REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Trustees and Participants of
HF Financial Corp. Retirement Savings Plan
Sioux Falls, South Dakota
We have audited the accompanying statements of net assets available for benefits of HF Financial Corp. Retirement Savings Plan as of June 30, 2006 and 2005, and the related statement of changes in net assets available for benefits for the year ended June 30, 2006. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States.) Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we do not express such an opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of HF Financial Corp. Retirement Savings Plan as of June 30, 2006 and 2005, and the changes in its net assets available for benefits for the year ended June 30, 2006, in conformity with accounting principles generally accepted in the United States of America.
Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule of Assets Held at End of Year is presented for the purpose of additional analysis and is not a required part of the basic financial statements but is supplementary information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
Sioux Falls, South Dakota
December 14, 2006
PEOPLE. PRINCIPLES. POSSIBILITIES.
www.eidebailly.com
200 E. 10th Street, Suite 500 · PO Box 5126 · Sioux Falls, South Dakota 57117-5226 · Phone 605.339.1999 · Fax 605.339.1306 · EOE
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HF Financial Corp. Retirement Savings Plan
Statements of Net Assets Available for Benefits
June 30, 2006 and 2005
| | 2006 | | 2005 | |
Assets | | | | | |
Investments (Note 3): | | | | | |
Participant directed: | | | | | |
HF Financial Corp. common stock | | $ | 1,205,904 | | $ | 1,296,511 | |
Mutual funds | | 5,758,900 | | 4,665,084 | |
Money market mutual fund | | 154,895 | | 112,163 | |
Common Investment Fund | | 340,156 | | 197,869 | |
Participant loans | | 22,563 | | 4,815 | |
Total participant directed investments | | 7,482,418 | | 6,276,442 | |
| | | | | |
Non-participant directed: | | | | | |
HF Financial Corp. common stock | | 4,128,504 | | 4,897,472 | |
Money market mutual fund | | 2,887 | | 279 | |
Total non-participant directed investments | | 4,131,391 | | 4,897,751 | |
Employer receivables | | — | | 2,283 | |
Total assets | | 11,613,809 | | 11,176,476 | |
| | | | | |
Liabilities | | | | | |
Accounts payable | | 4,164 | | 3,971 | |
Net Assets Available for Benefits | | $ | 11,609,645 | | $ | 11,172,505 | |
See Notes to Financial Statements.
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HF Financial Corp. Retirement Savings Plan
Statement of Changes in Net Assets Available for Benefits
Year Ended June 30, 2006
| | Participant
Directed
Savings | | Non-
Participant
Directed
(Employee
Stock Ownership) | | Total | |
Additions to net assets attributed to: | | | | | | | |
Investment income (loss): | | | | | | | |
Net appreciation in fair value of investments (Note 3) | | $ | 319,582 | | $ | (685,509 | ) | $ | (365,927 | ) |
Dividends and interest | | 122,723 | | 99,907 | | 222,630 | |
| | 442,305 | | (585,602 | ) | (143,297 | ) |
Contributions: | | | | | | | |
Employer | | 271,861 | | — | | 271,861 | |
Participants | | 750,643 | | — | | 750,643 | |
Rollover | | 96,436 | | — | | 96,436 | |
| | 1,118,940 | | — | | 1,118,940 | |
Total additions (deductions) | | 1,561,245 | | (585,602 | ) | 975,643 | |
| | | | | | | |
Deductions from net assets attributed to: | | | | | | | |
Benefits paid to participants | | 470,082 | | 10,703 | | 480,785 | |
Trustee and accounting fees | | 46,005 | | 11,713 | | 57,718 | |
Total deductions | | 516,087 | | 22,416 | | 538,503 | |
Net increase (before transfers) | | 1,045,158 | | (608,018 | ) | 437,140 | |
Transfers | | 158,342 | | (158,342 | ) | — | |
Net increase (after transfers) | | 1,203,500 | | (766,360 | ) | 437,140 | |
| | | | | | | |
Net assets available for benefits: | | | | | | | |
Beginning of year | | 6,274,754 | | 4,897,751 | | 11,172,505 | |
End of year | | $ | 7,478,254 | | $ | 4,131,391 | | $ | 11,609,645 | |
See Notes to Financial Statements.
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HF Financial Corp. Retirement Savings Plan
Notes to Financial Statements
June 30, 2006 and 2005
Note 1. Plan Description and Amendments
The following description of the HF Financial Corp. Retirement Savings Plan (the Plan) provides only general information. Participants should refer to the Plan agreement for a complete description of the Plan’s provisions.
General and plan amendments: The Plan is a defined contribution plan established for the benefit of the employees of HF Financial Corp. (the Company). The Plan and the Trust of which it is a part are intended to satisfy all of the requirements for a qualified retirement plan under the appropriate provisions of the Internal Revenue Code (IRC). The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA).
On March 17, 2004, the Plan adopted an amendment to comply with the Internal Revenue Code for dividends paid to the Plan on shares of stock held in the Plan.
During 2004, the Plan was amended to be in compliance with the final regulations issued under IRC Section 401(a)(9). The Plan was also amended to provide for valuation of its assets on a daily basis effective January 1, 2004.
On March 28, 2005, the Plan adopted an amendment to comply with the automatic payment requirements of the Internal Revenue Code so that a participant’s account balance can only be distributed without a participant’s consent if the participant’s account balance is not greater than $1,000, unless the participant has attained age of 65 (or the participant’s required beginning date, if employed on that date).
Effective July 1, 2001, the Plan was restated as a qualified profit sharing plan with a cash or deferred arrangement pursuant to Code Section 401(k). Prior to such date, the Plan was a qualified stock bonus plan and a qualified employee stock ownership plan within the meaning of Code Section 4975(e)(7) (collectively referred to as ESOP).
The Plan is administered by the Plan Administrative Committee comprised of up to five persons appointed by the Company’s Board of Directors. The Plan passed a resolution during 2003 to change the Plan Trustee to the Home Federal Bank, Investment Management and Trust Department which was effective August 1, 2003. The trust department of an independent bank was the Plan’s Trustee prior to August 1, 2003.
Eligibility: Employees of the Company and its participating subsidiaries are generally eligible to participate in the Plan, provided they are expected to have at least 1,000 hours of service and are 21 years old. Employees hired on or after July 1, 2001 are eligible to participate in the 401(k) portion of the Plan on the first day of the month after they have completed 30 consecutive calendar days of employment and attained age 21. Employees are eligible for other benefits of the Plan on the first day of the month after completing 1,000 hours of service and attaining age 21. Employees hired on or after July 1, 2001 are not eligible to participate in the ESOP portion of the Plan.
Contributions: Each year, participants may make salary deferral contributions in any percentage from 1% to 50% of pre-tax annual compensation, as defined in the Plan. For each calendar quarter, the Company makes a fixed matching contribution of 50% of participants’ deferrals up to 6% of the participants’ compensation. In addition, the Company may also make discretionary profit sharing and/or matching contributions to the Plan. There were no discretionary contributions made to the plan for the year ended June 30, 2006. Participants may roll over amounts representing distributions from other qualified defined benefit or contribution plans. Contributions are subject to certain limitations.
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Participant accounts: Separate employee accounts are maintained for the 401(k) and the employee stock ownership portions of the Plan. Each participant’s account is credited with the participant’s contributions, allocations of the Company’s contributions, Plan earnings, and charged with an allocation of administrative expenses. Plan earnings are allocated based on participant account balances, as defined. Forfeited balances of terminated participants’ non-vested employer matching accounts are allocated among the accounts of all participants as a part of and on the same basis as the employer matching contribution. Forfeited balances of terminated participants’ nonvested ESOP accounts are allocated in the same proportion that the compensation of each eligible participant bears to the compensation of all eligible participants. The amount allocated to eligible participants as of June 30, 2006, equaled $74,159.
Participants’ investment options: Participants must direct their salary deferral and rollover contributions to selected investments as made available and determined by the Plan Administrator. Participants may change their investment options daily.
Vesting: Participants are immediately vested in their Savings Plan (401(k)) contributions plus actual earnings thereon. Vesting in the Company’s discretionary ESOP and matching contribution portion of participants’ accounts plus actual earnings thereon is based on years of continuous service. A participant is 100 percent vested after three years of credited service in the employer matching contribution and after five years of credited service in the discretionary ESOP.
Payment of benefits: No distributions from the Plan will be made until a participant retires, dies (in which case, payment shall be made to his or her beneficiary or, if none, to his or her legal representatives), or otherwise terminates employment with the Company. On termination of service due to death, disability or retirement, a participant may elect to receive non-ESOP benefits in either a lump-sum amount equal to the value of the participant’s vested interest in his or her account, or annual installments not to exceed the participant’s life expectancy. Benefits from all accounts except a participant’s ESOP account will be paid in cash. A participant’s ESOP benefits will be paid in whole shares of Company stock, valued at its fair market value per share, plus cash for any fractional share or in cash.
Participant loans: Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50 percent of their vested account balance. The loans are secured by the balance in the participant’s account and bear interest deemed reasonable by the Plan Administrator. Loan terms range from one to five years, or longer for the purchase of a principal residence. Principal and interest are paid no less than quarterly through payroll deductions.
Voting rights: Each participant is entitled to exercise voting rights attributable to the shares allocated to his or her account and is notified by the Trustee prior to the time that such rights are to be exercised. The Trustee is permitted to vote any allocated share for which instructions have not been given by a participant. The Trustee votes such shares in the same proportion as the participants who voted their shares.
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Diversification: Diversification is offered to participants close to retirement so that they may have the opportunity to move part of the value of their investment in the non-participant directed Company stock into; investments which are more diversified. Participants who are at least age 55 with at least 10 years of participation in the Plan may elect to diversify a portion of their account. Diversification is offered to each eligible participant over a six-year period. In each of the first five years, a participant may diversify up to 25 percent of the number of post-1986 shares allocated to his or her account, less any shares previously diversified. In the sixth year, the percentage changes to 50 percent. Participants who elect to diversify have a portion of their account moved from the non-participant directed ESOP accounts to their participant diversified account.
Note 2. Significant Accounting Policies
Nature of business of Plan Sponsor: HF Financial Corp. and its subsidiaries, the sponsoring employer companies, offer banking, insurance and other financial services to customers in South Dakota and Minnesota.
Basis of accounting: The financial statements of the Plan are prepared under the accrual method of accounting.
Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Investment valuation and income recognition: The Plan’s investments are stated at fair value. Shares of registered investment companies are valued at quoted market prices which represent the net asset value of shares held by the Plan at year end. Shares of common investment funds have a fixed net asset value of $10.00. The common stock of the Company is valued at fair value which is determined by quoted market price on a national stock exchange (NASDAQ). Participant loans are valued at cost which approximates fair value.
Purchases and sales of securities are recorded on a trade date basis. Interest income is recorded on the accrual basis. Dividend income is accrued on the ex-dividend date.
Payment of benefits: Benefits are recorded when paid.
Administrative expenses: Certain administrative functions are performed by officers or employees of the Company. No such officer or employee receives compensation from the Plan for service provided. Administrative expenses incurred relative to the Plan are primarily paid by the Plan. Legal fees incurred by the Plan for the year ended June 30, 2006, have been paid by the Plan. All administrative expenses not paid by the Company are the responsibility of the Plan.
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Note 3. Investments
The following presents the fair value of the investments that represent 5% or more of the Plan’s net assets as of June 30, 2006 and 2005.
| | 2006 | | 2005 | |
Participant directed: | | | | | |
Investments, at fair value as determined by quoted market price: | | | | | |
HF Financial Corp. common stock | | $ | 1,205,904 | | $ | 1,296,511 | |
Mutual funds: | | | | | |
Vanguard Wellington Fund | | 715,319 | | — | |
Fidelity Contrafund | | 1,462,013 | | 1,221,432 | |
Vanguard 500 Index Fund | | 866,233 | | 767,698 | |
Legg Mason Value Trust Institutional Class Fund | | 956,598 | | 895,251 | |
First Eagle Overseas Fund | | 898,156 | | — | |
Funds individually less than 5% of Plan net assets | | 1,200,737 | | 1,978,573 | |
Money market mutual fund: | | | | | |
Goldman Sachs Prime Obligation Fund | | 154,895 | | 112,163 | |
Other investments, at estimated fair value | | 22,563 | | 4,814 | |
| | 7,482,418 | | 6,276,442 | |
| | | | | |
Non-participant directed: | | | | | |
Investments, at fair value as determined by quoted market price: | | | | | |
HF Financial Corp. common stock | | 4,128,504 | | 4,897,472 | |
Other investments individually less than 5% of Plan net assets | | 2,887 | | 279 | |
| | $ | 11,613,809 | | $ | 11,174,193 | |
Participant directed investment in HF Financial Corp. common stock results from market purchase.
During the year ended June 30, 2006, the Plan’s investments (including investments bought, sold and held during the year) depreciated in fair value by $365,927 as follows:
| | Participant
Directed | | Non-Participant
Directed | |
HF Financial Corp. common stock | | $ | (182,684 | ) | $ | (685,509 | ) |
Mutual Funds | | 502,266 | | — | |
| | $ | 319,582 | | $ | (685,509 | ) |
The classifications of investment earnings reported above and the statement of changes on net assets may differ from the classifications of earnings on Form 5500 due to different reporting requirements on Form 5500.
Market volatility of equity-based investments may substantially impact the value of such investments at any given time. It is possible that the value of the plan’s investments, both in total and in individual participant accounts, has changed significantly since June 30, 2006.
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Information about the Plan’s investment in HF Financial Corp. common stock, Employee Stock Ownership portion only, at June 30, 2006 and 2005 is as follows:
| | 2006 | | 2005 | |
Number of shares, all of which are allocated to participants | | 241,433.000 | | 224,140.600 | |
Cost | | $ | 928,778 | | $ | 910,903 | |
Fair Value | | $ | 4,128,504 | | $ | 4,897,472 | |
Note 4. Plan Termination
Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants would become 100 percent vested in their entire account.
Note 5. Tax Status
The Plan obtained its latest determination letter on September 20, 2002, in which the Internal Revenue Service stated that the Plan, as then designed, was in compliance with the applicable requirements of the Internal Revenue Code (IRC). The Plan has been amended since receiving the determination letter, however, the Plan Administrator believes the Plan is designed and being operated in compliance with the applicable requirements of the IRC.
Note 6. Related Party Transactions
The Trustee of the Plan is Home Federal Bank, Investment Management and Trust Department (the Trustee), a related party to the Plan. During the year ended June 30, 2006, the Plan paid administrative fees to the Trustee of $31,448. Dividends paid into the Plan received from HF Financial Corp. common stock were $127,366 in FY 2006. Refer to Note 3 for detailed information pertaining to HF Financial Corp. common stock.
Note 7. Subsequent Events
Effective July 1, 2006, the Plan was enhanced to allow participants to make Roth 401(k) after-tax contributions to their 401(k) plan.
Effective July 1, 2006, forfeitures attributable to the Company’s ESOP contributions shall be used to either reinstate Company ESOP contributions, to pay the Plan’s administrative expenses or to reduce the Company’s contributions to the Plan, as determined by the Plan Administrator in its sole discretion.
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HF Financial Corp. Retirement Savings Plan
Schedule H, Line 4i - Schedule of Assets Held at End of Year
EIN: 46-0418532
PN: 002
June 30, 2006
Identity of Issuer,
Borrower, Lessor or
Similar Party | | Description of Investment Including
Maturity Date, Rate of Interest,
Collateral, Par, or Maturity Value | | Cost | | Current Value | |
*HF Financial Corp. | | HF Financial Corp. Common Stock | | $ | 1,834,375 | | $ | 5,334,408 | |
| | | | | | | |
Fidelity | | Fidelity Low-Priced Fund, Mutual Fund | | N/A | | 472,130 | |
Fidelity | | Fidelity Contrafund, Mutual Fund | | N/A | | 1,462,013 | |
First Eagle | | First Eagle Overseas, Mutual Fund | | N/A | | 898,156 | |
The Vanguard Group | | Vanguard 500 Index Fund, Mutual Fund | | N/A | | 866,233 | |
The Vanguard Group | | Vanguard Wellington, Mutual Fund | | N/A | | 715,319 | |
Legg Mason | | Legg Mason Value Trust Institutional Class Fund, Mutual Fund | | N/A | | 956,598 | |
The Vanguard Group | | Vanguard Interm Team U.S. Treasury, Mutual Fund | | N/A | | 241,589 | |
T. Rowe Price | | T. Rowe Price Growth Stock Fund, Mutual Fund | | N/A | | 146,862 | |
Federated | | Federated Capital Preservation Fund, Common Investment Fund | | N/A | | 340,156 | |
| | | | | | | |
Goldman Sachs | | Goldman Sachs Prime Obligation Fund, Money Market Fund | | 157,782 | | 157,782 | |
| | | | | | | |
Participant Loans | | Participant Note Receivable, Interest Rate Varies, Maturity Date Varies | | — | | 22,563 | |
| | | | | | | |
| | Totals | | | | $ | 11,613,809 | |
| | | | | | | | | |
* Known to be a party-in-interest to the Plan.
N/A – Not applicable for participant directed accounts
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