perhaps even to the point of recording impairment. The risk to earnings is when the underlying mortgages payoff significantly faster than the assumptions used in the previously recorded amortization. Estimating future cash flows on the underlying mortgages is a difficult analysis and requires judgment based on the best information available. The Company looks at alternative assumptions and projections when preparing a reasonable and supportable analysis. Based on the Company’s quarterly analysis of MSRs, there was no impairment to the MSRs at March 31, 2006.

Retained Interest from Securitization – The Company recorded an asset as a result of the automobile securitization. See Note 4 of the “Notes to Unaudited Consolidated Financial Statements” which is included

in Part I, Item I “Financial Statements” of this Quarterly Report on Form 10-Q. This asset was recorded based on present value concepts of future expected cash flows. The assumptions used to calculate the initial retained interest value and subsequent assumptions were based on the best information available. On November 9, 2005, the Bank exercised its option to execute a cleanup call by purchasing the outstanding principal balances of the securitized motor vehicle installment loans.

Self-Insurance - The Company has a self-insured health 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 a maximum aggregate limitation of $2.0 million. The estimate of self-insurance liability is based upon known claims and an estimate of incurred, but not reported (“IBNR”) claims. IBNR claims are estimated using historical claims lag information received by a third party claims administrator. Due to the uncertainty of health claims, the approach includes a process that may differ significantly from other methodologies and still produce an estimate that is in accordance with GAAP. Although management believes that it uses the best information available to determine the accrual, unforeseen health claims could result in adjustments to the accrual. These adjustments could significantly affect net earnings if circumstances differ substantially from the assumptions used in estimating the accrual.

Asset Quality and Potential Problem Loans and Leases

Nonperforming assets (nonaccrual loans and leases, accruing loans and leases delinquent more than 90 days and foreclosed assets) decreased to $4.7 million at March 31, 2006 from $7.0 million at June 30, 2005, a decrease of $2.3 million, or 32.5%. Nonaccruing loans and leases decreased $3.5 million to $1.8 million at March 31, 2006 from $5.3 million at June 30, 2005. In addition, the ratio of nonperforming assets to total assets, which is one indicator of credit risk exposure, decreased to 0.51% at March 31, 2006 from 0.78% at June 30, 2005.

Nonaccruing loans and leases decreased 65.3%, or $3.5 million, to $1.8 million at March 31, 2006 compared to $5.3 million at June 30, 2005. Included in nonaccruing loans and leases at March 31, 2006 were two loans totaling $371,000 secured by one- to four-family real estate, eight loans totaling $846,000 secured by commercial business, one lease totaling $116,000, 32 consumer loans totaling $391,000 and one agriculture loan totaling $125,000.

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.

As of March 31, 2006, the Company had $126,000 of foreclosed assets. The balance of foreclosed assets at March 31, 2006 consisted of $1,000 of single-family collateral owned and $125,000 of consumer collateral owned.

At March 31, 2006, the Company had designated $9.8 million of its assets as special mention and classified $6.1 million of its assets that management has determined need to be closely monitored because of possible credit problems of the borrowers or the cash flows of the secured properties. At March 31, 2006 the Company had $10.0 million in multi-family, commercial business, commercial real estate and agricultural participation loans purchased, of which $679,000 were classified as of March 31, 2006. These loans and leases were considered in determining the adequacy of the allowance for loan and lease losses. The allowance for loan and lease losses is established based on management’s evaluation of the risks probable in the loan and lease portfolio and changes in the nature and volume of loan and lease activity. Such evaluation, which includes a review of all loans and leases for which full collectibility may not be reasonably assured, considers the estimated fair market value of the underlying collateral, present value of expected principal and interest payments, economic conditions, historical loss experience and other factors that warrant recognition in providing for an adequate loan and lease loss allowance.

Although the Company’s management believes that the March 31, 2006 recorded allowance for loan and lease losses was adequate to provide for probable losses on the related loans and leases, there can be no assurance that the allowance existing at March 31, 2006 will be adequate in the future.

In accordance with the Company’s internal classification of assets policy, management evaluates the loan and lease portfolio on a monthly basis to identify loss potential and determines the adequacy of the allowance for loan and lease losses quarterly. Loans and leases are placed on nonaccrual status when the collection of principal and/or interest become doubtful. Foreclosed assets include assets acquired in settlement of loans. The following table sets forth the amounts and categories of the Company’s nonperforming assets for the periods indicated.

	Nonperforming Assets As Of
	March 31, 2006			June 30, 2005
	(Dollars in Thousands)
Nonaccruing loans and leases:
One- to four-family	$	371		$	263
Commercial real estate	—			70
Commercial business	846			4,518
Equipment finance leases	116			130
Consumer (1)	391			341
Agricultural	125			—
Total	1,849			5,322

Accruing loans and leases delinquent more than 90 days:
One- to four-family	543			98
Commercial real estate	25			292
Commercial business	859			1,052
Equipment finance leases	707			71
Consumer (1)	2			—
Agricultural	626			96
Total	2,762			1,609

Foreclosed assets: (2)
One- to four-family	1			39
Equipment finance leases	—			—
Consumer (1)	125			50
Total	126			89

Total nonperforming assets	$	4,737		$	7,020

Ratio of nonperforming assets to total assets	0.51		%	0.78		%

Ratio of nonperforming loans and leases to total loans and leases (3) (4)	0.65		%	1.01		%

(1) Includes mobile home loans.

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

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

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

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

	Nine Months Ended March 31,
	2006			2005
	(Dollars in Thousands)

Balance at beginning of period	$	5,076		$	3,605
Charge-offs:
One- to four-family	(1		)	—
Commercial real estate	—			(31		)
Commercial business	(3,290		)	(179		)
Equipment finance leases	(17		)	(11		)
Consumer (1)	(764		)	(822		)
Agriculture	(377		)	(14		)
Total charge-offs	(4,449		)	(1,057		)

Recoveries:
One- to four-family	1			8
Commercial real estate	—			—
Commercial business	14			30
Equipment finance leases	40			1
Consumer (1)	177			170
Agriculture	—			78
Total recoveries	232			287

Net (charge-offs)	(4,217		)	(770		)

Additions charged to operations	4,510			504

Balance at end of period	$	5,369		$	3,339

Ratio of net (charge-offs) during the period to average loans and leases outstanding during the period	(0.61		)%	(0.12		)%

Ratio of allowance for loan and lease losses to total loans and leases at end of period (2)	0.76		%	0.51		%

Ratio of allowance for loan and lease losses to nonperforming loans and leases at end of period (3)	116.44		%	137.35		%

(1) Includes mobile home loans.

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

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

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.

	FASB 5 Allowance for Loan and Lease Losses		FASB 114 Impaired Loan Valuation Allowance		FASB 5 Allowance for Loan and Lease Losses		FASB 114 Impaired Loan Valuation Allowance
Loan Type	At March 31, 2006				At June 30, 2005
	(Dollars in Thousands)

One- to four-family	$	191	$	—	$	186	$	—
Commercial real estate	291		—		200		—
Multi-family real estate	75		—		61		—
Commercial business	2,324		—		844		1,750
Equipment finance leases	603		—		359		—
Consumer (1)	1,467		—		1,343		—
Agricultural	418		—		333		—
Total	$	5,369	$	—	$	3,326	$	1,750

(1) Includes mobile home loans.

FASB 114 Impaired Loan Summary

	Number of Loan Customers	Loan Balance		Impaired Loan Valuation Allowance		Number of Loan Customers	Loan Balance		Impaired Loan Valuation Allowance
Loan Type	At March 31, 2006					At June 30, 2005
	(Dollars in Thousands)					(Dollars in Thousands)
Commercial business	8	$	830	$	—	4	$	4,152	$	1,750
Agricultural	1	125		—		—	—		—
Total	9	$	955	$	—	4	$	4,152	$	1,750

The allowance for loan and lease losses was $5.4 million at March 31, 2006 as compared to $3.3 million at March 31, 2005. The ratio of the allowance for loan and lease losses to total loans and leases was 0.76% at March 31, 2006 compared to 0.51% at March 31, 2005. 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.

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

Comparison of the Three Months Ended March 31, 2006 and March 31, 2005

General. The Company’s net income was $1.3 million, or $0.32 for basic and $0.31 for diluted earnings per share for the three months ended March 31, 2006, a $94,000 decrease in earnings compared to $1.3 million, or $0.35 for basic and $0.33 for diluted earnings per share for the same period in the prior fiscal year. For the three months ended March 31, 2006, the return on average equity was 9.03%, a 9.0% decrease compared to 9.92% for the same period in the prior fiscal year. For the three months ended March 31, 2006, the return on average assets was 0.54%, a 15.6% decrease compared to 0.64% for the same period in the prior fiscal year. As discussed in more detail below, the decreases were due to a variety of key factors, including a decrease in noninterest income of $49,000 and increases in provision for losses on loans and leases of $289,000 and noninterest expense of $122,000 offset by an increase in net interest income of $100,000.

Interest, Dividend and Loan Fee Income. Interest, dividend and loan fee income was $13.5 million for the three months ended March 31, 2006 as compared to $11.0 million for the same period in the prior fiscal year, an increase of $2.5 million or 22.5%. A $1.2 million increase in interest, dividend and loan fee income was the result of an increase in the average yield on loans and leases receivable from 6.14% for the three months ended March 31, 2005 to 6.84% for the three months ended March 31, 2006 and a $744,000 increase in interest, dividend and loan fee income was due to a 7.5% increase in the average volume of loans and leases receivable. The average yield on total interest-earning assets was 6.38% for the three months ended March 31, 2006 as compared to 5.74% for the same period in the prior fiscal year.

Interest Expense. Interest expense was $7.1 million for the three months ended March 31, 2006 as compared to $4.7 million for the same period in the prior fiscal year, an increase of $2.4 million or 50.5%. A $1.6 million increase in interest expense was the result of an increase in average rate paid on interest-bearing deposits from 2.32% for the three months ended March 31, 2005 to 3.35% for the three months ended March 31, 2006. A $150,000 increase in interest expense was the result of a 14.8% increase in the average balance of FHLB advances and other borrowings and a $108,000 increase in interest expense was a result of the average rate paid on FHLB advances and other borrowings increasing from 4.23% for the three months ended March 31, 2005 to 4.62% for the three months ended March 31, 2006. An increase of $1.8 million in interest expense was the result of an increase in the average rate paid on total interest-bearing liabilities from 2.75% for the three months ended March 31, 2005 to 3.71% for the three months ended March 31, 2006.

Net Interest Income. The Company’s net interest income for the three months ended March 31, 2006 increased $100,000, or 1.6%, to $6.4 million compared to $6.3 million for the same period in the prior fiscal year. The increase in net interest income was due primarily to increases in the average yield on interest-earning assets and in the average balance of interest-earning assets for the three months ended March 31, 2006 compared to the same period in the prior fiscal year offset by an increase in the average rate paid on interest-bearing liabilities for the three months ended March 31, 2006 compared to the same period in the prior fiscal year. The Company’s net interest margin was 3.03% for the third quarter of Fiscal 2006 as compared to 3.28% for the same period in the prior fiscal year.

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 collectibility 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 March 31, 2006, the Company recorded a provision for losses on loans and leases of $418,000 compared to $129,000 for the three months ended March 31, 2005, an increase of $289,000. See “Asset Quality” for further discussion.

Noninterest Income. Noninterest income was $2.1 million for the three months ended March 31, 2006 as compared to $2.1 million for the same period in the prior fiscal year, a decrease of $49,000, or 2.3%. The decrease in noninterest income was primarily due to a decrease in loan servicing income of $190,000 offset by increases in gain on sale of loans of $73,000, trust income of $35,000 and fees on deposits of $21,000.

Loan servicing income decreased $190,000 from $351,000 for the three months ended March 31, 2005 to $184,000 for the three months ended March 31, 2006 primarily due to a decrease in the number of loans serviced by the Bank.

Trust income increased $35,000 primarily due to assets under management increasing from $93.7 million at March 31, 2005 to $110.7 million at March 31, 2006.

Fees on deposits increased $21,000 primarily due to an increase in fees collected on point-of-sale purchases by customers. The remaining increase in fees on deposits is comprised of various other deposit fee income.

Noninterest Expense. Noninterest expense was $6.4 million for the three months ended March 31, 2006 as compared to $6.3 million for the three months ended March 31, 2005, an increase of $122,000, or 1.94%. The increase in noninterest expense was primarily due to increases in compensation and employee benefits of $120,000 and occupancy and equipment of $95,000 offset by a decrease in other noninterest expense of $93,000.

Compensation and employee benefits increased $120,000, or 3.1%, to $4.0 million for the three months ended March 31, 2006 as compared to $3.9 million for the three months ended March 31, 2005. Net healthcare costs, inclusive of health claims and administration fees offset by stop loss and employee reimbursement under the Company’s self-insured health plan were $382,000 for the three months ended March 31, 2006, an increase of $3,000 compared to the same period in the prior fiscal year. The remainder of the increase in compensation and employee benefits was primarily due to merit increases, bonuses and additional staffing over the prior year.

Occupancy and equipment expense increased $95,000 for the three months ended March 31, 2006 compared to the same period in the prior fiscal year primarily due to increases in depreciation expense of $37,000, utilities expense of $23,000 and rent expense of $19,000.

Other noninterest expense decreased $93,000 for the three months ended March 31, 2006 compared to the same period in the prior fiscal year primarily due to a decrease in advertising of $189,000 offset by increases in community contributions for reinvestment in the communities we serve of $47,000 and legal expense of $44,000.

Income tax expense. The Company’s income tax expense for the three months ended March 31, 2006 decreased $266,000 or 42.1% to $366,000 compared to $632,000 for the same period in the prior fiscal year. The effective tax rate was 22.6% and 32.0% for the three months ended March 31, 2006 and March 31, 2005, respectively. The decrease in the effective tax rate for the quarter was the result of an increase in permanent tax differences primarily due to an increase in tax-exempt interest income.

Comparison of the Nine Months Ended March 31, 2006 and March 31, 2005

General. The Company’s net income was $3.6 million, or $0.91 for basic and $0.89 for diluted earnings per share for the nine months ended March 31, 2006, a $880,000 decrease in earnings compared to $4.5 million, or $1.14 for basic and $1.11 for diluted earnings per share for the same period in the prior fiscal year. For the nine months ended March 31, 2006, the return on average equity was 8.74%, a 21.4% decrease compared to 11.12% for the same period in the prior fiscal year. For the nine months ended March 31, 2006, the return on average assets was 0.52%, a 25.7% decrease compared to 0.70% for the same period in the prior fiscal year. As discussed in more detail below, the decreases were due to a variety of key factors, including a decrease in net interest income of $516,000 and increases in provision for losses on loans and leases of $4.0 million and noninterest expense of $718,000 offset by an increase in noninterest income of $3.8 million and a decrease in income tax expense of $572,000.

Interest, Dividend and Loan Fee Income. Interest, dividend and loan fee income was $39.1 million for the nine months ended March 31, 2006 as compared to $32.9 million for the same period in the prior fiscal year, an increase of $6.2 million or 18.7%. A $3.4 million increase in interest, dividend and loan fee income was the result of an increase in the average yield on loans and leases receivable from 6.00% for the nine months ended March 31, 2005 to 6.64% for the nine months ended March 31, 2006 and a $1.4 million increase in interest, dividend and loan fee income was due to a 4.6% increase in the average volume of loans and leases receivable. The average yield on total interest-earning assets was 6.15% for the nine months ended March 31, 2006 as compared to 5.59% for the same period in the prior fiscal year.

Interest Expense. Interest expense was $20.0 million for the nine months ended March 31, 2006 as compared to $13.3 million for the same period in the prior fiscal year, an increase of $6.7 million or 50.1%. A $4.5 million increase in interest expense was the result of an increase in average rate paid on interest-bearing deposits from 2.09% for the nine months ended March 31, 2005 to 3.09% for the nine months ended March 31, 2006. A $454,000 increase in interest expense was a result of the average rate paid on FHLB advances and other borrowings increasing from 3.91% for the nine months ended March 31, 2005 to 4.41% for the nine months ended March 31, 2006 and a $439,000 increase in interest expense was the result of a 14.1% increase in the average balance of FHLB advances and other borrowings. An increase of $5.4 million in interest expense was the result of an increase in the average rate paid on total interest-bearing liabilities from 2.51% for the nine months ended March 31, 2005 to 3.47% for the nine months ended March 31, 2006.

Net Interest Income. The Company’s net interest income for the nine months ended March 31, 2006 decreased $516,000, or 2.6%, to $19.1 million compared to $19.6 million for the same period in the prior fiscal year. The decrease in net interest income was due primarily to an increase in the average rate paid on interest-bearing liabilities for the nine months ended March 31, 2006 compared to the same period in the prior fiscal year offset by an increase in the average yield on interest earning assets for the nine months ended March 31, 2006 compared to the same period in the prior fiscal year. The Company’s net interest margin was 3.01% for the nine months ended March 31, 2006 as compared to 3.33% for the same period in the prior fiscal year.

During the nine months ended March 31, 2006, the Company recorded a provision for losses on loans and leases of $4.5 million compared to $504,000 for the nine months ended March 31, 2005, an increase of $4.0 million. See “Asset Quality” for further discussion.

Noninterest Income. Noninterest income was $10.5 million for the nine months ended March 31, 2006 as compared to $6.7 million for the same period in the prior fiscal year, an increase of $3.8 million or 56.9%. The increase in noninterest income was due primarily to a gain on sale of land of $3.6 million along with increases in fees on deposits of $120,000 and trust income of $99,000 offset by a decrease in loan servicing income of $158,000.

Net gain on sale of land was $3.6 million due to the completion of a land sale transaction in the second quarter of Fiscal 2006.

Fees on deposits increased $120,000 primarily due to an increase in fees collected on point-of-sale purchases by customers. The remaining increase in fees on deposits is comprised of various other deposit fee income.

Trust income increased $99,000 primarily due to assets under management increasing from $93.7 million at March 31, 2005 to $110.7 million at March 31, 2006.

Loan servicing income decreased $158,000 from $963,000 for the nine months ended March 31, 2005 to $805,000 for the nine months ended March 31, 2006 primarily due to a decrease in the number of loans serviced by the Bank.

Noninterest Expense. Noninterest expense was $19.8 million for the nine months ended March 31, 2006 as compared to $19.1 million for the nine months ended March 31, 2005. The increase in noninterest expense was primarily due to increases in compensation and employee benefits $508,000 and occupancy and equipment of $155,000.

Compensation and employee benefits increased $508,000, or 4.2%, to $12.6 million for the nine months ended March 31, 2006 as compared to $12.1 million for the nine months ended March 31, 2005. Net healthcare costs, inclusive of health claims and administration fees offset by stop loss and employee reimbursement under the Company’s self-insured health plan were $1.2 million for the nine months ended March 31, 2006, an increase of $237,000, or 24.4% compared to the same period in the prior fiscal year. The remainder of the increase in compensation and employee benefits was primarily due to merit increases, bonuses and additional staffing over the prior year.

Occupancy and equipment expense increased $155,000 for the nine months ended March 31, 2006 compared to the same period in the prior fiscal year primarily due to increases in depreciation expense of $66,000, utilities expense of $32,000 and rent expense of $30,000.

Income tax expense. The Company’s income tax expense for the nine months ended March 31, 2006 decreased $572,000 or 25.3% to $1.7 million compared to $2.3 million for the same period in the prior fiscal year. The effective tax rate was 32.1% and 33.7% for the nine months ended March 31, 2006 and March 31, 2005, respectively. The decrease in the effective tax rate was the result of an increase in permanent tax differences primarily due to an increase in tax-exempt interest income.

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 that it will have sufficient funds available to meet current loan commitments. At March 31, 2006, the Bank had outstanding commitments to originate residential mortgage loans of $28.3 million, commercial real estate loans of $5.1 million and commercial business loans of $11.4 million. In addition, the Bank had outstanding commitments to sell residential mortgage loans of $5.3 million, commercial business loans of $659,000 and consumer student loans of $3.3 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 March 31, 2006, the Bank had $383,000 commitments to purchase securities available for sale and no commitments to sell securities available for sale.

Although in-market deposits are the Bank’s primary source of funds, the Bank’s policy has been to utilize borrowings where the funds can be invested in either loans or securities at a positive rate of return or to use the funds for short-term liquidity purposes. The Bank currently has two unsecured lines of federal funds totaling $25.0 million with correspondent banks. There were no funds drawn on either line of credit at March 31, 2006. Additionally, as of March 31, 2006, the Bank had $43.5 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.

On March 31, 2006, the Company had in effect a stock buyback program in which up to 10% of the common stock of the Company outstanding on May 1, 2005 could be acquired through April 30, 2006. As of March 31, 2006, a total of 47,300 shares of common stock had been purchased pursuant to that program, all of which were purchased during May and June 2005. In addition, the Company approved a new stock buyback program in which up to 10% of the common stock of the Company outstanding on May 1, 2006 may be acquired through April 30, 2007. See Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds” of this Form 10-Q.

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 March 31, 2006, 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 8.24% at March 31, 2006. 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 10.81% at March 31, 2006.

Off-Balance Sheet Financing Arrangements

During the fiscal year ended June 30, 2003, the Bank securitized and sold consumer automobile loans in the amount of $50.0 million through HFSC and Automobile Securitization Trust. As part of the sales transaction, the Bank retained servicing responsibilities and a retained interest in the receivables, which is subordinated to third party investors’ interests. The receivables were sold without legal recourse. The sale provided the Bank with an additional source of liquidity at interest rates more favorable than it could receive through other forms of financing. It also assisted in reducing capital requirements and credit risk to the Bank, in addition to giving the Bank access to the national capital markets. The Company had the option to execute a cleanup call when the total outstanding balance was at 10% or less of the original pool balance, or $5.0 million. On November 9, 2005, the Bank exercised its option to execute a cleanup call by purchasing the outstanding principal balances of the securitized motor vehicle installment loans. See Note 4 of the “Notes to Consolidated Financial Statements” which is included in Part I, Item 1 “Financial Statements” of this Form 10-Q for further detail.

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 December 2004, FASB issued SFAS No. 123R, “Share-Based Payment”, which requires all companies to measure compensation costs for all share-based payments (including stock options) at fair value. The Company adopted SFAS No. 123R effective as of July 1, 2005.

SFAS No. 123R provides two alternatives for adoption: (1) a “modified prospective” method in which compensation cost is recognized for all awards granted subsequent to the effective date of this statement as well as for the unvested portion of awards outstanding as of the effective date, and (2) a “modified retrospective” method which follows the approach in the “modified prospective” method, but also permits entities to restate prior periods to reflect compensation cost calculated under SFAS No. 123 for pro forma amounts disclosure. The Company adopted the Black-Scholes option-pricing model and the modified prospective method.

In May 2005, FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, which replaces APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented, unless it is impracticable to do so. The new standard is effective for accounting changes and correction of errors made

in fiscal years beginning after December 15, 2005. The Company has not determined the effect the adoption of SFAS No. 154 will have on its consolidated financial statements.

In March 2006, FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets”, which amends SFAS No. 140. SFAS No. 156 requires the recognition of all separately recognized servicing assets and servicing liabilities to be initially measured at fair value utilizing the amortization method or fair market value method. SFAS 156 is effective the beginning of the first fiscal year that begins after September 15, 2006. The Company has not determined the effect the adoption of SFAS No. 156 will have on its financial statements.

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.

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 that can have an adverse effect on net income. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk although it may in the future, if necessary, to manage interest rate risk.

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

As set forth below, depending upon the volatility of the 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 converse situation can also be expected. One approach used to quantify interest rate risk is the NPV analysis. In essence, this analysis calculates the difference between the present value of the liabilities and the present value of expected cash flows from assets and off-balance sheet contracts. The following tables set forth, at December 31, 2005 (the most recent report available) and March 31, 2005, an analysis of the Company’s interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve (+300 or —200 basis points, measured in 100 basis point increments). 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 the fiscal year ended June 30, 2005 or that the Company’s primary market risk exposures and how those exposures were managed during the nine months ended March 31, 2006 changed significantly when compared to June 30, 2005.

The data in the following tables is based on assumptions utilized by the OTS in assessing interest rate risk of thrift institutions and published in “Selected Asset and Liability Price Tables as of December 31, 2005” and “Selected Asset and Liability Price Tables as of March 31, 2005”. 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.

	December 31, 2005
Change in Interest Rates	Estimated NPV Amount		Estimated Increase
			(Decrease) in NPV
			Amount			Percent

	(Dollars in thousands)
Basis Points
+300	$	90,630	$	(17,361	)	(16	)%
+200	97,846		(10,145		)	(9	)
+100	103,269		(4,722		)	(4	)
—	107,991		—			—
-100	110,442		2,451			2
-200	107,618		(372		)	—

	March 31, 2005
Change in Interest Rates	Estimated NPV Amount		Estimated Increase
			(Decrease) in NPV
			Amount			Percent

	(Dollars in thousands)
Basis Points
+300	$	95,398	$	(9,866	)	(9	)%
+200	100,323		(4,941		)	(5	)
+100	103,605		(1,659		)	(2	)
—	105,264		—			—
-100	103,748		(1,516		)	(1	)
-200	97,604		(7,660		)	(7	)

In managing market risk and the asset/liability mix, the Bank has placed its emphasis on developing a portfolio in which, to the extent practicable, assets and liabilities reprice within similar periods. The effect of this policy will generally be to reduce the Bank’s sensitivity to interest rate changes. 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 identified in the above referenced evaluation 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

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

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 during the quarterly period ended March 31, 2006.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs	Maximum Number of Shares that May Yet Be Purchased Under the Current Program
January 1 - 31, 2006	0	$	0.00	0	303,614
February 1 - 28, 2006	0	$	0.00	0	303,614
March 1 - 31, 2006	0	$	0.00	0	303,614

3rd Quarter Total	0	$	0.00	0

The Company currently has in effect stock buyback program, which was publicly announced on April 25, 2005 and pursuant to which up to 10% of the common stock of the Company that was outstanding on May 1, 2005, which equals 350,914 shares, may be acquired through April 30, 2006. As of March 31, 2006, a total of 47,300 shares of common stock have been purchased pursuant to the program, all of which were purchased in the open market during May and June 2005.

The Company approved a new stock buyback program effective as of May 1, 2006, which was publicly announced on April 24, 2006, in which up to 10% of the common stock of the Company outstanding on May 1, 2006, which equals 394,035 shares, may be acquired through April 30, 2007.

Item 6. Exhibits

Regulation S-K Exhibit Number		Document

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

HF FINANCIAL CORP.

FORM 10-Q

SIGNATURES

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

			HF Financial Corp.

			(Registrant)

Date:	May 12, 2006	By:	/s/ Curtis L. Hage
			Curtis L. Hage, Chairman, President
			And Chief Executive Officer
			(Principal Executive Officer)

Date:	May 12, 2006	By:	/s/ Darrel L. Posegate
			Darrel L. Posegate, Executive Vice President,
			Chief Financial Officer and Treasurer
			(Principal Financial and Accounting Officer)

Index to Exhibits

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