HF Financial (HFFC) 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended December 31, 2007

Commission File Number: 0-19972

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HF FINANCIAL CORP.

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

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

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           ACCELERATED FILER            NON-ACCELERATED FILER   X  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES         NO X  

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

As of February 8, 2008 there were 3,966,345 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

		Page Number
	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Consolidated Statements of Financial Condition As of December 31, 2007 and June 30, 2007	1
	Consolidated Statements of Income for the Six Months Ended December 31, 2007 and 2006	2
	Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2007 and 2006	3
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 4	Controls and Procedures	37
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 4.	Submission of Matters to a Vote of Security Holders	38
Item 6.	Exhibits	39
Form 10-Q	Signature Page	40

PART I  –  FINANCIAL INFORMATION

Item 1.             Financial Statements

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands)

ASSETS	December 31, 2007			June 30, 2007
	(Unaudited)			(Audited)
Cash and cash equivalents	$	24,042		$	22,476
Securities available for sale	164,352			142,223
Federal Home Loan Bank stock	8,402			5,058
Loans held for sale	5,536			8,776
Loans and leases receivable	759,882			767,471
Allowance for loan and lease losses	(5,424		)	(5,872		)
Net loans and leases receivable	754,458			761,599
Accrued interest receivable	9,806			8,495
Office properties and equipment, net of accumulated depreciation	15,869			15,830
Foreclosed real estate and other properties	458			508
Cash value of life insurance	13,784			13,519
Servicing rights	11,311			10,871
Goodwill, net	4,951			4,951
Other assets	7,680			7,148
Total assets	$	1,020,649		$	1,001,454

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits	$	771,896		$		815,864
Advances from Federal Home Loan Bank and other borrowings	130,457			68,600
Subordinated debentures payable to trusts	27,837			27,837
Advances by borrowers for taxes and insurance	10,953			10,337
Accrued expenses and other liabilities	15,067			16,546
Total liabilities	956,210			939,184
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, 6,020,181 and 5,991,200 shares issued at December 31, 2007 and June 30, 2007, respectively	60			60
Common stock subscribed for but not issued, 5,146 shares at June 30, 2007	- - - -			81
Additional paid-in capital	21,637			20,898
Retained earnings, substantially restricted	73,649			71,900
Accumulated other comprehensive income (loss), net of related deferred tax effect	(497		)	(1,502			)
Less cost of treasury stock, 2,053,836 and 1,977,836 shares at December 31, 2007 and June 30, 2007, respectively	(30,410		)	(29,167			)
Total stockholders’ equity	64,439			62,270
Total liabilities and stockholders’ equity	$	1,020,649		$	1,001,454

See accompanying notes to unaudited consolidated financial statements.

Page 1

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended December 31,				Six Months Ended December 31,
	2007		2006		2007		2006
Interest, dividend and loan fee income:
Loans and leases receivable	$	13,879	$	13,728	$	27,999	$	26,968
Investment securities and interest-earning deposits	2,206		1,935		4,071		3,773
	16,085		15,663		32,070		30,741
Interest expense:
Deposits	6,913		7,359		14,411		13,900
Advances from Federal Home Loan Bank and other borrowings	2,176		2,244		3,995		4,363
	9,089		9,603		18,406		18,263
Net interest income	6,996		6,060		13,664		12,478
Provision for losses on loans and leases	295		461		620		752
Net interest income after provision for losses on loans and leases	6,701		5,599		13,044		11,726
Noninterest income:
Gain on sale of branches, net	- - - -		2,763		- - - -		2,763
Fees on deposits	1,355		1,315		2,768		2,508
Loan servicing income	542		441		1,047		770
Gain on sale of loans, net	439		260		698		456
Trust income	249		230		498		446
Other	381		413		770		823
	2,966		5,422		5,781		7,766
Noninterest expense:
Compensation and employee benefits	4,788		4,478		9,231		8,634
Occupancy and equipment	981		958		1,918		1,896
Marketing	299		704		562		1,147
Check and data processing expense	608		567		1,221		1,119
Other	1,032		984		1,920		1,804
	7,708		7,691		14,852		14,600
Income before income taxes	1,959		3,330		3,973		4,892
Income tax expense	708		1,219		1,375		1,684
Net income	$	1,251	$	2,111	$	2,598	$	3,208
Comprehensive income	$	1,539	$	2,254	$	3,603	$	4,586
Cash dividends declared per share	$	0.1075	$	0.1050	$	0.2150	$	0.2075
Earnings per share:
Basic	$	0.32	$	0.53	$	0.65	$	0.81
Diluted	$	0.31	$	0.52	$	0.64	$	0.79

See accompanying notes to unaudited consolidated financial statements.

Page 2

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	Six Months Ended December 31,
	2007			2006
Cash flows from operating activities
Net income	$	2,598		$	3,208
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for losses on loans and leases	620			752
Depreciation	850			803
Amortization of discounts and premiums on securities and other	787			971
Stock based compensation	375			452
Deferred income taxes (credits)	- - - -			(572		)
Net change in loans held for resale	3,938			(4,888		)
(Gain) on sale of loans, net	(698		)	(456		)
(Gain) on sale of branches	- - - -			(2,763		)
Losses and provision for losses on sales of foreclosed real estate and other properties, net	15			32
(Gain) loss on disposal of office properties and equipment, net	- - - -			(7		)
Change in other assets and liabilities	(4,436		)	5,334
Net cash provided by operating activities	3,974			2,866
Cash flows from investing activities
Loan participations purchased	(4,911		)	(18,815		)
Net change in loans outstanding	10,833			(3,919		)
Proceeds from sale of loans associated with branch sales	- - - -			4,256
Securities available for sale:
Sales and maturities and repayments	26,301			18,668
Purchases	(46,430		)	(17,485		)
Purchase of Federal Home Loan Bank stock	(4,493		)	(2,658		)
Redemption of Federal Home Loan Bank stock	1,149			2,830
Proceeds from sale of office properties and equipment	- - - -			9
Proceeds from sale of office properties and equipment associated with branch sales	- - - -			341
Purchase of office properties and equipment	(889		)	(2,384		)
Purchase of servicing rights	(955		)	(5,514		)
Proceeds from sale of foreclosed real estate and other properties, net	209			581
Net cash (used in) investing activities	(19,186		)	(24,090		)
See accompanying notes to unaudited consolidated financial statements.

Page 3

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Dollars in Thousands)

(Unaudited) 

	Six Months Ended December 31,
	2007			2006
Cash flows from financing activities
Net increase (decrease) in deposit accounts	$	(43,968	)	$	73,397
Proceeds of advances from Federal Home Loan
Bank and other borrowings	822,949			492,902
Payments on advances from Federal Home Loan
Bank and other borrowings	(761,092		)	(494,022		)
Proceeds from issuance of subordinated debentures	5,000			10,000
Deposit account disbursements associated with branch sales	- - - -			(33,563		)
Redemption of subordinated debentures	(5,000		)	(10,000		)
Increase (decrease) in advances by borrowers	616			3,040
Purchase of treasury stock	(1,243		)	- - - -
Proceeds from issuance of common stock	364			325
Cash dividends paid	(848		)	(822		)
Net cash provided by financing activities	16,778			41,257
Increase (decrease) in cash and cash equivalents	1,566			20,033
Cash and cash equivalents
Beginning	22,476			27,037
Ending	$	24,042		$	47,070
Supplemental Disclosures of Cash Flows Information
Cash payments for interest	$	18,426		$	17,013
Cash payments for income and franchise taxes, net	1,850			396

See accompanying notes to unaudited consolidated financial statements.

Page 4

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Six Months Ended December 31, 2007 and 2006

(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, 2007 (“Fiscal 2007”), 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. All intercompany balances and transactions have been eliminated in consolidation.

 NOTE 2.         REGULATORY CAPITAL

The following table sets forth the Bank’s compliance with its minimum capital requirements for a well-capitalized institution at December 31, 2007:

	Amount	Percent
	(Dollars in Thousands)
Tier I (core) capital (to adjusted total assets):
Required	$50,735	5.00	%
Actual	85,109	8.39
Excess over required	34,374	3.39
Risk-based capital (to risk-weighted assets):
Required	$80,990	10.00	%
Actual	90,403	11.16
Excess over required	9,413	1.16

Page 5

NOTE 3.          EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period they were outstanding. The weighted average number of basic common shares outstanding for the three months ended December 31, 2007 and 2006 was 3,955,388 and 3,968,451, respectively. The weighted average number of basic common shares outstanding for the six months ended December 31, 2007 and 2006 was 3,984,376 and 3,964,261, respectively.

Dilutive earnings per share is similar to the computation of basic earnings per share except the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive options outstanding had been exercised. The weighted average number of common and dilutive potential common shares outstanding for the three months ended December 31, 2007 and 2006 was 4,009,060 and 4,046,493, respectively. The weighted average number of common and dilutive potential common shares outstanding for the six months ended December 31, 2007 and 2006 was 4,043,022 and 4,040,227, respectively.

NOTE 4.          INVESTMENTS IN SECURITIES

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

	December 31, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
	(Dollars in Thousands)
Debt securities:
U.S. government agencies	$	10,054	$	122	$	- - - -		$	10,176
Federal Home Loan Bank	12,457		215		- - - -			12,672
Municipal bonds	11,147		83		(99		)	11,131
Preferred Term Securities	10,931		- - - -		(505		)	10,426
	44,589		420		(604		)	44,405
Equity securities:
FNMA	8		8		- - - -			16
Federal Ag Mortgage	7		2		- - - -			9
Other Investments	232		- - - -		- - - -			232
	247		10		- - - -			257
Mortgage-backed securities	119,876		860		(1,046		)	119,690
	$	164,712	$	1,290	$	(1,650	)	$	164,352

Page 6

	December 31, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
	(Dollars in Thousands)
Debt securities:
U.S. government agencies	$	12,061	$	25	$	(89	)	$	11,997
Federal Home Loan Bank	13,450		14		(82		)	13,382
Municipal bonds	7,925		30		(66		)	7,889
Preferred Term Securities	11,019		102		(80		)	11,041
Other Investments	5,274		92		- - - -			5,366
	49,729		263		(317		)	49,675
Common Stock:
FNMA	8		16		- - - -			24
Federal Ag Mortgage	7		3		- - - -			10
Other Investments	100		- - - -		- - - -			100
	115		19		- - - -			134
Mortgage-backed securities	98,273		100		(1,813		)	96,560
	$	148,117	$	382	$	(2,130	)	$	146,369

The following table presents the fair value and age of gross unrealized losses by investment category at December 31, 2007 in accordance with FASB Staff Position (“FSP”) No. FAS 115-1, 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)
Municipal bonds	2,192		(9		)	2,867		(90		)	5,059		(99		)
Preferred term securities	8,533		(380		)	1,893		(125		)	10,426		(505		)
Mortgage-backed securities	22,579		(293		)	42,923		(753		)	65,502		(1,046		)
	$	33,304	$	(682	)	$	47,683	$	(968	)	$	80,987	$	(1,650	)

Management does not believe any individual unrealized losses as of December 31, 2007 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 (“GNMA”), and the Federal Home Loan Mortgage Corporation (“FHLMC”). These unrealized losses in total are primarily attributable to changes in interest rates and the contractual cashflows of those investments are guaranteed by an agency of the U.S. government. As a group, the unrealized losses were less than 2.0% of their respective amortized cost basis at December 31, 2007. Because the decline in market value is attributable primarily to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be at maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2007.

Page 7

NOTE 5.          SEGMENT REPORTING

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

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

Three Months Ended December 31, 2007	Banking			Other			Total
	(Dollars in Thousands)
Net interest income	$	7,503		$	(507	)	$	6,996
Provision for losses on loans and leases	(295		)	- - - -			(295		)
Noninterest income	2,923			43			2,966
Intersegment noninterest income	(22		)	(22		)	(44		)
Noninterest expense	(7,408		)	(300		)	(7,708		)
Intersegment noninterest expense	- - - -			44			44
Income (loss) before income taxes	$	2,701		$	(742	)	$	1,959
Total assets at December 31, 2007	$	1,016,060		$	4,589		$	1,020,649

Three Months Ended December 31, 2006	Banking			Other			Total
	(Dollars in Thousands)
Net interest income	$	7,174		$	(1,114	)	$	6,060
Intersegment interest income	(230		)	230			- - - -
Provision for losses on loans and leases	(461		)	- - - -			(461		)
Noninterest income	5,475			(53		)	5,422
Intersegment noninterest income	(201		)	201			- - - -
Noninterest expense	(7,463		)	(228		)	(7,691		)
Intersegment noninterest expense	3			(3		)	- - - -
Income (loss) before income taxes	$	4,297		$	(967	)	$	3,330
Total assets at December 31, 2006	$	1,009,944		$	2,074		$	1,012,018

Page 8

Six Months Ended December 31, 2007	Banking			Other			Total
	(Dollars in Thousands)
Net interest income	$	14,797		$	(1,133	)	$	13,664
Provision for losses on loans and leases	(620		)	- - - -			(620		)
Noninterest income	5,692			89			5,781
Intersegment noninterest income	(54		)	(34		)	(88		)
Noninterest expense	(14,313		)	(539		)	(14,852		)
Intersegment noninterest expense	- - - -			88			88
Income (loss) before income taxes	$	5,502		$	(1,529	)	$	3,973
Total assets at December 31, 2007	$	1,016,060		$	4,589		$	1,020,649

Six Months Ended December 31, 2006	Banking			Other			Total
	(Dollars in Thousands)
Net interest income	$	14,453		$	(1,975	)	$	12,478
Intersegment interest income	(477		)	477			- - - -
Provision for losses on loans and leases	(752		)	- - - -			(752		)
Noninterest income	7,901			(135		)	7,766
Intersegment noninterest income	(208		)	208			- - - -
Noninterest expense	(14,179		)	(421		)	(14,600		)
Intersegment noninterest expense	4			(4		)	- - - -
Income (loss) before income taxes	$	6,742		$	(1,850	)	$	4,892
Total assets at December 31, 2006	$	1,009,944		$	2,074		$	1,012,018

Page 9

NOTE 6.          DEFINED BENEFIT PLAN

The Company has a noncontributory (cash balance) defined benefit pension plan covering all employees of the Company and its wholly-owned subsidiaries who have attained the age of 21 and have completed 1,000 hours of service in a plan year. The benefits are based on 6% of each eligible participant’s annual compensation, plus income earned in the accounts at a rate determined annually based on 30-year treasury note rates. The Company’s funding policy is to make the minimum annual required contribution plus such amounts as the Company may determine to be appropriate from time to time. Participants are 100% vested after five years of service with a retirement age of the later of age 65 or five years of participation. Information relative to the components of net periodic benefit cost for the Company’s defined benefit plan is presented below:

	Three Months Ended December 31,						Six Months Ended December 31,
	2007			2006			2007			2006
Service cost	$	111,830		$	116,521		$	223,660		$	233,042
Interest cost	109,260			97,748			$	218,520		$	195,496
Expected return on plan assets	(121,791		)	(109,101		)	$	(243,582	)	$	(218,202	)
Total costs recognized in expense	$	99,299		$	105,168		$	198,598		$	210,336

The Company previously disclosed in its consolidated financial statements for Fiscal 2007, 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 2007, that it contributed $621,000 to fund its qualified pension plan. During the first quarter of the fiscal year ending June 30, 2008 (“Fiscal 2008”), the Company made contributions of $532,000 to fund its qualified pension plan. The Company anticipates no additional contributions for Fiscal 2008.

NOTE 7.          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.

Page 10

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, 2008 and 2007.

	Fiscal Years Ended June 30,
	2008			2007
	(Dollars in Thousands)
Quarter ended September 30	$	221		$	436
Quarter ended December 31	409			357
Quarter ended March 31	- - - -			760
Quarter ended June 30	- - - -			596
Net healthcare costs	$		630	$	2,149

NOTE 8.          STOCK-BASED COMPENSATION PLANS

The fair value of each incentive stock option grant and stock appreciation right is estimated at the grant date using the Black-Scholes option-pricing model. The following weighted average assumptions were used for grants in the six months ended December 31, 2007 and 2006:

	For the Six Months Ended
	December 31,
	2007		2006
Expected volatility	22.00	%	23.00	%
Expected dividend yield	2.61	%	2.63	%
Risk-free interest rate	4.10	%	4.61	%
Expected term (in years)		4		4

Page 11

Stock option and stock appreciation right activity for the six months ended December 31 follow:

	Stock Options
	2007							2006
	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value		Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Beginning Balance	244,602		$	12.75				318,977		$	12.77
Granted	- - - -		- - - -					- - - -		- - - -
Forfeited	(1,870	)	17.27					(11,002	)	17.27
Exercised	(24,920	)	10.88					(23,267	)	12.69
Ending Balance	217,812		$	12.60	6.06	$	508	284,708		$	12.85	5.76	$	1,268
	Stock Appreciation Rights
	2007							2006
	SARs		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value		SARs		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Beginning Balance	19,899		$	12.75				- - - -		$	- - - -
Granted	29,204		16.10					20,953		16.00
Forfeited	(3,534	)	16.05					(1,054	)	16.00
Exercised	- - - -		- - - -					- - - -		- - - -
Ending Balance	45,569		$	13.22	3.33	$	83	19,899		$	12.85	3.75	$	81

The weighted-average grant date fair value of options and stock appreciation rights (SARs) granted during the six months ended December 31, 2007 and 2006 was $2.89 and $3.11, respectively. The total intrinsic value of options exercised during the six months ended December 31, 2007 and 2006 was $106,000 and $107,000, respectively. As of December 31, 2007, there was $6,000 of total unrecognized compensation cost related to nonvested stock option awards. The cost is expected to be recognized over a period of six months for stock option awards and over a weighted average period of four years for SARs awards. Cash received from the exercise of options for the six months ended December 31, 2007 and 2006 was $271,000 and $295,000, respectively. The tax benefit realized for the tax deductions from cashless option exercises totaled $2,600 and $30,000 for the six months ended December 31, 2007 and 2006, respectively.

Page 12

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

	2007				2006
			Weighted				Weighted
			Average				Average
			Grant Date				Grant Date
	Shares		Fair Value		Shares		Fair Value
Nonvested Balance, beginning	144,711		$	16.10	158,159		$	15.85
Granted	14,955		16.78		10,335		16.67
Vested	(30,925	)	14.47		(16,447	)	13.97
Forfeited	(10,894	)	16.46		(5,733	)	15.35
Nonvested Balance, ending	117,847		$	16.58	146,314		$	16.06

Pretax compensation expense recognized for restricted shares for the six months ended December 31, 2007 and 2006 was $216,000 and $234,000, respectively. The tax benefit for the six months ended December 31, 2007 and 2006 was $73,000 and $80,000, respectively. As of December 31 2007, there was $1.2 million of total unrecognized compensation cost related to restricted shares granted under the Company’s 2002 Stock Option and Incentive Plan, as amended (“the Plan”). The cost is expected to be recognized over a weighted-average period of four years. The total fair value of shares vested during the six months ended December 31, 2007 and 2006 was $447,000 and $230,000, respectively.

Awards to directors of restricted shares of the Company’s common stock are made to outside directors from the Company’s 2002 Stock Option and Incentive Plan (2002 Option Plan). This plan was effective for directors as of January 1, 2007, when the prior plan, the “Director Restricted Stock Plan” expired on December 31, 2006. The Director Restricted Stock Plan provided awards of restricted shares of the Company’s common stock and was in effect for a period of ten years.

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 2007, under Note 16 of “Notes to Consolidated Financial Statements.”

NOTE 9.          SUBORDINATED DEBENTURES PAYABLE TO TRUSTS

On July 5, 2007, the Company issued 5,000 shares totaling $5.0 million of Company Obligated Mandatorily Redeemable Preferred Securities of Trust VI. Trust VI was established and exists for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the Company. These subordinated debentures constitute the sole asset of Trust VI. The securities provide for cumulative cash distributions calculated at a rate based on three-month LIBOR plus 1.65%, adjusted quarterly. Refer to Note 11 in regards to the interest rate swap agreement, which converted the variable-rate Trust Preferred VI security into a fixed-rate security for a term of five years. The Company may, at one or more times, defer interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond October 1, 2037. At the end of the deferral period, all accumulated and unpaid distributions must be paid. The capital securities must be redeemed on October 1, 2037; however, the Company has the option to shorten the maturity date to a date not earlier than October 1, 2012. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of the payment to all of the Company’s indebtedness and senior to the Company’s capital stock.

On July 5, 2007, the Company exercised its option to redeem $5.0 million of Company Obligated Mandatorily Redeemable Preferred Securities of Trust II.

Page 13

NOTE 10.       SALE OF BRANCHES

During the second quarter of Fiscal 2007, the Bank closed on the sale of three branches and their associated book of business, along with one physical location. The Bank recognized a gain on sale of $2.8 million that resulted in the sale of $4.2 million in loans and $33.6 million in deposits.

NOTE 11.       INTEREST RATE CONTRACTS

During the first quarter of Fiscal 2008, the Company entered into an interest rate swap agreement with a $5.0 million notional amount to convert the variable-rate Trust Preferred VI security into a fixed-rate security for a term of five years at a fixed rate of 6.69%. This rate swap is designated as a cash flow hedge. For the six months ended December 31, 2007, the Company recognized net interest income of $5,100 and this was used to offset the interest expense for the subordinated debentures.

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

NOTE 12.       COMPREHENSIVE INCOME

Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenues, expenses and gains and losses under accounting principles generally accepted in the United States of America (“GAAP”) which are recorded as an element of shareholders’ equity but are excluded from net income. The components of total comprehensive income follow:

	Three Months Ended December 31,					Six Months Ended December 31,
	2007			2006		2007			2006
Net Income	$	1,251		$	2,111	$	2,598		$	3,208
Other comprehensive income:
Net change in unrealized gain (loss) on securities available for sale, net of deferred taxes	430			143		1,181			1,378
Net change in interest rate swap fair value	(142		)	- - - -		(176		)	- - - -
Total other comprehensive income	288			143		1,005			1,378
Total comprehensive income	$	1,539		$	2,254	$	3,603		$	4,586

Page 14

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

Forward-Looking Statements

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

*Projections of income, loss, revenues, earnings or losses per share, dividends, capital expenditures, capital structure, tax benefit or other financial items.

*Descriptions of plans or objectives of management for future operations, products or services, transactions, investments and use of subordinated debentures payable to trusts.

*Forecasts of future economic performance.

*Use and descriptions of assumptions and estimates underlying or relating to such matters.

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

Forward-looking statements about the Company’s expected financial results and other plans are subject to certain risks, uncertainties and assumptions. These include, but are not limited to, the risks discussed in Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for Fiscal 2007 and the following: possible legislative changes and adverse economic, business and competitive conditions and developments (such as shrinking interest margins and continued short-term rate environments); deposit outflows; reduced demand for financial services and loan products; changes in accounting policies or guidelines, or in monetary and fiscal policies of the federal government; changes in credit and other risks posed by the Company’s loan and lease portfolios; the ability or inability of the Company to manage interest rate and other risks; unexpected, continuing or excessive claims against the Company’s self-insured health plan; the Company’s use of trust preferred securities; the ability or inability of the Company to successfully enter into a definitive agreement for and close anticipated transactions; technological, computer-related or operational difficulties; adverse changes in securities markets; results of litigation; or other significant uncertainties.

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

Executive Summary

The Company’s net income for the second quarter of Fiscal 2008 was $1.3 million, or $0.31 in diluted earnings per share, compared to $2.1 million, or $0.52 in diluted earnings per share, for the second quarter of Fiscal 2007. Fiscal year 2007 second quarter net income included a non-recurring after-tax gain on sale of branches of $1.7 million, which represented $0.42 of diluted earnings per share. For the first six months of Fiscal 2008, net income was $2.6 million, or $0.64 in diluted earnings per share, compared to $3.2 million, or $0.79 in diluted earnings per share, for the first six months of Fiscal 2007. Return on average equity was 8.18% at December 31, 2007 compared to 11.05% at December 31, 2006.

Page 15

The net interest margin on a fully taxable equivalent basis for the six months ended December 31, 2007 was 2.96%, compared to 2.76% for the same period a year ago, an increase of 20 basis points. The increase over the same period last year is primarily attributable to a higher volume of earning assets and higher yields on earning assets. During the first quarter of Fiscal 2008, there was $125,000 expense of unamortized debt issue costs related to the early redemption of the Trust II Trust Preferred Securities. This caused a decrease of three basis points to the net interest margin on a fully taxable equivalent basis for the six months ended December 31, 2007. During the second quarter of Fiscal 2007, the Company expensed $290,000 of unamortized debt issuance costs relating to the redemption of the Trust I Trust Preferred Securities. This caused a decrease of six basis points to the net interest margin on a fully taxable equivalent basis for the six months ended December 31, 2006.

Net interest income for the first six months of Fiscal 2008 was $13.7 million, an increase of $1.2 million, or 9.5%, over the same period a year ago. Net interest income increased $936,000, or 15.4%, to $7.0 million for the three months ended December 31, 2007 from $6.1 million for the same period in the prior fiscal year. For the six months ended December 31, 2007, average interest-earning assets and average interest-bearing liabilities increased 2.4% and 1.7%, respectively, compared to the same period a year ago. Yields on earning assets increased to 6.81% in the first six months of Fiscal 2008, compared to 6.67% a year ago, an increase of 14 basis points. For the same period, cost of funds decreased to 4.38%, compared to 4.40%, a decrease of two basis points.

Net interest margin ratio may vary due to many factors, including Federal Reserve policies for short-term interest rates, competitive and economic factors and customer preferences for various products and services. On September 18, 2007 the Federal Reserve decreased the Fed Funds Target Rate by 50 basis points, the first decrease in short-term interest rates since June 25, 2003. This action was followed by another Fed Funds rate cut of 25 basis points on October 31, 2007 and by a 25 basis point cut on December 11, 2007.

The Company had previously issued trust preferred securities primarily to provide funding for stock repurchases and to repay other borrowings. Interest expense on the $27.8 million of trust preferred securities outstanding decreased to $1.2 million for the six months ended December 31, 2007, compared to $1.6 million for the same period a year ago, a decrease of $358,000 or 23.0%. The average rate paid on these securities decreased 253 basis points, from 11.10% at December 31, 2006 to 8.57% at December 31, 2007. In July 2007, the Company refinanced $5.0 million of trust preferred securities, originally issued in July 2002. This new funding was calculated at a rate based on three-month LIBOR plus 1.65%. This compares to the original issuance which was based on three-month LIBOR plus 3.65%. In December 2006, the Company refinanced $10.0 million of trust preferred securities, originally issued in November 2001. The new funding was calculated at a rate based on three-month LIBOR plus 1.83%, fixed for five years and adjusted quarterly thereafter, compared to the original issuance of six-month LIBOR plus 3.75%. The Company will evaluate the suitability to refinance additional trust preferred securities outstanding over the next year depending upon yield curve spreads which exist at the time of refinancing.

The allowance for loan and lease losses decreased to $5.4 million at December 31, 2007, compared to $5.9 million at December 31, 2006, a decrease of $448,000 or 7.6%. The ratio of allowance for loan and lease losses to total loans and leases was 0.71% as of December 31, 2007 compared to 0.77% at December 31, 2006. Total nonperforming assets at December 31, 2007 were $3.4 million as compared to $4.5 million a year ago, a decrease of $1.1 million or 23.7%. The ratio of nonperforming assets to total assets decreased to 0.34% at December 31, 2007, compared to 0.44% at December 31, 2006. 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.

The Company made a strategic decision during the first quarter of Fiscal 2008 to stop originating indirect automobile loans, and will continue to service the existing portfolio. As of December 31, 2007, the Consumer Indirect loan portfolio balance was $62.9 million, a decrease of $20.2 million from June 30, 2007. The Company entered this line of business in the 1990’s as part of an interest rate risk reduction strategy, as well as for further diversification of the balance sheet.

Page 16

Total deposits at December 31, 2007 were $771.9 million, a decrease of $36.9 million, or 4.6%, from December 31, 2006. In-market deposits increased from $693.6 million at December 31, 2006 to $752.8 million at December 31, 2007, an increase of $59.2 million, or 8.5%. For the same period, out-of-market deposits decreased from $115.3 million to $19.1 million, respectively. Public funds have increased, from $122.1 million at December 31, 2006 to $151.8 million at December 31, 2007. Interest expense on deposits was $14.4 million for the six months ended December 31, 2007, an increase of $511,000, or 3.7%, over the same period a year ago. The primary factor affecting interest expense on deposits was the increase in average fiscal year-to-date volume of certificates of deposits by $8.6 million, or 2.4%, from December 2006 to December 2007. Interest expense for certificates of deposit increased by $951,000, or 11.7%, in the first six months of Fiscal 2008, compared to the same period in the prior fiscal year, driving its average cost of funds to 4.91% from 4.48%.

In October 2007, the Company announced an increase in its quarterly cash dividend, from 10.50 cents per share to 10.75 cents per share, resulting in an annualized increase of 2.4%.

The total risk-based capital ratio of 11.16% at December 31, 2007 is above the 10.85% at December 31, 2006, an increase of 31 basis points. This continues to place the Bank in the “well capitalized” category within OTS regulation at December 31, 2007 and is consistent with the “well capitalized” OTS category in which the Company plans to operate. The Company historically has been able to manage the size of its assets through secondary market loan sales of single-family mortgages and student loans.

On December 31, 2007, 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, 2007 could be acquired through April 30, 2008. The Company utilized its stock buyback program during the second quarter, repurchasing 6,000 shares.  For fiscal year 2008, the Company has repurchased a total of 76,000 shares. Under the current program, the Company is authorized to repurchase up to 323,141 additional shares of common stock through April 30, 2008.

Non-interest income was $3.0 million for the quarter ended December 31, 2007 compared to $5.4 million at December 31, 2006, a decrease of $2.5 million or 45.3%. The quarter ending December 31, 2006 included a one-time gain on sale of branches of $2.8 million. Excluding this gain, non-interest income for the quarter ended December 31, 2006 would have been $2.7 million. The primary factors affecting non-interest income were increases of $179,000 in net gain on sale of loans and $101,000 in loan servicing income.

Non-interest expense was $7.7 million for the quarter ended December 31, 2007 compared to $7.7 million at December 31, 2006, an increase of $17,000 or 0.2%. Compensation and employee benefit expense increased $310,000 and other non-interest expense increased $48,000, offset by a decrease in marketing expense of $405,000. The increase in compensation and employee benefit expense was primarily due to increases in variable pay relating to employee incentives of $118,000, regular employee compensation of $80,000 and net healthcare costs of $52,000. The increase in other non-interest expense was primarily due to an increase in legal expenses of $138,000. The decrease in marketing expense was attributed to additional expenses in Fiscal 2007 for several deposit package programs.

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.

Page 17

Financial Condition Data

At December 31, 2007, the Company had total assets of $1.0 billion, an increase of $19.2 million from the level at June 30, 2007. The increase in assets was due primarily to increases in securities available for sale of $22.1 million, and FHLB stock of $3.3 million, offset by decreases in loans and leases receivable of $7.6 million and loans held for sale of $3.2 million. The increase in liabilities of $17.0 million from June 30, 2007 to December 31, 2007 was primarily due to increases in advances from the FHLB and other borrowings of $61.9 million, offset by a decrease in out-of-market deposits of $52.4 million. In addition, stockholders’ equity increased $2.2 million to $64.4 million at December 31, 2007 from $62.3 million at June 30, 2007, primarily due to net income of $2.6 million.

The increase in securities available for sale of $22.1 million was primarily the result of purchases of $46.4 million exceeding sales, maturities and repayments of $26.3 million. The purchases of $46.4 million included fixed-rate, mortgage-backed securities of $20.1 million. The increase in FHLB stock of $3.3 million was the result of higher outstanding balances of advances.

The decrease in net loans and leases receivable of $7.6 million was due primarily to the previous announcement on the decision to stop indirect automobile loan origination. The balances on consumer indirect loans decreased $20.2 million from June 30, 2007 to December 31, 2007. This was offset by the increase in other loan and lease receivables of $12.6 million for the same period. In addition, net deferred (fees), costs and discounts decreased $425,000 from the levels at June 30, 2007 to $157,000 at December 31, 2007. Loans held for sale decreased $3.2 million primarily due to the lower level of one- to four-family loans held.

Advances from the FHLB and other borrowings increased $61.9 million. The overall increase in FHLB borrowings was primarily the result of a decrease in public funds of $15.5 million and a decrease in out-of-market certificates of deposit of $52.4 million.

The $44.0 million decrease in deposits was due to decreases in out-of-market certificates of deposit of $52.4 million, money market accounts of $29.7 million and savings accounts of $8.6 million. The decrease in out-of-market certificates of deposit is attributed to a decision to pursue other sources of lower cost wholesale funds in the period. Public fund deposits decreased $15.5 million during the first six months of Fiscal 2008 due to seasonal fluctuations typical for these accounts, primarily affecting the savings and money market account balances. These decreases were offset by increases within in-market certificates of deposit of $42.3 million, non-interest-bearing checking accounts of $2.8 million and interest-bearing checking accounts of $1.6 million.

During the period of fiscal years 2002 through 2004, the Company issued a total of $27.8 million in subordinated debentures payable to trusts at various times through its trust subsidiaries. Each of the issuances included an option to shorten the maturity date at a specific time as stated in the contract. The issuance of $5.0 million of Company Obligated Mandatorily Redeemable Preferred Securities of Trust II on July 11, 2002 included an option to shorten the maturity date to July 5, 2007. The Company exercised this option to redeem $5.0 million of trust preferred securities. Also during the first quarter of Fiscal 2008, the Company issued $5.0 million of Company Obligated Mandatorily Redeemable Preferred Securities of Trust VI. The new funding is calculated at a rate based on three-month LIBOR plus 1.65%, compared to the original issuance which was based on three-month LIBOR plus 3.65%. The unamortized amount of $125,000 deferred debt issuance costs related to the original issuance was expensed.

Page 18

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

Loan and Lease Portfolio Composition
	At December 31, 2007				At June 30, 2007
	Amount		Percent		Amount		Percent
	(Dollars in Thousands)
One-to four-family (1)	$	108,142	14.23	%	$	116,544	15.18	%
Commercial business and real estate (2) (3)	284,712		37.47	%	275,646		35.92	%
Multi-family real estate	42,862		5.64	%	34,047		4.44	%
Equipment finance leases	21,081		2.77	%	22,307		2.91	%
Consumer Direct (4)	103,487		13.62	%	104,647		13.63	%
Consumer Indirect (5)	62,914		8.28	%	83,094		10.83	%
Agricultural	126,213		16.61	%	116,710		15.21	%
Construction and development	10,471		1.38	%	14,476		1.88	%
Total Loans and Leases Receivable (6)	$	759,882	100.00	%	$	767,471	100.00	%

(1) Excludes $3,765 and $8,290 loans held for sale at December 31, 2007 and June 30, 2007, respectively.

(2) Includes $3,109 and $3,297 tax exempt leases at December 31, 2007 and June 30, 2007, respectively.

(3) Excludes $223 commercial loans held for sale at December 31, 2007 and June 30, 2007.

(4) Excludes $1,547 and $263 student loans held for sale at December 31, 2007 and June 30, 2007, respectively.

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

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

Deposit Composition
	At December 31, 2007				At June 30, 2007
	Amount		Percent		Amount		Percent
	(Dollars in Thousands)
Noninterest bearing checking accounts	$	89,496	11.60	%	$	86,679	10.62%
Interest bearing checking accounts	88,677		11.49	%	87,030		10.67%
Money market accounts	182,809		23.68	%	212,546		26.05%
Savings accounts	57,664		7.47	%	66,235		8.12%
In-Market Certificates of deposit	334,169		43.29	%	291,858		35.77%
Out-of-Market Certificates of deposit	19,081		2.47	%	71,516		8.77%
Total Deposits	$	771,896	100.00	%	$	815,864	100.00%

Page 19

Analysis of Net Interest Income

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

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

	Three Months Ended December 31,
	2007						2006
	Average		Interest				Average		Interest
	Outstanding		Earned/		Yield/		Outstanding		Earned/		Yield/
	Balance		Paid		Rate		Balance		Paid		Rate
	(Dollars in Thousands)
Interest-earning assets:
Loans and leases receivable (1) (3)	$	775,089	$	13,879	7.12	%	$	762,367	$	13,728	7.14%
Investment securities (2) (3)	162,701		2,119		5.18	%	157,222		1,860		4.69%
FHLB stock	7,703		87		4.48	%	6,657		75		4.47%
Total interest-earning assets	945,493		$	16,085	6.77	%	926,246		$	15,663	6.71%
Noninterest-earning assets	72,793						71,653
Total assets	$	1,018,286					$	997,899
Interest-bearing liabilities:
Deposits:
Checking and money market	$	265,510	$	2,077	3.11	%	$	277,185	$	2,676	3.83%
Savings	47,416		274		2.30	%	38,123		207		2.15%
Certificates of deposit	371,511		4,562		4.89	%	383,073		4,476		4.64%
Total interest-bearing deposits	684,437		6,913		4.02	%	698,381		7,359		4.18%
FHLB advances and other borrowings	135,817		1,642		4.81	%	111,084		1,332		4.76%
Subordinated debentures payable to trusts (4)	27,837		534		7.63	%	27,837		912		13.00%
Total interest-bearing liabilities	848,091		9,089		4.26	%	837,302		9,603		4.55%
Noninterest-bearing deposits	80,806						77,757
Other liabilities	25,674						23,836
Total liabilities	954,571						938,895
Equity	63,715						59,004
Total liabilities and equity	$	1,018,286					$	997,899
Net interest income; interest rate spread (5)			$	6,996	2.51	%			$	6,060	2.16%
Net interest margin (5) (6)					2.94	%					2.60%
Net interest margin, TE (7)					3.00	%					2.66%

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

(2) Includes federal funds sold.

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

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

(5) Percentages for the three months ended December 31, 2007 and December 31, 2006 have been annualized.

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

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

Page 20

	Six Months Ended December 31,
	2007						2006
	Average		Interest				Average		Interest
	Outstanding		Earned/		Yield/		Outstanding		Earned/		Yield/
	Balance		Paid		Rate		Balance		Paid		Rate
	(Dollars in Thousands)
Interest-earning assets:
Loans and leases receivable (1) (3)	$	775,583	$	27,999	7.18	%	$	753,432	$	26,968	7.10%
Investment securities (2) (3)	153,949		3,923		5.07	%	154,397		3,619		4.65%
FHLB stock	6,660		148		4.41	%	6,816		154		4.48%
Total interest-earning assets	936,192		$	32,070	6.81	%	914,645		$	30,741	6.67%
Noninterest-earning assets	70,686						67,087
Total assets	$	1,006,878					$	981,732
Interest-bearing liabilities:
Deposits:
Checking and money market	$	275,962	$	4,658	3.36	%	$	278,628	$	5,314	3.78%
Savings	51,096		684		2.66	%	40,939		468		2.27%
Certificates of deposit	367,672		9,069		4.91	%	359,060		8,118		4.48%
Total interest-bearing deposits	694,730		14,411		4.13	%	678,627		13,900		4.06%
FHLB advances and other borrowings	114,057		2,796		4.88	%	116,476		2,806		4.78%
Subordinated debentures payable to trusts (4)	27,837		1,199		8.57	%	27,837		1,557		11.10%
Total interest-bearing liabilities	836,624		18,406		4.38	%	822,940		18,263		4.40%
Noninterest-bearing deposits	79,743						78,596
Other liabilities	27,349						22,124
Total liabilities	943,716						923,660
Equity	63,162						58,072
Total liabilities and equity	$	1,006,878					$	981,732
Net interest income; interest rate spread (5)			$	13,664	2.43	%			$	12,478	2.27%
Net interest margin (5) (6)					2.90	%					2.71%
Net interest margin, TE (7)					2.96	%					2.76%

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

(2) Includes federal funds sold.

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

(4) Includes $125 and $290 expense in July 2007 and December 2006, respectively, for unamortized debt issuance costs.

(5) Percentages for the six months ended December 31, 2007 and December 31, 2006 have been annualized.

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

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

Page 21

Rate/Volume Analysis of Net Interest Income

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

	Three Months Ended December 31,									Six Months Ended December 31,
	2007 vs 2006									2007 vs 2006
	Increase			Increase						Increase			Increase
	(Decrease)			(Decrease)			Total			(Decrease)			(Decrease)			Total
	Due to			Due to			Increase			Due to			Due to			Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
	(Dollars in Thousands)
Interest-earning assets:
Loans and leases receivable (1)	$	210		$	(59	)	$	151		$	754		$	277		$	1,031
Investment securities (2)	63			196			259			(15		)	319			304
FHLB stock	12			- - - -			12			(4		)	(2		)	(6		)
Total interest-earning assets	$	285		$	137		$	422		$	735		$	594		$	1,329
Interest-bearing liabilities:
Deposits:
Checking and money market	$	(116	)	$	(483	)	$	(599	)	$	(58	)	$	(599	)	$	(657	)
Savings	50			17			67			116			101			217
Certificates of deposit	(141		)	227			86			183			768			951
Total interest-bearing deposits	(207		)	(239		)	(446		)	241			270			511
FHLB advances and other borrowings	294			16			310			(62		)	52			(10		)
Subordinated debentures payable to trusts	- - - -			(378		)	(378		)	- - - -			(358		)	(358		)
Total interest-bearing liabilities	$	87		$	(601	)	$	(514	)	$	179		$	(36	)	$	143
Net interest income increase							$	936								$	1,186

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

(2) Includes federal funds sold.

Page 22

Application of Critical Accounting Policies

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

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

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

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

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

The Company has included MSRs as a critical accounting policy because the use of estimates for determining fair value using present value concepts may produce results which may significantly differ from other fair value analysis perhaps even to the point of recording impairment.  The risk to earnings is when the underlying mortgages pay off significantly faster than the assumptions used in the previously recorded amortization.  Estimating future cash flows on the underlying mortgages is a difficult analysis and requires judgment based on the best information available.  The Company looks at alternative assumptions and projections when preparing a reasonable and supportable analysis.  Based on the Company’s quarterly analysis of MSRs, there was no impairment to the MSRs at December 31, 2007.

Self-Insurance - The Company has a self-insured healthcare plan for its employees up to certain limits.  To mitigate a portion of these risks, the Company has a stop-loss insurance policy through a commercial insurance carrier for coverage in excess of $65,000 per individual occurrence with 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 which may differ significantly from other methodologies and still produce an estimate in accordance with GAAP.  Although management believes it uses the best information available to determine the accrual, unforeseen health claims could result in adjustments to the accrual.  These adjustments could significantly affect net earnings if circumstances differ substantially from the assumptions used in estimating the accrual.

Page 23

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 $3.4 million at December 31, 2007 from $4.0 million at June 30, 2007, a decrease of $580,000, or 14.5%.  Nonaccruing loans and leases decreased $350,000 to $1.8 million at December 31, 2007 from $2.2 million at June 30, 2007.  In addition, the ratio of nonperforming assets to total assets, which is one indicator of credit risk exposure, decreased to 0.34% at December 31, 2007 from 0.40% at June 30, 2007.

Nonaccruing loans and leases decreased 16.0%, or $350,000, to $1.8 million at December 31, 2007 compared to $2.2 million at June 30, 2007.  Included in nonaccruing loans and leases at December 31, 2007 were five loans totaling $256,000 secured by one- to four-family real estate, 11 loans totaling $684,000 secured by commercial business, six loans totaling $326,000 secured by agriculture, two leases totaling $106,000 and 27 consumer loans totaling $468,000.

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 December 31, 2007, the Company had $458,000 of foreclosed assets.  The balance of foreclosed assets at December 31, 2007 consisted of $256,000 of single-family collateral owned, $4,000 of equipment finance leases and $198,000 of consumer collateral owned.

At December 31, 2007, the Company had designated $12.8 million of its assets as special mention and classified $7.3 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 December 31, 2007 the Company had $22.9 million in multi-family, commercial business, commercial real estate and agricultural participation loans purchased, of which $243,000 were classified as of December 31, 2007.  These loans and leases were considered in determining the adequacy of the allowance for loan and lease losses.  The allowance for loan and lease losses is established based on management’s evaluation of the risks probable in the loan and lease portfolio and changes in the nature and volume of loan and lease activity.  Such evaluation, which includes a review of all loans and leases for which full collectability may not be reasonably assured, considers the estimated fair market value of the underlying collateral, present value of expected principal and interest payments, economic conditions, historical loss experience and other factors that warrant recognition in providing for an adequate loan and lease loss allowance.

Although the Company’s management believes the December 31, 2007 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 the allowance existing at December 31, 2007 will be adequate in the future.

Page 24

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 becomes doubtful.  Foreclosed assets include assets acquired in settlement of loans and leases.  The following table sets forth the amounts and categories of the Company’s nonperforming assets for the periods indicated.

	Nonperforming Assets As Of
	December 31, 2007		June 30, 2007
	(Dollars in Thousands)
Nonaccruing loans and leases:
One- to four-family	$	256	$	228
Commercial real estate	- - - -		25
Commercial business	684		1,441
Equipment finance leases	106		118
Consumer	468		378
Agricultural	326		- - - -
Total	1,840		2,190
Accruing loans and leases delinquent more than 90 days:
One- to four-family	265		470
Commercial real estate	354		178
Commercial business	271		213
Equipment finance leases	238		88
Consumer	- - - -		1
Agricultural	- - - -		358
Total	1,128		1,308
Foreclosed assets: (1)
One- to four-family	256		158
Equipment finance leases	4		180
Consumer	198		170
Total	458		508
Total nonperforming assets	$	3,426	$	4,006
Ratio of nonperforming assets to total assets	0.34%		0.40%
Ratio of nonperforming loans and leases to total loans and leases (2) (3)	0.39%		0.45%
(1)  Total foreclosed assets do not include land or other real estate owned held for sale.
(2)  Nonperforming loans and leases include both nonaccruing and accruing loans and leases delinquent more than 90 days.
(3)  Total loans and leases include loans held for sale.

Page 25

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

	Six Months Ended December 31,
	2007			2006
	(Dollars in Thousands)
Balance at beginning of period	$	5,872		$	5,657
Charge-offs:
One- to four-family	(3		)	- - - -
Commercial business	(620		)	(216		)
Equipment finance leases	(171		)	(115		)
Consumer	(421		)	(370		)
Total charge-offs	(1,215		)	(701		)
Recoveries:
One- to four-family	- - - -			3
Commercial business	8			- - - -
Consumer	134			101
Agricultural	5			57
Total recoveries	147			161
Net (charge-offs)	(1,068		)	(540		)
Additions charged to operations	620			752
Balance at end of period	$	5,424		$	5,869
Ratio of net (charge-offs) during the period to average loans and leases outstanding during the period	(0.14		)%	(0.07)%
Ratio of allowance for loan and lease losses to total loans and leases at end of period (1)	0.71		%	0.77%
Ratio of allowance for loan and lease losses to nonperforming loans and leases at end of period (2)	182.75		%	145.89%

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

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

Page 26

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

	Allowance for Loan and Lease Losses		Impaired Loan Valuation Allowance		Allowance for Loan and Lease Losses		Impaired Loan Valuation Allowance
Loan and Lease Type	At December 31, 2007				At June 30, 2007
	(Dollars in Thousands)
One- to four-family	$	380	$	- - - -	$	342	$	- - - -
Commercial real estate	586		- - - -		524		- - - -
Multi-family real estate	130		- - - -		123		- - - -
Commercial business	1,809		- - - -		1,974		335
Equipment finance leases	399		- - - -		486		- - - -
Consumer	1,125		- - - -		1,178		- - - -
Agricultural	865		130		860		50
Total	$	5,294	130		$	5,487	385

Impaired Loan Summary

	Number of Loan Customers	Loan Balance		Impaired Loan Valuation Allowance	Number of Loan Customers	Loan Balance		Impaired Loan Valuation Allowance
Loan and Lease Type	At December 31, 2007				At June 30, 2007
	(Dollars in Thousands)				(Dollars in Thousands)
Commercial business	5	$	607	- - - -	7	$	1,360	335
Agricultural	2	424		130	1	121		50
Total	7	$	1,031	130	8	$	1,481	385

Page 27

The allowance for loan and lease losses was $5.4 million at December 31, 2007 as compared to $5.9 million at December 31, 2006.  The ratio of the allowance for loan and lease losses to total loans and leases was 0.71% at December 31, 2007 compared to 0.77% at December 31, 2006.  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 it uses the best information available to determine the allowances, unforeseen market conditions could result in adjustments and net earnings being significantly affected if circumstances differ substantially from the assumptions used in making the final determinations.  Future additions to the Company’s allowances may result from periodic loan, property or collateral reviews which cannot be predicted at this time.

Page 28

Comparison of the Three Months Ended December 31, 2007 and December 31, 2006

General.  The Company’s net income was $1.3 million, or $0.32 in basic and $0.31 in diluted earnings per share for the three months ended December 31, 2007, an $860,000 decrease in earnings compared to $2.1 million, or $0.53 in basic and $0.52 in diluted earnings per share for the same period in the prior fiscal year.  For the three months ended December 31, 2007, the return on average equity was 7.81% compared to 14.31% for the same period in the prior fiscal year.  For the three months ended December 31, 2007, the return on average assets was 0.49% compared to 0.85% 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 an increase in interest income of $422,000 and decreases in interest expense of $514,000 and provision for losses on loans and leases of $166,000 offset by a decrease in non-interest income of $2.5 million.

Interest, Dividend and Loan Fee Income.  Interest, dividend and loan fee income was $16.1 million for the three months ended December 31, 2007 as compared to $15.7 million for the same period in the prior fiscal year, an increase of $422,000 or 2.7%.  A $210,000 increase in interest, dividend and loan fee income was due to a 1.7% increase in the average volume of loans and leases receivable and a $196,000 increase in interest, dividend and loan fee income was the result of an increase in the average yield on investment securities from 4.69% for the three months ended December 31, 2006 to 5.18% for the three months ended December 31, 2007.  The average yield on total interest-earning assets was 6.77% for the three months ended December 31, 2007 as compared to 6.71% for the same period in the prior fiscal year.

Interest Expense.  Interest expense was $9.1 million for the three months ended December 31, 2007 as compared to $9.6 million for the same period in the prior fiscal year, a decrease of $514,000 or 5.4%.  A $239,000 decrease in interest expense was the result of a decrease in the average rate paid on interest-bearing deposits from 4.18% for the three months ended December 31, 2006 to 4.02% for the three months ended December 31, 2007.  An interest expense decrease of $290,000 was due to the unamortized debt issuance costs relating to the early redemption of a Trust Preferred Security in Fiscal 2007 and $88,000 in interest expense was the result of a decrease in the average rate paid on subordinated debentures payable to trusts.  The average rate paid on total interest-bearing liabilities was 4.26% for the three months ended December 31, 2007 as compared to 4.55% for the same period in the prior fiscal year.

Net Interest Income. The Company’s net interest income for the three months ended December 31, 2007 increased $936,000, or 15.4%, to $7.0 million compared to $6.1 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 average volume of interest-earning assets and by decreases in the average rate paid on interest-bearing liabilities and average volume of interest-bearing liabilities for the three months ended December 31, 2007 compared to the same period in the prior fiscal year.  The Company’s net interest margin on a fully taxable equivalent basis was 3.00% for the three months ended December 31, 2007 as compared to 2.66% 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 collectability of loans and leases and prior loan and lease loss experience.  The evaluation takes into consideration such factors as changes in the nature and volume of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases, and current economic conditions that may affect the borrower’s ability to pay.  The allowance for loan and lease losses is established through a provision for losses on loans and leases charged to expense.

During the three months ended December 31, 2007, the Company recorded a provision for losses on loans and leases of $295,000 compared to $491,000 for the three months ended December 31, 2006, a decrease of $166,000.  See “Asset Quality” for further discussion.

Non-interest Income.  Non-interest income was $3.0 million for the three months ended December 31, 2007 as compared to $5.4 million for the same period in the prior fiscal year, a decrease of $2.5 million, or 45.3%.  The decrease in non-interest income was primarily attributable to a one-time gain on sale of branches recorded in Fiscal 2007 of $2.8 million.  In addition, there were increases in net gain on sale of loans of $179,000 and loan servicing income of $101,000 for the three months ended December 31, 2007 as compared to the same period in the prior fiscal year.

Page 29

Net gain on sale of loans increased $179,000, from $260,000 for the three months ended December 31, 2006 to $439,000 for the three months ended December 31, 2007, primarily due to an increase in the amount of loans sold.

Loan servicing income increased $101,000 from $441,000 for the three months ended December 31, 2006 to $542,000 for the three months ended December 31, 2007 primarily due to an increase of $80.4 million in the balances of loans serviced by the Bank from $946.2 million at December 31, 2006 to $1.027 billion at December 31, 2007.

Non-interest Expense.  Non-interest expense was $7.7 million for the three months ended December 31, 2007 as compared to $7.7 million for the three months ended December 31, 2006, an increase of $17,000, or 0.2%.  The increase in non-interest expense was primarily due to increases in compensation and employee benefits of $310,000 and other non-interest expense of $48,000 offset by a decrease in marketing of $405,000.

Compensation and employee benefits increased $310,000, or 6.9%, from $4.5 million for the three months ended December 31, 2006 to $4.8 million for the three months ended December 31, 2007.  Variable pay related to employee incentives increased $118,000, regular employee pay increased $80,000 and net healthcare costs increased $52,000.

Other non-interest expense increased $48,000, or 4.9%, from $984,000 for the three months ended December 31, 2006 to $1.0 million for the three months ended December 21, 2007, primarily due to an increase in legal expenses of $138,000.

Marketing decreased $405,000, or 57.5%, from $704,000 for the three months ended December 31, 2006 to $299,000 for the three months ended December 31, 2007.  Fiscal 2007 included additional expenses relating to several deposit package programs.

Income tax expense.  The Company’s income tax expense for the three months ended December 31, 2007 decreased $511,000 or 41.9% to $708,000 compared to $1.2 million for the same period in the prior fiscal year.  The effective tax rate was 36.15% and 36.61% for the three months ended December 31, 2007 and 2006, respectively.

Comparison of the Six Months Ended December 31, 2007 and December 31, 2006

General.  The Company’s net income was $2.6 million, or $0.65 in basic and $0.64 in diluted earnings per share for the six months ended December 31, 2007, a $610,000 decrease in earnings compared to $3.2 million, or $0.81 in basic and $0.79 in diluted earnings per share for the same period in the prior fiscal year.  For the six months ended December 31, 2007, the return on average equity was 8.18% compared to 11.05% for the same period in the prior fiscal year.  For the six months ended December 31, 2007, the return on average assets was 0.51% compared to 0.65% 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 an increase in interest income of $1.3 million offset by a decrease in non-interest income of $2.0 million.

Interest, Dividend and Loan Fee Income.  Interest, dividend and loan fee income was $32.1 million for the six months ended December 31, 2007 as compared to $30.7 million for the same period in the prior fiscal year, an increase of $1.3 million or 4.3%.  A $754,000 increase in interest, dividend and loan fee income was due to a 2.9% increase in the average volume of loans and leases receivable.  A $277,000 increase in interest, dividend and loan fee income was the result of an increase in the average yield on loans and leases receivable from 7.10% for the six months ended December 31, 2006 to 7.18% for the six months ended December 31, 2007, and a $319,000 increase in interest, dividend and loan fee income was the result of an increase in the average yield on investment securities from 4.65% for the six months ended December 31, 2006 to 5.07% for the six months ended December 31, 2007.  The average yield on total interest-earning assets was 6.81% for the six months ended December 31, 2007 as compared to 6.67% for the same period in the prior fiscal year.

Page 30

Interest Expense.  Interest expense was $18.4 million for the six months ended December 31, 2007 as compared to $18.3 million for the same period in the prior fiscal year, an increase of $143,000 or 0.8%.  A $270,000 increase in interest expense was the result of an increase in average rate paid on interest-bearing deposits from 4.06% for the six months ended December 31, 2006 to 4.13% for the six months ended December 31, 2007, and a $241,000 increase in interest expense was the result of an increase in the average volume of interest-bearing deposits of 2.4%.  A net interest expense decrease of $165,000 was due to the unamortized debt issuance costs relating to the early redemption of two Trust Preferred Securities and $193,000 in interest expense was the result of a decrease in the average rate paid on subordinated debentures payable to trusts moving from 11.10% for the six months ended December 31, 2006 to 8.57% for the six months ended December 31, 2007.  An increase of $179,000 in interest expense was the result of an increase in the average volume of total interest-bearing liabilities of 1.7%.

Net Interest Income. The Company’s net interest income for the six months ended December 31, 2007 increased $1.2 million, or 9.5%, to $13.7 million compared to $12.5 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 average volume of interest-earning assets and by decreases in the average rate paid on subordinated debentures payable to trusts offset by increases in the average rate paid on interest-bearing deposits and average volume of interest-bearing deposits for the six months ended December 31, 2007 compared to the same period in the prior fiscal year.  The Company’s net interest margin on a fully taxable equivalent basis was 2.96% for the six months ended December 31, 2007 as compared to 2.76% 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 collectability of loans and leases and prior loan and lease loss experience.  The evaluation takes into consideration such factors as changes in the nature and volume of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases, and current economic conditions that may affect the borrower’s ability to pay.  The allowance for loan and lease losses is established through a provision for losses on loans and leases charged to expense.

During the six months ended December 31, 2007, the Company recorded a provision for losses on loans and leases of $620,000 compared to $752,000 for the six months ended December 31, 2006, a decrease of $132,000.  See “Asset Quality” for further discussion.

Non-interest Income.  Non-interest income was $5.8 million for the six months ended December 31, 2007 as compared to $7.8 million for the same period in the prior fiscal year, a decrease of $2.0 million, or 25.6%.  The decrease in non-interest income was primarily attributable to a one-time gain on sale of branches of $2.8 million in Fiscal 2007.  In addition, there were increases in loan servicing income of $277,000, fees on deposits of $260,000 and net gain on sale of loans of $242,000 for the six months ended December 31, 2007 as compared to the same period in the prior fiscal year.

Loan servicing income increased $277,000 from $770,000 for the six months ended December 31, 2006 to $1.0 million for the six months ended December 31, 2007 primarily due to an increase of $80.4 million in the balances of loans serviced by the Bank from $946.2 million at December 31, 2006 to $1.027 billion at December 31, 2007.

Fees on deposits increased $260,000 to $2.8 million for the six months ended December 31, 2007 from $2.5 million the same period in the prior fiscal year primarily due to an increase in higher activity and increased service pricing.

Net gain on sale of loans increased $242,000 from $456,000 for the six months ended December 31, 2006 to $698,000 for the six months ended December 31, 2007 primarily due to an increase in the amount of loans sold.

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Non-interest Expense.  Non-interest expense was $14.9 million for the six months ended December 31, 2007 as compared to $14.6 million for the six months ended December 31, 2006, an increase of $252,000, or 1.7%.  The increase in non-interest expense was primarily due to increases in compensation and employee benefits of $597,000, other non-interest expense of $116,000 and check and data processing expenses of $102,000 offset by a decrease in marketing of $585,000.

Compensation and employee benefits increased $597,000, or 6.9%, from $8.6 million for the six months ended December 31, 2006 to $9.2 million for the six months ended December 31, 2007.

Other non-interest expense increased $116,000 for the six months ended December 31, 2007 compared to the same period in the prior fiscal year, primarily due to an increase of $154,000 in legal expenses for the six months ended December 31, 2007 compared to the same period in the prior fiscal year.

Check and data processing expenses increased $102,000 for the six months ended December 31, 2007 compared to the same period in the prior fiscal year, primarily due to increases in data processing expenses of $75,000 for the six months ended December 31, 2007 compared to the six months ended December 31, 2006.

Marketing expense decreased $585,000, or 51.0%, from $1.1 million for the six months ended December 31, 2006 to $562,000 for the six months ended December 31, 2007 primarily due to several deposit packages introduced during Fiscal 2007.

Income tax expense.  The Company’s income tax expense for the six months ended December 31, 2007 decreased $309,000, or 18.3%, to $1.4 million compared to $1.7 million for the same period in the prior fiscal year.  The effective tax rate was 34.60% and 34.42% for the six months ended December 31, 2007 and 2006, respectively.

Liquidity and Capital Resources

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

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

The Bank anticipates it will have sufficient funds available to meet current loan commitments.  At December 31, 2007, the Bank had outstanding commitments to originate mortgage loans of $27.8 million and non-mortgage loans of $8.4 million.  In addition, the Bank had outstanding commitments to sell residential mortgage loans of $9.3 million, commercial real estate loans of $2.0 million, commercial business loans of $223,000 and consumer student loans of $1.5 million.  Commitments by the Bank to originate loans are not necessarily executed by the customer.  The Bank monitors the ratio of commitments to funding for use in liquidity management.  At December 31, 2007, the Bank had no commitments to purchase securities available for sale and no commitments to sell securities available for sale.

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Although in-market deposits are the Bank’s primary source of funds, the Bank’s policy has been to utilize borrowings where the funds can be invested in either loans or securities at a positive rate of return or to use the funds for short-term liquidity purposes.  The Bank has unsecured federal funds accommodations totaling $25.0 million with correspondent banks.  In addition, the Company has a revolving line of credit totaling $6.0 million with a correspondent bank.  There were no funds drawn on either line of credit at December 31, 2007.  Additionally, as of December 31, 2007, the Bank had $19.1 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 December 31, 2007, 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, 2007 could be acquired through April 30, 2008.  As of December 31, 2007, 76,000 shares of common stock had been purchased pursuant to the program.  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 December 31, 2007, 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 8.39% at December 31, 2007.  The minimum OTS total risk-based capital requirement for well-capitalized institutions is 10.00% of risk-weighted assets.  The Bank had total risk-based capital of 11.16% at December 31, 2007.

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Impact of Inflation and Changing Prices

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

Recent Accounting Pronouncements

In 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 adopted this new accounting standard effective July 1, 2007.  Under the amortization method, an entity shall amortize the value of servicing assets or liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or liabilities for impairment or increased obligation based on fair value at each reporting date. Under the fair value method, an entity shall measure servicing assets or liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur. The adoption of SFAS No. 156 has not had a material affect on the Company’s financial statements.

In June 2006, FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” to create a single model to address accounting for uncertainty in tax positions.  FIN 48 clarifies that a tax position must be more likely than not of being sustained before being recognized in the financial statements.  As required, the Company adopted FIN 48 effective July 1, 2007.  The adoption of FIN 48 did not have a material impact on the Company’s financial statements.

In September 2006, FASB issued Statement of Financial Accounting Standards No. 157 (SFAS 157), “Fair Value Measurements” and is effective for financial statements issued for fiscal years beginning after November 15, 2007.  SFAS 157 provides a common definition of fair value and a framework for measuring assets and liabilities at fair values when a particular standard prescribes it.  In addition, the Statement expands disclosures about fair value measurements.  As required by SFAS 157, the Company will adopt this new accounting standard effective July 1, 2008.  Management is currently reviewing the impact of SFAS 157 on the Company’s financial statements.

In September 2006, FASB issued Statement of Financial Accounting Standards No. 158 (SFAS 158), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132R.”  SFAS 158 requires recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet.  Under SFAS 158, gains and losses, prior service costs and credits and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost.  Also, the measurement date — the date at which the benefit obligation and plan assets are measured — is required to be the company’s fiscal year-end.  As required by SFAS 158, the Company adopted the balance sheet recognition provisions at June 30, 2007 and will adopt the year-end measurement date in 2009.

In February 2007, FASB issued Statement of Financial Accounting Standards No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.”  SFAS 159 is effective as of the beginning of an entity’s first fiscal year after November 15, 2007.  SFAS 159 allows companies the choice to measure many financial instruments and certain other items at fair value.  This gives a company the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  The Company will adopt this new accounting standard effective July 1, 2008.  Management is currently reviewing the impact of SFAS 159 on our financial statements.

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In December 2007, FASB issued Statement of Financial Accounting Standards No. 141(R) (SFAS 141R), “Business Combinations.”  SFAS 141 (R) is effective for fiscal years beginning after December 15, 2008.  SFAS 141 (R) improves reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements.  Management has reviewed SFAS 141 (R) and does not expect the adoption of this statement to have a material impact on the Company’s consolidated financial condition, results of operations or cash flow.

In December 2007, FASB issued Statement of Financial Accounting Standards No. 160 (SFAS 160), “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.”  SFAS 160 is effective for fiscal years beginning after December 15, 2008.  SFAS 160 improves the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interest in subsidiaries in the same way — as equity in the consolidated financial statements.  The Company does not currently have any noncontrolling interest in the consolidated financial statements.

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 which may have an adverse effect on net income.

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

As set forth below, the volatility of a rate change, the change in asset or liability mix of the Company or other factors may produce a decrease in net interest margin in an upward moving rate environment even as the net portfolio value (“NPV”) estimate indicates an increase in net value.  The inverse situation may also occur.  One approach used by the Company to quantify interest rate risk is an NPV analysis.  This analysis calculates the difference between the present value of the liabilities and the present value of expected cash flows from assets and off-balance sheet contracts.  The following tables set forth, at September 30, 2007 (the most recent report available) and December 31, 2006, 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 Fiscal 2007 or that the Company’s primary market risk exposures and how those exposures were managed during the six months ended December 31, 2007 changed significantly when compared to June 30, 2007.

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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 September 30, 2007” and “Selected Asset and Liability Price Tables as of December 31, 2006.”  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.

September 30, 2007
Change in	Estimated NPV	Estimated Increase (Decrease) in NPV
Interest Rates	Amount	Amount		Percent
Basis Points	(Dollars in Thousands)
+300	$100,026	$(23,435	)	(19	) %
+200	109,065	(14,396	)	(12	)
+100	117,085	(6,376	)	(5	)
- - - -	123,461	- - - -		- - - -
-100	125,554	2,093		2
-200	124,386	925		1

December 31, 2006
Change in	Estimated NPV	Estimated Increase (Decrease) in NPV
Interest Rates	Amount	Amount		Percent
Basis Points	(Dollars in Thousands)
+300	$98,526	$(24,353	)	(20	) %
+200	107,462	(15,416	)	(13	)
+100	115,964	(6,914	)	(6	)
- - - -	122,878	- - - -		- - - -
-100	124,943	2,065		2
-200	123,352	473		- - - -

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

Item 4.  Controls and Procedures

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

PART II  — OTHER INFORMATION

Item 1.             Legal Proceedings

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

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

Item 1A.          Risk Factors

There have been no material changes from the risk factors disclosed in Part 1, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for Fiscal 2007.

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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 December 31, 2007.

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
October 1 - 31, 2007	- - - -	$0.00	- - - -	329,141
November 1 - 30, 2007	6,000	$15.76	6,000	323,141
December 1 - 31, 2007	- - - -	$0.00	- - - -	323,141
2nd Quarter Total	6,000	$0.00	6,000

The Company currently has in effect a stock buyback program, which was publicly announced on April 30, 2007 and pursuant to which up to 10% of the common stock of the Company that was outstanding on May 1, 2007, which equals 399,141 shares, may be acquired through April 30, 2008.  As of December 31, 2007, 76,000 shares of common stock have been purchased pursuant to this program.

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

At the Company’s Annual Meeting of Stockholders held on November 14, 2007 (the “Annual Meeting”), the stockholders elected the two individuals nominated to serve as Class II directors until 2010 or until their respective successors are elected and qualified, as set forth in Proposal 1 in the Company’s Proxy Statement relating to the Annual Meeting.  The two individuals elected, and the number of votes cast for, or withheld, with respect to each of them, is as follows:

Charles T. Day	For:   2,974,559	Vote Withheld:    425,327
Robert L. Hanson	For:   2,847,388	Vote Withheld:    552,498

The following directors continue to serve on the Board of Directors following the Annual Meeting:  Curtis L. Hage, Curtis J. Bernard, Christine E. Hamilton, Wm. G. Pederson and Thomas L. Van Wyhe.

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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

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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:	February 14, 2008	By:	/s/ Curtis L. Hage
		Curtis L. Hage, Chairman, President
		And Chief Executive Officer
		(Principal Executive Officer)
Date:	February 14, 2008	By:	/s/ Darrel L. Posegate
		Darrel L. Posegate, Executive Vice President,
		Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)

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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

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