PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(DOLLARS IN THOUSANDS, except share data)

	December 31, 2009			June 30, 2009
	(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents	$	38,706		$	18,511
Securities available for sale	221,840			222,910
Federal Home Loan Bank stock	8,848			12,476
Loans held for sale	23,123			14,881

Loans and leases receivable	819,034			851,282
Allowance for loan and lease losses	(8,512		)	(8,470		)
Net loans and leases receivable	810,522			842,812

Accrued interest receivable	9,384			7,598
Office properties and equipment, net of accumulated depreciation	17,638			16,917
Foreclosed real estate and other properties	1,133			1,085
Cash value of life insurance	14,872			14,594
Servicing rights	12,351			11,768
Goodwill, net	4,951			4,951
Other assets	12,080			8,293
Total assets	$	1,175,448		$	1,176,796

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Deposits	$	863,388		$	837,868
Advances from Federal Home Loan Bank and other borrowings	166,041			212,869
Subordinated debentures payable to trusts	27,837			27,837
Advances by borrowers for taxes and insurance	11,230			11,899
Accrued expenses and other liabilities	14,650			17,648
Total liabilities	1,083,146			1,108,121

STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized, none outstanding	—			—
Common stock, $.01 par value, 10,000,000 shares authorized, 9,021,993 and 6,109,437 shares issued at December 31, 2009 and June 30, 2009, respectively	90			61
Common stock subscribed for but not issued	—			224
Additional paid-in capital	44,142			22,911
Retained earnings, substantially restricted	82,643			80,735
Accumulated other comprehensive (loss), net of related deferred tax effect	(3,676		)	(4,359		)
Less cost of treasury stock, 2,083,455 and 2,083,455 shares at December 31, 2009 and June 30, 2009, respectively	(30,897		)	(30,897		)
Total stockholders’ equity	92,302			68,675
Total liabilities and stockholders’ equity	$	1,175,448		$	1,176,796

See accompanying notes to unaudited consolidated financial statements.

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HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

	Three Months Ended					Six Months Ended
	December 31,					December 31,
	2009			2008		2009			2008
Interest, dividend and loan fee income:
Loans and leases receivable	$	12,352		$	12,646	$	24,695		$	25,664
Investment securities and interest-earning deposits	1,995			2,920		4,285			5,733
	14,347			15,566		28,980			31,397
Interest expense:
Deposits	3,332			4,132		6,856			8,709
Advances from Federal Home Loan Bank and other borrowings	2,157			2,427		4,515			4,992
	5,489			6,559		11,371			13,701
Net interest income	8,858			9,007		17,609			17,696
Provision for losses on loans and leases	424			—		767			387

Net interest income after provision for losses on loans and leases	8,434			9,007		16,842			17,309

Noninterest income:
Fees on deposits	1,403			1,518		2,849			3,069
Loan servicing income	488			534		979			1,091
Gain on sale of loans, net	537			285		1,033			536
Trust income	207			153		464			375
Gain on sale of securities, net	603			45		1,136			125

Total other-than-temporary impairment losses	(1,663		)	—		(2,081		)	—
Portion of loss recognized in other comprehensive income comprehensive income (before taxes)	1,323			—		(117		)	—
Net impairment losses recognized in earnings	(340		)	—		(2,198		)	—

Other	355			394		688			782
	3,253			2,929		4,951			5,978
Noninterest expense:
Compensation and employee benefits	5,139			5,828		10,302			10,949
Occupancy and equipment	1,100			1,012		2,184			1,989
FDIC insurance	335			122		660			263
Check and data processing expense	677			652		1,375			1,274
Professional fees	337			447		937			955
Marketing and community development	494			475		965			886
Foreclosed real estate and other properties, net	48			96		67			213
Other	649			544		1,238			1,050
	8,779			9,176		17,728			17,579

Income before income taxes	2,908			2,760		4,065			5,708

Income tax expense	947			914		1,249			1,887

Net income available to common shareholders	$	1,961		$	1,846	$	2,816		$	3,821

Comprehensive income	$	1,401		$	1,031	$	3,499		$	2,574

Basic earnings per common share:	$	0.38		$	0.46	$	0.61		$	0.96
Diluted earnings per common share:	0.38			0.46		0.61			0.95
Dividends declared per common share	0.11			0.11		0.23			0.23

See accompanying notes to unaudited consolidated financial statements.

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HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

	Six Months Ended December 31,
	2009			2008
Cash flows from operating activities
Net income	$	2,816		$	3,821
Adjustments to reconcile net income to net cash (used in) operating activities
Provision for losses on loans and leases	767			387
Depreciation	1,005			842
Amortization of discounts and premiums on securities and other	1,451			955
Stock based compensation	369			194
Net change in loans held for resale	(7,209		)	(4,695		)
(Gain) on sale of loans, net	(1,033		)	(536		)
Realized (gain) on sale of securities, net	(1,136		)	(125		)
Other-than-temporary impairments recognized in noninterest income	2,198			—
(Gains) losses and provision-for-losses on sales of foreclosed real estate and other properties, net	7			17
Change in other assets and liabilities	(9,255		)	(4,793		)
Net cash (used in) operating activities	(10,020		)	(3,933		)

Cash flows from investing activities
Loan participations purchased	(1,320		)	(969		)
Net change in loans outstanding	32,329			(25,209		)
Securities available for sale
Sales, maturities, repayments and adjustments	49,506			43,835
Purchases	(49,432		)	(74,342		)
Purchase of Federal Home Loan Bank stock	(13		)	(5,565		)
Redemption of Federal Home Loan Bank stock	3,641			4,334
Purchase of office properties and equipment	(1,726		)	(1,046		)
Purchase of servicing rights	(817		)	(769		)
Proceeds from sale of foreclosed real estate and other properties	265			405
Net cash provided by (used in) investing activities	32,433			(59,326		)

Cash flows from financing activities
Net increase (decrease) in deposit accounts	25,520			(11,320		)
Proceeds of advances from Federal Home Loan Bank and other borrowings	1,107,707			1,408,730
Payments on advances from Federal Home Loan Bank and other borrowings	(1,154,535		)	(1,354,415		)
Increase (decreases) in advances by borrowers	(669		)	193
Proceeds from issuance of Preferred Stock	—			25,000
Proceeds from issuance of common stock	20,667			694
Cash dividends paid	(908		)	(911		)
Net cash provided by (used in) financing activities	(2,218		)	67,971

Increase in cash and cash equivalents	20,195			4,712
Cash and cash equivalents
Beginning	18,511			21,170
Ending	$	38,706		$	25,882

Supplemental Disclosures of Cash Flows Information
Cash payments for interest	$	12,449		$	15,147
Cash payments for income and franchise taxes, net	1,318			1,669

See accompanying notes to unaudited consolidated financial statements.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008

(Unaudited)

NOTE 1—SELECTED ACCOUNTING POLICIES

Basis of Financial Statement 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, 2009 (“fiscal 2009”), filed with the Securities and Exchange Commission. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practice within the industry.

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

Management has evaluated subsequent events for potential disclosure or recognition through February 5, 2010, the date of the filing of the consolidated financial statements with the Securities and Exchange Commission.

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, 2009:

	Amount		Percent
	(Dollars in Thousands)
Tier I (core) capital (to adjusted total assets):
Required	$	58,507	5.00	%
Actual	103,645		8.86
Excess over required	45,138		3.86

Total Risk-based capital (to risk-weighted assets):
Required	$	94,513	10.00	%
Actual	111,862		11.84
Excess over required	17,349		1.84

NOTE 3—EARNINGS PER COMMON SHARE

Basic earnings per common 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,

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2009 and 2008 was 5,201,869 and 4,007,870, respectively. The weighted average number of basic common shares outstanding for the six months ended December 31, 2009 and 2008 was 4,616,130 and 3,989,962, respectively.

Dilutive earnings per common share is similar to the computation of basic earnings per common 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, 2009 and 2008 was 5,204,102 and 4,023,791, respectively. The weighted average number of common and dilutive potential common shares outstanding for the six months ended December 31, 2009 and 2008 was 4,622,984 and 4,019,280, 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, 2009									December 31, 2008
			Gross									Gross
	Amortized		Unrealized					Fair		Amortized		Unrealized					Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
	(Dollars in Thousands)

Debt securities:
U.S. government agencies	$	2,632	$	26	$	—		$	2,658	$	6,373	$	435	$	—		$	6,808
Federal Home Loan Bank	—		—		—			—		1,500		23		—			1,523
Municipal bonds	13,944		373		(64		)	14,253		13,862		145		(255		)	13,752
Trust preferred securities	9,701		—		(5,488		)	4,213		12,310		—		(5,336		)	6,974
	26,277		399		(5,552		)	21,124		34,045		603		(5,591		)	29,057

Equity securities:
FNMA	—		—		—			—		8		—		(8		)	—
Federal Ag Mortgage	7		—		(4		)	3		7		—		(5		)	2
Other investments	253		—		—			253		253		—		—			253
	260		—		(4		)	256		268		—		(13		)	255

Residential mortgage- backed securities	197,559		3,614		(713		)	200,460		224,443		2,881		(2,247		)	225,077
	$	224,096	$	4,013	$	(6,269	)	$	221,840	$	258,756	$	3,484	$	(7,851	)	$	254,389

Management has implemented a process to identify securities that could potentially have a credit impairment that is other-than-temporary. This process involves evaluation of the length of time and extent to which the fair value has been less than the amortized cost basis, review of available information regarding the financial position of the issuer, monitoring the rating of the security, cash flow projections, and the Company’s intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity. To the extent we determine that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized.

For all securities that are considered temporarily impaired, the Company does not intend to sell these securities (has not made a decision to sell) and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost, which may occur at maturity. The Company believes that it will collect all principal and interest due on all investments that have amortized cost in excess of fair value that are considered only temporarily impaired.

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The following table presents the fair value and age of gross unrealized losses by investment category at December 31, 2009:

	Less than 12 Months					12 Months or More					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		(Losses)			Value		(Losses)			Value		(Losses)
	(Dollars in Thousands)
Debt securities:
Municipal bonds	$	1,660	$	(11	)	$	1,879	$	(53	)	$	3,539	$	(64	)
Trust preferred securities	—		—			4,213		(5,488		)	4,213		(5,488		)
	1,660		(11		)	6,092		(5,541		)	7,752		(5,552		)
Equity securities:
Federal Ag Mortgage	3		(4		)	—		—			3		(4		)
	3		(4		)	—		—			3		(4		)
Residential mortgage-backed securities	36,782		(272		)	18,206		(441		)	54,988		(713		)
	$	38,445	$	(287	)	$	24,298	$	(5,982	)	$	62,743	$	(6,269	)

For the three months ended December 31, 2009, gross proceeds from the securities sold at a gain were $13.1 million, resulting in a gain on sale of securities of $603,000. This compares to gross proceeds of $5.5 million, resulting in a gain on sale of securities of $90,000 for the three months ended December 31, 2008. There were no securities sold at a loss for the three months ended December 31, 2009 as compared to $6.0 million received in gross proceeds, which resulted in a net loss of $45,000 for the three months ended December 31, 2008.

For the six months ended December 31, 2009, gross proceeds from the securities sold at a gain were $24.2 million, resulting in a gain on sale of securities of $1.1 million. This compares to gross proceeds of $12.8 million, resulting in a gain on sale of securities of $172,000 for the six months ended December 31, 2008. There were no securities sold at a loss for the six months ended December 31, 2009 as compared to $8.3 million received in gross proceeds, which resulted in a net loss of $47,000 for the six months ended December 31, 2008.

The unrealized losses reported for municipal bonds relate to 22 municipal general obligation or revenue bonds. The unrealized losses are primarily attributed to changes in credit spreads or market interest rate increases since the securities were originally acquired, rather than due to credit or other causes. Management does not believe any individual unrealized losses as of December 31, 2009, represent an other-than-temporary impairment for these investments. The Company does not have the intent to sell these securities (has not made a decision to sell) and has assessed that it is not more likely than not that the Company will be required to sell these securities before anticipated recovery of fair value.

The unrealized losses reported for residential mortgage-backed securities relate to 49 securities issued by the Federal National Mortgage Association (“FNMA”), the Government National Mortgage Association (“GNMA”), or the Federal Home Loan Mortgage Corporation (“FHLMC”). These unrealized losses are primarily attributable to changes in interest rates and the contractual cash flows of those investments which are guaranteed by an agency of the U.S. government. Residential mortgage-backed securities also include one “private-label” collateralized mortgage obligation with an amortized amount of $2.0 million, which has maintained its AAA rating as of December 31, 2009. Management does not believe any of these unrealized losses as of December 31, 2009, represent an other-than-temporary impairment for those investments. The Company does not have the intent to sell these securities (has not made a decision to sell) and has assessed that it is not more likely than not that the Company will be required to sell these securities before anticipated recovery of fair value.

The unrealized losses reported for trust preferred securities are attributable to six rated pooled securities. Rating downgrades regarding these investments have occurred placing each in a below investment grade rating. The securities have an amortized cost of $1.9 million rated Caa3, $2.4 million rated Caa1, and $5.4 million rated Ca. The market for these securities is currently inactive. The CUSIPs of the trust preferred securities are 74042TAE1 rated Caa3, 740417AB6 and 74042CAE8 rated Caa1, and 74041EAC9, 74041RAB2, and 55312HAE9 rated Ca. The Company performed assessments of available information for each security during the second quarter ended December 31, 2009, and also

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considered factors such as overall deal structure and its position within the structure, quality of underlying issuers within each pool, defaults and recoveries, loss severities and prepayments. Based upon scenarios developed in regard to this information, management compared the present value of best estimates of cash flows expected to be collected from each security at the security’s effective interest rate to the amortized cost basis of each security. Management determined that three trust preferred securities exhibited an other-than-temporary impairment. The difference between the present value of cash flows and the amortized cost basis for each of the three securities was recorded as credit loss impairment and recognized in earnings in the amount of $340,000. The amortized cost basis of the three securities was reduced by the amount of credit loss. The remaining impairment amount related to other factors of $1.3 million was recognized in other comprehensive income, net of applicable taxes. The unrealized losses on these trust preferred securities can primarily be attributed to changes in credit spreads since the securities were acquired. See Note 13 “Financial Instruments” for additional information related to the determination of fair value. The Company does not have the intent to sell these six securities (has not made a decision to sell) and has assessed that it is not more likely than not that the Company will be required to sell these securities before anticipated recovery of fair value. Within this segment, five securities with amortized cost of $7.9 million are quarterly variable-rate securities tied to 3-month LIBOR.

The following table presents the amounts recognized in the Consolidated Statements of Income for other-than-temporary impairments related to credit losses charged to earnings:

	Six Months Ended
	December 31, 2009
	(Dollars in Thousands)
Beginning balance of credit losses on securities held as of July 1, 2009 for which a portion of other-than-temporary impairment was recognized in other comprehensive income	$	405

Credit losses for which an other-than-temporary impairment was not previously recognized	50

Increases to the amount related to the credit losses for which other-than-temporary was previously recognized	2,148

Ending balance of credit losses on securities held as of December 31, 2009 for which a portion of other-than-temporary impairment was recognized in other comprehensive income	$	2,603

The composition and maturities of the investment securities portfolio, excluding equity securities, are indicated in the following table:

	At December 31, 2009
									TOTAL
	Less than		1 to 5		5 to 10		Over 10		Amortized		Fair
	1 Year		Years		Years		Years		Cost		Values
	(Dollars in Thousands)
U.S. government agencies & corporations	$	1,128	$	1,504	$	—	$	—	$	2,632	$	2,658
Municipal bonds	730		4,037		6,600		2,577		13,944		14,253
Trust preferred securities	—		—		—		9,701		9,701		4,213
Residential mortgage- backed securities	—		3,775		20,789		172,995		197,559		200,460
Total investment securities	$	1,858	$	9,316	$	27,389	$	185,273	$	223,836	$	221,584

NOTE 5—LOAN SERVICING

Mortgage loans serviced for others (primarily the South Dakota Housing Development Authority) are not included in the accompanying consolidated statements of financial condition.

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The following tables summarize the activity in, and the main assumptions used to estimate the amortization of servicing rights:

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2009			2008			2009			2008
	(Dollars in Thousands)

Balance, beginning	$	11,998		$	11,426		$	11,768		$	11,189
Additions	775			373			1,429			958
Amortization	(422		)	(387		)	(846		)	(735		)
Balance, ending	$	12,351		$	11,412		$	12,351		$	11,412

Servicing fees received	$	910		$	920		$	1,825		$	1,825
Balance of loans serviced at:
Beginning of period	1,073,658			1,016,293			1,046,600			994,065
End of period	1,111,380			1,033,884			1,111,380			1,033,884

Amortization of servicing rights is adjusted each quarter as the result of the evaluation of historical prepayment activity. For the second quarter ended December 31, 2009 and 2008, the constant prepayment rates (CPR) used to calculate the amortization was 10.57% and 10.09%, respectively. Management utilized a discount rate of 10.00% for valuation purposes for both periods.

NOTE 6—SEGMENT REPORTING

Operating segments are defined as components of an enterprise for which discrete 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 non-reportable segments, the Company and intersegment 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,
	2009									2008
	Banking			Other			Total			Banking			Other			Total
	(Dollars in Thousands)

Net interest income	$	9,349		$	(491	)	$	8,858		$	9,460		$	(453	)	$	9,007
Provision for losses on loans and leases	(424		)	—			(424		)	—			—			—
Non-interest income	3,183			70			3,253			2,847			82			2,929
Intersegment non-interest income	(24		)	(37		)	(61		)	(26		)	(35		)	(61		)
Non-interest expense	(8,365		)	(414		)	(8,779		)	(8,723		)	(453		)	(9,176		)
Intersegment non-interest expense	—			61			61			—			61			61
Income (loss) before income taxes	$	3,719		$	(811	)	$	2,908		$	3,558		$	(798	)	$	2,760

Total assets at December 31	$	1,158,655		$	16,793		$	1,175,448		$	1,148,150		$	25,002		$	1,173,152

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	Six Months Ended December 31,
	2009									2008
	Banking			Other			Total			Banking			Other			Total
	(Dollars in Thousands)

Net interest income	$	18,590		$	(981	)	$	17,609		$	18,578		$	(882	)	$	17,696
Provision for losses on loans and leases	(767		)	—			(767		)	(387		)	—			(387		)
Non-interest income	4,765			186			4,951			5,778			200			5,978
Intersegment non-interest income	(48		)	(76		)	(124		)	(64		)	(57		)	(121		)
Non-interest expense	(16,895		)	(833		)	(17,728		)	(16,773		)	(806		)	(17,579		)
Intersegment non-interest expense	—			124			124			—			121			121
Income (loss) before income taxes	$	5,645		$	(1,580	)	$	4,065		$	7,132		$	(1,424	)	$	5,708

Total assets at December 31	$	1,158,655		$	16,793		$	1,175,448		$	1,148,150		$	25,002		$	1,173,152

NOTE 7—DEFINED BENEFIT PLAN

The Company has a noncontributory (cash balance) defined benefit pension plan covering all employees of the Company and its wholly-owned subsidiaries who have attained the age of 21 and have completed 1,000 hours of service in a plan year. The benefits are based on 6% of each eligible participant’s annual compensation, plus income earned in the accounts at a rate determined annually based on 30-year treasury note rates. The Company’s funding policy is to make the minimum annual required contribution plus such amounts as the Company may determine to be appropriate from time to time. One hundred percent vesting occurs after three years with a retirement age of the later of age 65 or three years of participation. The Company has adopted all plan provisions required by the Pension Protection Act of 2006. Information relative to the components of net periodic benefit cost for the Company’s defined benefit plan is presented below:

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2009			2008			2009			2008
	(Dollars in Thousands)

Service cost	$	142		$	118		$	284		$	237
Interest cost	143			120			287			240
Amortization of prior losses	46			16			91			31
Expected return on plan assets	(139		)	(139		)	(278		)	(253		)
Total costs recognized in expense	$	192		$	115		$	384		$	255

The Company previously disclosed in its consolidated financial statements for fiscal 2009, 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 2009, that it contributed $2.35 million to fund its qualified pension plan. During the second quarter of the fiscal 2010, the Company made contributions of $425,000 to fund its qualified pension plan. The Company anticipates no additional contributions will be made in fiscal 2010.

NOTE 8—SELF-INSURED HEALTHCARE PLAN

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

The Company assumes the responsibility for funding the plan benefits out of general assets; however, employees cover some of the costs of covered benefits through contributions, deductibles, co-pays and participation amounts. An

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employee is eligible for coverage upon completion of 30 calendar days of regular employment. The plan, which is on a calendar year basis, is intended to comply with, and be governed by, the Employee Retirement Income Security Act of 1974, as amended.

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

	Fiscal Years Ended June 30,
	2010		2009
	(Dollars in Thousands)

Quarter ended September 30	$	748	$	358
Quarter ended December 31	311		945
Quarter ended March 31	—		704
Quarter ended June 30	—		555
Net healthcare costs	$	1,059	$	2,562

NOTE 9—STOCK-BASED COMPENSATION PLANS

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

	2009		2008

Expected volatility	22.00	%	19.00	%
Expected dividend yield	3.61	%	3.06	%
Risk-free interest rate	2.35	%	2.87	%
Expected term (in years)	5		5

Stock option activity for the six months ended December 31, 2009 is as follows:

				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
	Shares	Price		Term	Value
Beginning balance	139,919	$	12.89
Granted	—	—
Forfeited	—	—
Exercised	—	—
Ending balance	139,919	$	12.89	3.52	$	16,875

Vested and exercisable	139,919	$	12.89	3.52	$	16,875

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Stock appreciation rights activity for the six months ended December 31, 2009 is as follows:

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

Beginning balance	87,650		$	15.35
Granted	115,747		12.48
Forfeited	(2,084	)	15.38
Exercised	—		—
Ending balance	201,313		$	13.70	9.00	$	—

Vested and exercisable	35,463		$	15.62	7.69	$	—

The total intrinsic value of options exercised during the six months ended December 31, 2009 and 2008 was $0 and $174,000, respectively. Cash received from the exercise of these options was $0 and $501,000, respectively, and the related tax benefit realized for the tax deductions from cashless option exercises totaled $0 and $700, respectively. The weighted-average grant date fair value of stock appreciation rights (SARs) granted during the six months ended December 31, 2009 and 2008 was $1.75 and $2.06, respectively. The total unrecognized compensation cost related to nonvested SARs awards at December 31, 2009 was $303,000. The unrecognized cost at December 31, 2009 is expected to be recognized over a weighted average period of 32 months.

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

	2009				2008
			Weighted				Weighted
			Average				Average
			Grant Date				Grant Date
	Shares		Fair Value		Shares		Fair Value

Nonvested balance, beginning	90,708		$	15.81	121,746		$	16.57
Granted	38,062		10.80		23,602		13.33
Vested	(55,403	)	15.30		(48,982	)	16.43
Forfeited	(506	)	16.53		(1,305	)	16.95

Nonvested balance, ending	72,861		$	13.58	95,061		$	15.83

Pretax compensation expense recognized for nonvested shares for the six months ended December 31, 2009, and 2008 was $276,000 and $179,000, respectively. The tax benefit for the six months ended December 31, 2009, and 2008 was $94,000 and $61,000, respectively. Annually, the expected forfeiture rate is considered and a cumulative amortization adjustment is recorded to compensation expense if necessary. During the second quarter of fiscal 2010, the expected forfeiture rate was changed to 14%, down from 22% from the evaluation in the second quarter of fiscal 2009, based upon historical employee turnover and expectations about the future. This resulted in a pretax cumulative adjustment to increase compensation expense totaling $103,000. This compares to a pretax adjustment to decrease compensation expense totaling $34,000 recognized in the second quarter of fiscal 2009, when the forfeiture rate increased from 19% to 22%. As of December 31, 2009, there was $566,000 of total unrecognized compensation cost related to nonvested shares granted under the Company’s 2002 Stock Option and Incentive Plan, as amended (“the Plan”). The cost is expected to be recognized over a weighted-average period of 21 months. The total fair value of shares vested during the six months ended December 31, 2009 and 2008 was $673,000 and $805,000, respectively.

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In association with the 2002 Option Plan, awards of nonvested shares of the Company’s common stock are made to outside directors of the Company. Each outside director is entitled to all voting, dividend and distribution rights during the vesting period. During the second quarter of fiscal 2010, 19,626 shares of nonvested stock were awarded. Nonvested shares vest on the first anniversary of the date of grant. As of December 31, 2009, there was $181,000 of total unrecognized compensation cost related to nonvested shares, which are expected to be recognized over the remaining 12 months. For the six months ended December 31, 2009, amortization expense was recorded in the amount of $60,000.

These stock option and incentive plans are described more fully in Part II, Item 8 “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for fiscal 2009, under Note 16 of “Notes to Consolidated Financial Statements.”

NOTE 10—SUBORDINATED DEBENTURES PAYABLE TO TRUSTS

On December 19, 2002, the Company issued 5,000 shares totaling $5.0 million of Company Obligated Mandatorily Redeemable Preferred Securities of Trust III. Trust III 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 III. The securities provide for cumulative cash distributions calculated at a rate based on three-month LIBOR plus 3.35% adjusted quarterly. 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 January 7, 2033. At the end of the deferral period, all accumulated and unpaid distributions must be paid. The capital securities must be redeemed on January 7, 2033; however, the Company has the option to shorten the maturity date as the call option date has passed. 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 September 25, 2003, the Company issued 7,000 shares totaling $7.0 million of Company Obligated Mandatorily Redeemable Preferred Securities of Trust IV. Trust IV 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 IV. The securities provide for cumulative cash distributions calculated at a rate based on three-month LIBOR plus 3.10% adjusted quarterly. 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 8, 2033. At the end of the deferral period, all accumulated and unpaid distributions must be paid. The capital securities must be redeemed on October 8, 2033; however, the Company has the option to shorten the maturity date as the call option date has passed. 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 December 7, 2006, the Company issued 10,000 shares totaling $10.0 million of Company Obligated Mandatorily Redeemable Preferred Securities of Trust V. Trust V 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 V. The securities provide for cumulative cash distributions calculated at a rate based on three-month LIBOR plus 1.83%, fixed for five years at 6.61%; thereafter, adjusted quarterly. The Company may, at one or more times, defer interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond March 1, 2037. At the end of the deferral period, all accumulated and unpaid distributions must be paid. The capital securities must be redeemed on March 1, 2037; however, the Company has the option to shorten the maturity date to a date not earlier than March 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 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. The Company may, at one or more times, defer interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond October 1, 2037. At the end of the deferral period, all accumulated and unpaid distributions must be paid. The capital securities must be redeemed on October 1, 2037; however, the Company has the option to shorten the maturity date to a date not earlier than October 1, 2012. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of the payment to all of the Company’s indebtedness and senior to the Company’s capital stock.

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NOTE 11—INTEREST RATE CONTRACTS

Interest rate swap contracts are entered into primarily as an asset/liability management strategy of the Company to modify interest rate risk. The primary risk associated with all swaps is the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contract. 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 agreements. These contracts are designated as cash flow hedges.

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 instrument for a term of five years at a fixed rate of 6.69%. The fair value of the derivative was a $491,000 unrealized loss at December 31, 2009.

During the fourth quarter of fiscal 2008, the Company entered into an interest rate swap agreement with a $7.0 million notional amount to convert the variable-rate Trust Preferred IV security into a fixed-rate instrument for a term of three years at a fixed rate of 6.19%. The fair value of the derivative was a $222,000 unrealized loss at December 31, 2009.

During the first quarter of fiscal 2009, the Company entered into an interest rate swap agreement with a $3.0 million notional amount to convert a portion of the variable-rate Trust Preferred III security into a fixed-rate instrument for a term of three years at a fixed rate of 6.70%. The Company also entered into an interest rate swap agreement with a $2.0 million notional amount to convert the remaining portion of variable rate Trust Preferred III security into a fixed rate instrument for a term of four years at a fixed rate of 6.91%. The fair value of the $3.0 million notional amount derivative was a $135,000 unrealized loss, while the fair value of the $2.0 million notional amount derivative was a $107,000 unrealized loss at December 31, 2009.

During the second quarter of fiscal 2010, the Company entered into three interest rate swap agreements with notional amounts totaling $22.0 million to convert the variable-rate attributes of trust preferred debt into fixed-rate instruments through forward-starting swaps. The $10.0 million notional amount fixed-rate instrument has a term of five years at a fixed rate of 5.68%, effective December 1, 2011 for Trust Preferred V. The $7.0 million notional amount fixed-rate instrument has a term of three years at a fixed rate of 5.93%, effective January 8, 2011 for Trust Preferred IV. The $5.0 million notional amount fixed-rate instrument has a term of five years at a fixed rate of 5.95%, effective October 1, 2012 for Trust Preferred VI. The fair value of the $10.0 million, $7.0 million and $5.0 million notional amount derivatives were unrealized gains of $222,000, $91,000, and $98,000, respectively, at December 31, 2009.

No gain or loss was recognized in earnings for the six months ended December 31, 2009, and 2008 related to interest rate swaps. No deferred net losses on interest rate swaps in other comprehensive loss as of December 31, 2009, are expected to be reclassified into earnings during the current fiscal year. See Note 12 “Accumulated Other Comprehensive Loss” for amounts reported as other comprehensive loss.

The Company posted $1.8 million in cash under collateral arrangements as of December 31, 2009, to satisfy collateral requirements associated with our interest rate swap contracts.

The following table summarizes the derivative financial instruments utilized as of December 31, 2009:

Balance

Notional

Estimated Fair Value

Cash flow hedge

Sheet Location

Amount

Gain

Loss

(Dollars in Thousands)

Interest rate swap contracts

Accumulated other comprehensive loss

39,000

411

(954

)

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The following table details the derivative financial instruments, the average remaining maturities and the weighted-average interest rates being paid and received as of December 31, 2009:

			Average
	Notional		Maturity	Fair			Weighted Average Rate
Liability conversion swaps	Amount		(years)	Value			Receive		Pay
	(Dollars in Thousands)

Interest rate swap contracts	$	39,000	4.3	$	(543	)	3.0	%	6.1	%

NOTE 12—ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss are as follows:

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2009			2008			2009			2008
	(Dollars in Thousands)

Net income	$	1,961		$	1,846		$	2,816		$	3,821
Other comprehensive income (loss), net of tax:
Securities available for sale:
Change in unrealized losses on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in earnings	(1,663		)	—			(2,081		)	—
Change in unrealized gain (losses) on other securities available for sale	482			(322		)	1,684			(906		)
Reclassification adjustment:
Net impairment credit loss recognized in earnings	340			—			2,198			—
Security (gains) recognized in earnings	(603		)	(45		)	(1,136		)	(125		)
Net unrealized gains (losses)	(1,444		)	(367		)	665			(1,031		)
Income tax benefit (expense)	550			138			(252		)	391
Other comprehensive income (loss) on securities available for sale	(894		)	(229		)	413			(640		)

Defined benefit plan:
Other comprehensive (loss) on defined benefit plan	—			—			—			—
Cash flow hedging activities-interest rate swap contracts:
Net unrealized gains (losses)	505			(888		)	409			(920		)
Income tax benefit (expense)	(171		)	302			(139		)	313
Other comprehensive income (loss) on cash flow hedging activities-interest rate swap contracts	334			(586		)	270			(607		)
Total other comprehensive income (loss)	(560		)	(815		)	683			(1,247		)
Comprehensive income	$	1,401		$	1,031		$	3,499		$	2,574

Cumulative other comprehensive (loss) balances were:

Unrealized loss on securities available for sale, net of related tax effect of $858 and $1,659							$	(1,398	)	$	(2,707	)
Unrealized loss on defined benefit plan, net of related tax effect of $1,177 and $523							(1,920		)	(853		)
Unrealized loss on cash flow hedging activities, net of related tax effect of $185 and $354							(358		)	(687		)
							$	(3,676	)	$	(4,247	)

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

Estimated fair values of the Company’s financial instruments are as follows:

	December 31, 2009						June 30, 2009
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
	(Dollars in Thousands)
Financial Assets
Cash and cash equivalents	$	38,706		$	38,706		$	18,511		$	18,511
Securities	221,840			221,840			222,910			222,910
Federal Home Loan Bank Stock	8,848			8,848			12,476			12,476
Loans and leases	833,645			836,367			857,693			863,453
Accrued interest receivable	9,384			9,384			7,598			7,598
Servicing rights	12,351			15,660			11,768			15,055
Interest rate swap contracts	(543		)	(543		)	(952		)	(952		)

Financial liabilities
Deposits	863,388			869,693			837,868			844,243
Borrowed funds	166,041			172,404			212,869			219,249
Subordinated debentures payable to trusts	27,837			12,323			27,837			9,990
Accrued interest payable and advances by borrowers for taxes and insurance	15,674			15,674			17,421			17,421

Fair Value Measurement

Effective July 1, 2009, FASB Staff Position 157-2, Effective Date of SFAS No. 157(ASC Topic 820), the Company applied the provisions of this statement to non-financial assets and liabilities. The Company early adopted FASB Staff Position 157-4, in April 2009, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly(ASC 820-10-65). ASC 820-10-65 defines fair value and establishes a consistent framework for measuring fair value under GAAP and expands disclosure requirements for fair value measurements. Fair values represent the estimated price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The standard describes three levels of inputs that may be used to measure fair value:

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

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

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

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The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis by level within the hierarchy at December 31, 2009:

	Quoted Prices		Significant Other			Significant
	In Active		Observable			Unobservable
	Markets		Inputs			Inputs		Total at
	(Level 1)		(Level 2)			(Level 3)		Fair Value
	(Dollars in Thousands)

Securities available for sale	$	3	$	217,624		$	4,213	$	221,840
Interest rate swap contracts	—		(543		)	—		(543		)
Total assets	$	3	$	217,081		$	4,213	$	221,297

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

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

The securities shown in Level 3 relate to trust preferred securities which are currently part of an inactive market. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade, and then by a significant decrease in the volume of trades relative to historical levels. The new issue market for pooled trust preferred securities has been inactive since 2007. Given conditions in the debt markets and the absence of observable orderly transactions in the secondary and new issue markets, management determined that an income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique.

The results of third party valuation and valuation derived by management cash flow scenarios were weighted each at 50% and used to measure fair value for each security. The approaches to determining fair value for the trust preferred securities included the following factors:

1. The credit quality of the collateral is estimated using average probability of default values for each industry within the third part valuation.

2. The loss given default was assumed to be 100% (i.e. no recovery) for third party valuations. Management utilized a range of loss given default based upon a review of the financial condition of underlying issuers in each pool, under multiple scenarios for each security.

3. The cash flows were forecasted for the underlying collateral and applied to each tranche to determine the resulting distribution among the securities.

4. For third party valuation, the expected cash flows for each scenario are discounted at 3-month Libor plus 300 basis points. Management scenarios of the best estimates of expected cash flows were discounted to calculate the present value of the security. Management considered a range of discount rates based upon three factors: (1) 3-Month Libor or a risk-free rate based on the rate of return on government debt securities,

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(2) the credit spread for BBB Bank Corporate Debt Indices, and (3) a liquidity or “risk premium” of 200 basis points.

5. The third party calculations were modeled in several thousand scenarios and the average price was used for the third party valuations. Management utilized an average price derived from various cash flow scenarios.

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

The following table reconciles the beginning and ending balances of securities available for sale that are measured at fair value on a recurring basis using significant unobservable inputs:

	Three Months Ended			Six Months Ended
	December 31, 2009
	(Dollars in Thousands)
Beginning balance	$	5,649		$	6,051
Total realized/unrealized gains (losses)
Included in earnings	(340		)	(2,198		)
Included in other comprehensive loss	(1,113		)	336
Purchases, issuances, (paydowns) and (sales)	17			24
Transfers into or (out) of Level 3	—			—
Ending balance	$	4,213		$	4,213

The table below presents the Company’s assets subject to the nonrecurring fair value measurements by level within the hierarchy at December 31, 2009:

	Quoted Prices		Significant Other		Significant
	In Active		Observable		Unobservable		Fiscal 2010
	Markets		Inputs		Inputs		Incurred
	(Level 1)		(Level 2)		(Level 3)		Losses
	(Dollars in Thousands)

Loans held for sale	$	—	$	23,123	$	—	$	—
Impaired loans	—		7,691		103		—
Mortgage servicing rights	—		—		12,351		—
Foreclosed assets	—		—		—		7

Loans held for sale, which consist generally of current production of certain fixed-rate, first-lien residential mortgage loans and student loans, are carried at the lower of cost or estimated fair value. The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics, which the Company classifies as a Level 2 nonrecurring fair value measurement.

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value. Market value is measured based on the value of the collateral securing these loans. Collateral is primarily real estate and its fair value is generally determined based on real estate appraisals or other evaluations by qualified professionals and reported as Level 2 inputs. When no appraisal or external valuation can be obtained, the Company internally values these assets and reports these as Level 3 inputs. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. Impaired loans that are collateral dependent are written down to their fair value, less costs to sell, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeds the fair value. Valuation techniques

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Forward-looking statements speak only as of the date they are made. Forward-looking statements are based upon management’s then-current beliefs and assumptions, but management does not give any assurance that such beliefs and assumptions will prove to be correct. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this Form 10-Q or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise, except to the extent required by federal securities laws. Based upon changing conditions, should any one or more of the above risks or uncertainties materialize, or should any of our underlying beliefs or assumptions prove incorrect, actual results may vary materially from those described in any forward-looking statement.

References in this Form 10-Q to “we,” “our,” “us” and other similar references are to the Company, unless otherwise expressly stated or the context requires otherwise.

Executive Summary

The Company’s net income available to common shareholders for the second quarter of fiscal 2010 was $2.0 million, or $0.38 in diluted earnings per common share, compared to $1.8 million, or $0.46 in diluted earnings per common share, for the second quarter of fiscal 2009. The Company’s net income available to common shareholders for the six months ended December 31, 2009 was $2.8 million, or $0.61 in diluted earnings per common share, compared to $3.8 million, or $0.95 in diluted earnings per common share, for the six months ended December 31, 2008.

Net interest income for the first six months of fiscal 2010 was $17.6 million, a decrease of $87,000, or 0.5%, compared to the same period a year ago. For the six months ended December 31, 2009, average interest-earning assets and average interest-bearing liabilities increased 2.5% and 1.3%, respectively, compared to the same period a year ago. Yields on earning assets decreased to 5.29% in the first six months of fiscal 2010, compared to 5.88% a year ago, a decrease of 59 basis points. For the same period, interest-bearing cost of funds decreased to 2.35%, compared to 2.87%, a decrease of 52 basis points.

The net interest margin on a fully taxable equivalent basis (“Net Interest Margin, TE”) for the six months ended December 31, 2009 was 3.27%, compared to 3.37% for the same period a year ago, a decrease of 10 basis points. A sustained overall decline in the interest rate yield curve affected the yield for the interest-earning assets and the interest-bearing liabilities, while the average balances for these categories increased over the comparable period of the prior year. Net Interest Margin, TE is a non-GAAP financial measure. See “Analysis of Net Interest Income” for a calculation of this non-GAAP financial measure and for further discussion as to the reasons we believe this non-GAAP financial measure is useful.

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

The allowance for loan and lease losses increased $42,000 to $8.5 million at December 31, 2009, compared to June 30, 2009. The ratio of allowance for loan and lease losses to total loans and leases was 1.01% as of December 31, 2009 compared to 0.98% at June 30, 2009. Total nonperforming assets at December 31, 2009 were $16.2 million as compared to $12.6 million at June 30, 2009, an increase of $3.6 million. The ratio of nonperforming assets to total assets increased to 1.38% at December 31, 2009, compared to 1.07% at June 30, 2009. The allowance for loan and lease losses is calculated based on loan and lease levels, loan and lease loss history over 12, 36, and 60 month time periods, 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. Management intends to continue its disciplined credit administration and loan underwriting processes and to remain focused on the creditworthiness of new loan originations. Management believes that it has identified the most significant non-performing assets in its loan portfolio and is working to resolve the credit issues related to these assets to obtain the most favorable outcome for the Company.

The Company held $9.7 million in trust preferred securities at December 31, 2009 that are currently impaired under applicable accounting rules. These are comprised of pooled securities issued primarily by banks throughout the United States, and were downgraded by Moody’s during the 2009 fiscal year. The Company performed analysis to determine if any of the securities had a credit loss by estimating if any of the cash flows are not expected to be received as

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contracted. Based upon the analysis, the Company recognized total other-than-temporary impairment credit losses of $2.1 million for four trust preferred securities for the six months ended December 31, 2009. The difference between the present value of cash flows and the amortized cost basis for each of the four securities was recorded as credit loss impairment and recognized in earnings for a total of $2.2 million. The amortized cost basis of the four securities was reduced by the amount of credit loss. The remaining amount of change in the fair value related to other factors was an increase of $117,000 and is recognized in other comprehensive income, net of applicable taxes.

Total deposits at December 31, 2009 were $863.4 million, an increase of $25.5 million, or 3.0%, from June 30, 2009. During the six month period, public fund account balances decreased $25.9 million which are categorized in multiple categories of deposits. In-market certificates of deposit increased a total of $19.8 million from $401.3 million to $421.1 million for the six month period, due in part to customer preference for higher yielding term deposit products. The primary factor affecting interest expense was the decrease in the average rates paid on total deposits for the six month period ended December 31, 2009 of 1.86% compared to 2.52% for the six month period ended December 31, 2008.

During the second quarter of fiscal 2010, the Company issued 2.875 million shares of its common stock at a public offering price of $8.00 per share, for gross proceeds of $23.0 million. The net proceeds of the offering after deducting underwriting discounts and commissions and estimated offering expenses totaled approximately $20.7 million. Per share earnings calculations were based on a diluted weighted average shares outstanding of 5.20 million shares versus 4.02 million shares in the comparable period in fiscal 2009.

On January 25, 2010, the Company announced it will pay a quarterly cash dividend of 11.25 cents per common share for the second quarter of fiscal 2010. The dividend will be paid on February 12, 2010 to stockholders of record on February 5, 2010.

The total risk-based capital ratio of 11.84% at December 31, 2009, increased by 79 basis points from 11.05% at June 30, 2009. This continues to place the Bank in the “well-capitalized” category within OTS regulation at December 31, 2009 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.

Noninterest income was $5.0 million for the six months ended December 31, 2009 compared to $6.0 million for the same period in the prior fiscal year, a decrease of $1.0 million or 17.2%. This decrease is due primarily to net impairment credit losses recognized in earnings of $2.2 million for the six months ended December 31, 2009. Net gain on sale of loans and net gain on sale of securities increased $497,000 and $1.0 million, respectively, to partially offset the decrease for the comparable period.

Noninterest expense was $17.7 million for the six months ended December 31, 2009 as compared to $17.6 million for the six months ended December 31, 2008, an increase of $149,000, or 0.8%. The increase was attributed to an increase in FDIC insurance premiums and occupancy and equipment of $397,000 and $195,000, respectively. The increase in noninterest expense was neutralized by a decrease in compensation and employee benefits of $647,000, which was attributed primarily to performance-based incentive pay and healthcare cost decreases.

The Bank is a member of the Deposit Insurance Fund (the “DIF”), which is administered by the Federal Deposit Insurance Corporation (“FDIC”). Deposits are insured up to the applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. Recent bank failures have decreased the DIF to levels below its required reserve ratio. In order to replenish the DIF, the FDIC has increased deposit insurance premiums to a level designed to restore the DIF to required levels within seven years, and the Company paid a one-time special assessment of $535,000 on September 30, 2009, based upon deposits at June 30, 2009. This assessment was accrued in the fourth quarter of fiscal 2009. In addition, on November 12, 2009, the FDIC Board approved a rule requiring prepayment of the quarterly assessments for the fourth quarter of calendar 2009, and the entire calendar years of 2010, 2011, and 2012. On December 30, 2009, the Company paid $4.9 million of which $4.3 million was recorded as a prepaid asset and will be proportionally expensed over the future periods. The FDIC may impose additional special assessments which would be recorded as they are incurred. The FDIC also instituted the Transaction Account Guarantee Program (“TAGP”). The TAGP extended the FDIC’s insurance to full coverage of non-interest bearing transaction accounts for participating institutions through June 30, 2010 at an annualized rate of 10 basis points on deposit balances in excess of the $250,000 insurance limit currently in place. The Bank is a participant in the TAGP, but does not expect this program to have a material impact on the FDIC assessment. The Bank had previously paid

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assessments under the Savings Association Insurance Fund (“SAIF”) and was eligible for certain credit against deposit insurance assessments when SAIF was merged into the DIF in 2005. This credit had offset the majority of the Bank’s FDIC premium expense in past fiscal years, but was fully utilized during the second quarter of fiscal 2009. As a result of these factors, the Bank is anticipating an increase in deposit insurance premiums in the first three quarters of fiscal 2010 as compared to the same period of fiscal 2009.

General

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

Financial Condition Data

At December 31, 2009, the Company had total assets of $1.2 billion, and exhibited a decrease of $1.3 million from the level at June 30, 2009. The decrease in assets in the six months of fiscal 2010 was due primarily to a decrease in net loans and leases receivable of $32.3 million and was partially offset by an increase of cash and cash equivalents and loans held for sale of $20.2 million and $8.2 million, respectively. Total liabilities decreased $25.0 million at December 31, 2009 as compared to June 30, 2009. This decrease was primarily due to decreases in advances from the FHLB and other borrowings of $46.8 million and was partially offset by an increase in deposits of $25.5 million. Stockholders’ equity increased $23.6 million to $92.3 million at December 31, 2009 from $68.7 million at June 30, 2009, due primarily to the equity offering in November 2009 and current earnings.

The decrease in net loans and leases receivable of $32.3 million at December 31, 2009 as compared to June 30, 2009, was primarily the result of decreases in commercial business and real estate loans of $27.7 million and one-to four-family loans of $9.7 million. Commercial business lines available to customers continued to increase, though overall utilization decreased. These decreases were partially offset by an increase in agricultural loans of $3.8 million at December 31, 2009 as compared to June 30, 2009. Loans held for sale increased $8.2 million at December 31, 2009, as compared to June 30, 2009, due primarily to seasonal fluctuation of student loan activity and increased single family loan production activity.

Cash and cash equivalents increased $20.2 million at December 31, 2009 as compared to June 30, 2009. See the Consolidated Statement of Cash Flows for an in-depth analysis in the change in cash and cash equivalents for the six months ended December 31, 2009.

Deposits increased $25.5 million at December 31, 2009 as compared to June 30, 2009. Public fund account balances decreased $25.9 million to $156.6 million at December 31, 2009 from $182.5 million at June 30, 2009, as a result of seasonal fluctuations typical with these types of municipal deposits. In-market certificates of deposit increased $19.8 million to $421.1 million from $401.3 million for the fiscal year, while out-of-market certificates of deposit decreased $2.4 million to $18.6 million at December 31, 2009.

Advances from the FHLB and other borrowings decreased $46.8 million at December 31, 2009 as compared to June 30, 2009. This decrease was primarily the result of a net decrease in net loans and leases receivable of $32.3 million combined with the net proceeds from the equity offering of approximately $20.7 million.

Stockholders’ equity increased $23.6 million at December 31, 2009 when compared to June 30, 2009. This increase was due primarily to the underwritten public offering in November 2009, whereby the Company issued 2.875 million shares of its common stock at a public offering of $8.00 per share, for gross proceeds of $23.0 million. The net proceeds of the offering after deducting underwriting discounts and commissions and estimated offering expenses totaled approximately $20.7 million. The increase in stockholders’ equity was also attributed to the net income available to common shareholders for the six months ended December 31, 2009 of $2.8 million.

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

Loan and Lease Portfolio Composition

	December 31, 2009				June 30, 2009
	Amount		Percent		Amount		Percent
	(Dollars in Thousands)

One-to four-family (1)	$	75,176	9.18	%	$	84,849	9.97	%
Commercial business and real estate (2)	294,723		35.98		322,416		37.87
Multi-family real estate	47,800		5.84		48,342		5.68
Equipment finance leases	13,172		1.61		16,010		1.88
Consumer direct (3)	118,856		14.51		116,777		13.72
Consumer indirect (4)	13,912		1.70		21,394		2.51
Agricultural	235,140		28.71		231,315		27.17
Construction	20,255		2.47		10,179		1.20
Total loans and leases receivable (5)	$	819,034	100.00	%	$	851,282	100.00	%

(1) Excludes $17,652 and $8,888 loans held for sale at December 31, 2009 and June 30, 2009, respectively.

(2) Includes $2,706 and $2,810 tax exempt leases at December 31, 2009 and June 30, 2009, respectively.

(3) Excludes $5,471 and $5,993 student loans held for sale at December 31, 2009 and June 30, 2009, respectively.

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

(5) Includes deferred loan fees and discounts.

Deposit Composition

	December 31, 2009				June 30, 2009
	Amount		Percent		Amount		Percent
	(Dollars in Thousands)

Noninterest bearing checking accounts	$	93,254	10.80	%	$	94,067	11.23	%
Interest bearing checking accounts	99,921		11.57		94,846		11.32
Money market accounts	147,734		17.11		145,214		17.33
Savings accounts	82,816		9.59		81,417		9.72
In-market certificates of deposit	421,052		48.77		401,291		47.89
Out-of-market certificates of deposit	18,611		2.16		21,033		2.51
Total deposits	$	863,388	100.00	%	$	837,868	100.00	%

Analysis of Net Interest Income

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

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

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	Three Months Ended December 31,
	2009						2008
	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)	$	849,032	$	12,352	5.77	%	$	819,530	$	12,646	6.12	%
Investment securities (2) (3)	221,444		1,891		3.39	%	238,971		2,883		4.79	%
FHLB stock	11,922		104		3.46	%	12,069		37		1.22	%

Total interest-earning assets	1,082,398		$	14,347	5.26	%	1,070,570		$	15,566	5.77	%
Noninterest-earning assets	80,938						67,481
Total assets	$	1,163,336					$	1,138,051

Interest-bearing liabilities:
Deposits:
Checking and money market	$	217,238	$	291	0.53	%	$	236,596	$	559	0.94	%
Savings	68,999		63		0.36	%	64,029		127		0.79	%
Certificates of deposit	447,988		2,978		2.64	%	388,650		3,446		3.52	%
Total interest-bearing deposits	734,225		3,332		1.80	%	689,275		4,132		2.38	%
FHLB advances and other borrowings	193,339		1,697		3.48	%	233,474		1,947		3.31	%
Subordinated debentures payable to trusts	27,837		460		6.56	%	27,837		480		6.84	%

Total interest-bearing liabilities	955,401		5,489		2.28	%	950,586		6,559		2.74	%
Noninterest-bearing deposits	93,479						72,626
Other liabilities	32,891						36,445
Total liabilities	1,081,771						1,059,657
Equity	81,565						78,394
Total liabilities and equity	$	1,163,336					$	1,138,051

Net interest income; interest rate spread (4)			$	8,858	2.98	%			$	9,007	3.03	%

Net interest margin (4) (5)					3.25	%					3.34	%

Net interest margin, TE (6)					3.30	%					3.40	%

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

(2) Includes federal funds sold.

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

(4) Percentages for the three months ended December 31, 2009 and December 31, 2008 have been annualized.

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

(6) Net interest margin expressed on a fully taxable equivalent basis (“Net Interest Margin, TE”) is a non-GAAP financial measure. The tax-equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income and certain other permanent income tax differences. We believe that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis, and accordingly believe the presentation of this non-GAAP financial measure may be useful for peer comparison purposes. As a non-GAAP financial measure, Net Interest Margin, TE should be considered supplemental to and not a substitute for or superior to, financial measures calculated in accordance with GAAP. As other companies may use different calculations for Net Interest Margin, TE, this presentation may not be comparable to similarly titled measures reported by other companies.

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	Six Months Ended December 31,
	2009						2008
	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)	$	850,238	$	24,695	5.76	%	$	812,657	$	25,664	6.26	%
Investment securities (2) (3)	223,378		4,119		3.66	%	234,450		5,575		4.72	%
FHLB stock	12,199		166		2.70	%	12,079		158		2.59	%

Total interest-earning assets	1,085,815		$	28,980	5.29	%	1,059,186		$	31,397	5.88	%
Noninterest-earning assets	76,074						66,864
Total assets	$	1,161,889					$	1,126,050

Interest-bearing liabilities:
Deposits:
Checking and money market	$	222,467	$	615	0.55	%	$	241,027	$	1,417	1.17	%
Savings	67,796		125		0.37	%	67,284		388		1.14	%
Certificates of deposit	440,276		6,116		2.76	%	376,546		6,904		3.64	%
Total interest-bearing deposits	730,539		6,856		1.86	%	684,857		8,709		2.52	%
FHLB advances and other borrowings	199,959		3,596		3.57	%	233,055		4,056		3.45	%
Subordinated debentures payable to trusts	27,837		919		6.55	%	27,837		936		6.67	%

Total interest-bearing liabilities	958,335		11,371		2.35	%	945,749		13,701		2.87	%
Noninterest-bearing deposits	95,846						75,263
Other liabilities	31,381						32,706
Total liabilities	1,085,562						1,053,718
Equity	76,327						72,332
Total liabilities and equity	$	1,161,889					$	1,126,050

Net interest income; interest rate spread (4)			$	17,609	2.94	%			$	17,696	3.01	%

Net interest margin (4) (5)					3.22	%					3.31	%

Net interest margin, TE (6)					3.27	%					3.37	%

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

(2) Includes federal funds sold.

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

(4) Percentages for the six months ended December 31, 2009 and December 31, 2008 have been annualized.

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

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The reconciliation of the net interest income (GAAP) to Net Interest Margin, TE (non-GAAP) is as follows:

	Three Months Ended						Six Months Ended
	December 31,			December 31,			December 31,			December 31,
	2009			2008			2009			2008
	(Dollars in Thousands)
Net interest income	$	8,858		$	9,007		$	17,609		$	17,696
Taxable equivalent adjustment	144			167			289			321
Adjusted net interest income	9,002			9,174			17,898			18,017
Average interest-earning assets	1,082,398			1,070,570			1,085,815			1,059,186
Net interest margin, TE	3.30		%	3.40		%	3.27		%	3.37		%

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,
	2009 vs 2008									2009 vs 2008
	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)	$	455		$	(749	)	$	(294	)	$	1,182		$	(2,151	)	$	(969	)
Investment securities (2)	(212		)	(780		)	(992		)	(263		)	(1,193		)	(1,456		)
FHLB stock	—			67			67			2			6			8

Total interest-earning assets	$	243		$	(1,462	)	$	(1,219	)	$	921		$	(3,338	)	$	(2,417	)

Interest-bearing liabilities:
Deposits:
Checking and money market	$	(46	)	$	(222	)	$	(268	)	$	(109	)	$	(693	)	$	(802	)
Savings	10			(74		)	(64		)	3			(266		)	(263		)
Certificates of deposit	526			(994		)	(468		)	1,168			(1,956		)	(788		)
Total interest-bearing deposits	490			(1,290		)	(800		)	1,062			(2,915		)	(1,853		)
FHLB advances and other borrowings	(333		)	83			(250		)	(580		)	120			(460		)
Subordinated debentures payable to trusts	—			(20		)	(20		)	—			(17		)	(17		)

Total interest-bearing liabilities	$	157		$	(1,227	)	$	(1,070	)	$	482		$	(2,812	)	$	(2,330	)

Net interest income increase	$	86		$	(235	)	$	(149	)	$	439		$	(526	)	$	(87	)

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

(2) Includes federal funds sold.

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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, 2009.

Security Impairment. Management continually monitors the investment security portfolio for impairment on a security by security basis. During the third quarter of fiscal 2009, the Company early adopted FASB Staff Position (“FSP”) No. FAS 115-2(ASC Subtopic 320-10), The Recognition and Presentation of Other-Than-Temporary Impairments, which changed the recognition and presentation of other-than-temporary impairment for securities. Management has a process in place to identify securities that could potentially have a credit impairment that is other than temporary. This process involves the length of time and extent to which the fair value has been less than the amortized cost basis, review of available information regarding the financial position of the issuer, monitoring the rating of the security, cash flow projections, and the Company’s intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity. To the extent we determine that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized. If the Company intends to sell a security or it is more likely than not that the Company would be

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required to sell a security before the recovery of its amortized cost, less any current period credit loss, the Company recognizes an other-than-temporary impairment in earnings for the difference between amortized cost and fair value. If we do not expect to recover the amortized cost basis, we do not plan to sell the security and if it is not more likely than not that the Company would be required to sell a security before the recovery of it amortized cost, less any current period credit loss, the recognition of the other-than-temporary impairment is bifurcated. For those securities, the Company separates the total impairment into a credit loss component recognized in earnings, and the amount of the loss related to other factors is recognized in other comprehensive income net of taxes.

The amount of the credit loss component of a debt security impairment is estimated as the difference between amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. Cash flow estimates for trust preferred securities are derived from scenario-based outcomes of forecasted default rates, loss severity, prepayment speeds and structural support.

Level 3 Fair Value Measurement. GAAP requires the Company to measure the fair value of financial instruments under a standard which describes three levels of inputs that may be used to measure fair value. Level 3 measurement includes significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. Although management believes that it uses a best estimate of information available to determine fair value, due to the uncertainty of future events, the approach includes a process that may differ significantly from other methodologies and still produce an estimate that is in accordance with GAAP.

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

Asset Quality and Potential Problem Loans and Leases

Nonperforming assets (nonaccrual loans and leases, accruing loans and leases delinquent more than 90 days and foreclosed assets) increased to $16.2 million at December 31, 2009 from $12.6 million at June 30, 2009, an increase of $3.6 million, or 29.0%. Nonaccruing loans and leases increased $285,000 from June 30, 2009 to December 31, 2009, to a total of $9.7 million. Accruing loans and leases delinquent more than 90 days increased $3.3 million to $5.4 million at December 31, 2009 from $2.1 million at June 30, 2009. Foreclosed assets increased $48,000 to $1.1 million at December 31, 2009, from $1.1 million at June 30, 2009. In addition, the ratio of nonperforming assets to total assets, which is one indicator of credit risk exposure, was 1.38% at December 31, 2009, which is an increase from 1.07% as reported at June 30, 2009.

Nonaccruing loans and leases increased $285,000 to $9.7 million at December 31, 2009 compared to $9.4 million at June 30, 2009. One agricultural relationship comprised most of the total nonaccruing loans and leases. It consists of one loan totaling $32,000 secured by one- to four-family real estate, one loan totaling $740,000 secured by agricultural real estate, and four loans totaling $6.5 million secured by agricultural business assets. The remaining loans and leases included in nonaccruing loans and leases at December 31, 2009 were 12 loans totaling $701,000 secured by one- to four-family real estate, one loan totaling $153,000 secured by commercial real estate, seven loans totaling $352,000 secured by commercial business assets, 26 leases totaling $742,000 secured by equipment, and 29 loans totaling $489,000 secured by consumer assets.

Accruing loans and leases delinquent more than 90 days increased $3.3 million, to $5.4 million at December 31, 2009 compared to $2.1 million at June 30, 2009. Included in accruing loans and leases delinquent more than 90 days at December 31, 2009 were two loans totaling $337,000 secured by commercial real estate, 11 loans totaling $2.4 million

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

	Nonperforming Assets
	December 31, 2009			June 30, 2009
	(Dollars in Thousands)
Nonaccruing loans and leases:
One- to four-family	$	733		$	977
Commercial real estate	153			177
Commercial business	352			405
Equipment finance leases	741			272
Consumer	489			355
Agricultural	7,198			7,195
Total	9,666			9,381

Accruing loans and leases delinquent more than 90 days:
Commercial real estate	337			277
Commercial business	1,829			349
Equipment finance leases	232			264
Consumer	51			8
Agricultural	2,958			1,194
Total	5,407			2,092

Foreclosed assets:
One- to four-family	458			406
Equipment finance leases	99			105
Consumer	94			92
Agricultural	482			482
Total (1)	1,133			1,085

Total nonperforming assets (2)	$	16,206		$	12,558

Ratio of nonperforming assets to total assets (3)	1.38		%	1.07		%

Ratio of nonperforming loans and leases to total loans and leases (4) (5)	1.79		%	1.32		%

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

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

(3) Percentage is calculated based upon total assets of the Company and its direct and indirect subsidiaries on a consolidated basis.

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

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

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

	Six Months Ended December 31,
	2009			2008
	(Dollars in Thousands)

Balance at beginning of period	$	8,470		$	5,933
Charge-offs:
One- to four-family	(90		)	(1		)
Commercial real estate	(9		)	(9		)
Commercial business	(215		)	(23		)
Equipment finance leases	(113		)	(34		)
Consumer	(376		)	(446		)
Construction	(11		)	—
Total charge-offs	(814		)	(513		)

Recoveries:
One- to four-family	4			2
Commercial business	—			2,217
Equipment finance leases	5			—
Consumer	80			102
Agricultural	—			5
Total recoveries	89			2,326

Net recoveries (charge-offs)	(725		)	1,813

Additions charged to operations	767			387

Balance at end of period	$	8,512		$	8,133

Ratio of allowance for loan and lease losses to total loans and leases at end of period (1)	1.01		%	0.99		%

Ratio of allowance for loan and lease losses to nonperforming loans and leases at end of period (2)	56.47		%	198.17		%

Ratio of net charge offs to average loans and leases for the year-to-date period (3)	0.17		%	(0.44		)%

(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.

(3) Percentages for the six months ended December 31, 2009 and December 31, 2008 have been annualized.

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The distribution of the Company’s allowance for loan and lease losses and impaired loss summary as required by FASB Statement No. 114 (ASC Topic 310), “Accounting by Creditors for Impairment of a Loan” are summarized in the following tables. The combination of FASB Statement No. 5 (ASC Topic 450) “Accounting for Contingencies” and FASB Statement No. 114 calculations comprise the Company’s allowance for loan and lease losses.

	FAS 5		FAS 114		FAS 5		FAS 114
	Allowance		Impaired Loan		Allowance		Impaired Loan
	for Loan and		Valuation		for Loan and		Valuation
	Lease Losses		Allowance		Lease Losses		Allowance
Loan Type	December 31, 2009				June 30, 2009
	(Dollars in Thousands)

One- to four-family	$	343	$	—	$	416	$	—
Commercial real estate	1,399		15		1,110		—
Multi-family real estate	188		—		192		—
Commercial business	1,671		77		2,136		153
Equipment finance leases	389		—		409		—
Consumer	1,268		—		1,280		—
Agricultural	3,112		50		2,724		50
Total	$	8,370	$	142	$	8,267	$	203

FAS 114 Impaired Loan Summary

				Impaired					Impaired
	Number			Loan		Number			Loan
	of Loan	Loan		Valuation		of Loan	Loan		Valuation
	Customers	Balance		Allowance		Customers	Balance		Allowance
Loan Type	December 31, 2009					June 30, 2009
	(Dollars in Thousands)

Commercial real estate	2	$	168	15		3	177		$	—
Commercial business	4	199		77		4	453		153
Agricultural	3	7,569		50		2	7,997		50
Total	9	$	7,936	$	142	9	$	8,627	$	203

The allowance for loan and lease losses was $8.5 million at December 31, 2009, as compared to $8.1 million at December 31, 2008. The ratio of the allowance for loan and lease losses to total loans and leases was 1.01% at December 31, 2009, compared to 0.99% at December 31, 2008. 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.

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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 in advance.

Comparison of the Three Months Ended December 31, 2009, and December 31, 2008

General. The Company’s net income available to common shareholders was $2.0 million, or $0.38 in basic and $0.38 in diluted earnings per common share for the three months ended December 31, 2009, a $115,000 increase in earnings available to common shareholders compared to $1.8 million, or $0.46 in basic and $0.46 in diluted earnings per common share for the same period in the prior fiscal year. For the three months ended December 31, 2009, the return on average equity and the return on average assets was 9.54% and 0.67%, respectively, compared to 9.34% and 0.64%, respectively, for the same period in the prior fiscal year.

Interest, Dividend and Loan Fee Income. Interest, dividend and loan fee income was $14.3 million for the three months ended December 31, 2009 as compared to $15.6 million for the same period in the prior fiscal year, a decrease of $1.2 million or 7.8%. This decrease was primarily the result of declining average yields on the interest-earning assets. Loans and leases receivable had an average yield of 5.77% for the three months ended December 31, 2009, which is 35 basis points less than the average yield of 6.12% for the three months ended December 31, 2008. Investment securities also had a decline in average yield of 140 basis points when comparing the second quarter of fiscal 2010 against the same period of the prior year. The average interest-earning assets for loans and leases receivables increased $29.5 million, or 3.6% to $849.0 million for the three months ended December 31, 2009, when compared to the three months ended December 31, 2008. Investment securities decreased in average balance $17.5 million, or 7.3% to $221.4 million for the second quarter of fiscal 2010, when compared to the average balance of the same quarter of the prior fiscal year. The revenue decrease attributable to the overall declining yield for loans and leases was $749,000, which was partially offset by the revenue increase due to an increase in average volume of $455,000. The net revenue decrease attributable to the overall declining yield and average volume for investment securities was $780,000 and $212,000, respectively.

Interest Expense. Interest expense was $5.5 million for the three months ended December 31, 2009 as compared to $6.6 million for the same period in the prior fiscal year, a decrease of $1.1 million or 16.3%. A $1.3 million decrease in interest expense was the result of a decrease in the average rate paid of 1.80% on interest-bearing deposits for the three months ended December 31, 2009 compared to an average rate paid of 2.38% for the three months ended December 31, 2008. Average balance of interest-bearing deposits increased by $45.0 million, or 6.5%, while average balance of FHLB advances and other borrowings decreased by $40.1 million, or 17.2% for the three month period ended December 31, 2009, as compared to the three month period ended December 31, 2008. The decrease in interest expense due to a decrease in the overall rate of interest-bearing liabilities was $1.2 million, while the increase in average volume of interest-bearing liabilities partially offset this decrease by $157,000 for the quarter. The average rate paid on total interest-bearing liabilities was 2.28% for the three months ended December 31, 2009 as compared to 2.74% for the same period in fiscal 2009.

Net Interest Income. The Company’s net interest income for the three months ended December 31, 2009 decreased $149,000 or 1.7%, to $8.9 million compared to $9.0 million for the same period in the prior fiscal year. The net increase in volumes of interest-earning assets in excess of increased volumes of interest-bearing liabilities resulted in a net increase in net interest income of $86,000. This was offset by the net effect of the reduction of rates earned for interest-earning assets in excess of the reduction of rates paid for interest-bearing liabilities and resulted in a net decrease in net interest income of $235,000. The Company’s Net Interest Margin, TE was 3.30% for the three months ended December 31, 2009 as compared to 3.40% for the three months ended December 31, 2008. Net Interest Margin, TE is a non-GAAP financial measure. See “Analysis of Net Interest Income” for a calculation of this non-GAAP financial measure and for further discussion as to the reasons we believe this non-GAAP financial measure is useful.

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

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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, 2009, the Company recorded a provision for losses on loans and leases of $424,000 compared to $0 for the three months ended December 31, 2008. See “Asset Quality and Potentially Problem Loans and Leases” for further discussion.

Noninterest Income. Noninterest income was $3.3 million for the quarter ended December 31, 2009 compared to $2.9 million for the quarter ended December 31, 2008, an increase of $324,000 or 11.1%. This increase is due primarily to net gain on sale of loans and net gain on sale of securities of $252,000 and $558,000, respectively. Net impairment credit losses on trust preferred securities recognized in earnings of $340,000 for the quarter ended December 31, 2009, partially offset the increase in noninterest income.

Fees on deposits decreased $115,000 to $1.4 million for the three months ended December 31, 2009 as compared to the three months ended December 31, 2008, due largely to a decrease in NSF and overdraft fees of $187,000 and partially offset by an increase in point-of-sale interchange and ATM fee income of $95,000. Loan servicing income decreased by $46,000 to $488,000 for the second quarter fiscal 2010 due primarily to increased servicing rights amortization expense recorded during the period based upon the Company’s quarterly analysis of portfolio prepayment experience. Net gain on sale of loans increased $252,000 to $537,000 for the three months ended December 31, 2009 from $285,000 for the three months ended December 31, 2008, primarily due to an increase in mortgage loan activity and the related loan sales. Net gain on the sale of securities totaled $603,000, an increase of $558,000 for the three months ended December 31, 2009 as compared to the same period in fiscal 2009. The Company took advantage of elevated fixed-rate mortgage-backed securities prices which were influenced by U.S. government participation in the mortgage-backed securities market, while also restructuring the portfolio for a higher rate environment. Net impairment credit losses on trust preferred securities recognized in earnings were $340,000 for the quarter ended December 31, 2009. The Company determined that a total of $1.7 million of losses due to other-than temporary impairments were incurred, of which $1.3 million were recognized in other comprehensive income. The resulting net credit loss of $340,000 was recognized as a reduction of other noninterest income.

Noninterest Expense. Noninterest expense was $8.8 million for the three months ended December 31, 2009 as compared to $9.2 million for the three months ended December 31, 2008, a decrease of $397,000, or 4.3%. For the second quarter of fiscal 2010, compensation and employee benefits decreased $689,000, or 11.8 percent, compared to the second quarter of fiscal 2009. Net healthcare costs, also a component of compensation and employee benefits, decreased $634,000, to $311,000, the result of a reduction in specific high dollar claims from the prior year. FDIC insurance premiums increased $213,000, to $335,000 for the second quarter of fiscal 2010, versus fiscal 2009.

Compensation and employee benefits were $5.1 million for the three months ended December 31, 2009, a decrease of $689,000 or 11.8% when compared to the three months ended December 31, 2008. Performance-based incentives decreased $206,000, or 13.7%, due to a reduction in performance outcomes through the second quarter of fiscal 2010. Net healthcare costs, which are included in the total for compensation and employee benefits, decreased $634,000, or 67.1% to $311,000 due to a reduction in specific high dollar claims and general overall utilization. Management currently believes the self-insured structure is a reasonable alternative to traditional healthcare plans over the long term. The level of healthcare costs which the Company incurs may vary from year to year.

Occupancy and equipment increased $88,000, or 8.7% to $1.1 million for the three months ended December 31, 2009 as compared to the same period ended December 31, 2008. During fiscal 2009, a new facility in Watertown, South Dakota was built and placed in service in July 2009. The depreciation and expenses related to this new facility as well as other increases related to information technology equipment accounted for an increase of $83,000 when compared to the second quarter of fiscal 2009.

FDIC insurance premiums increased $213,000, to $335,000 for the second quarter of fiscal 2010, compared to the same period of fiscal 2009. FDIC rate increases totaling 8 basis points were added during the last twelve months, which increased the total expense for the current quarter versus the comparable quarter of the prior fiscal year. The Bank also applied the remaining unused credits in the second quarter of fiscal 2009, which reduced the amount when compared to the current quarter where no credits were applied.

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Professional fees decreased $110,000, or 24.6% to $337,000 for the second quarter of fiscal 2010, compared to the second quarter of fiscal 2009. This decrease is primarily attributed to the increase in services needed in fiscal 2009 for the Company’s involvement in the issuance of preferred stock under the CPP program in November of 2008.

Income tax expense. The Company’s income tax expense for the three months ended December 31, 2009 increased to $947,000 compared to $914,000 for the same period in the prior fiscal year. The effective tax rate was 32.6% and 33.1% for the three months ended December 31, 2009 and 2008, respectively.

Comparison of the Six Months Ended December 31, 2009, and December 31, 2008

General. The Company’s net income available to common shareholders was $2.8 million, or $0.61 in basic and $0.61 in diluted earnings per common share for the six months ended December 31, 2009, a $1.0 million decrease in earnings available to common shareholders compared to $3.8 million, or $0.96 in basic and $0.95 in diluted earnings per common share for the same period in the prior fiscal year. For the six months ended December 31, 2009, the return on average equity and the return on average assets was 7.32% and 0.48%, respectively, compared to 10.48% and 0.67%, respectively, for the same period in the prior fiscal year. As discussed in more detail below, the decrease to earnings was due primarily to the recording of net impairment credit losses of $2.2 million for the first six months of fiscal 2010.

Interest, Dividend and Loan Fee Income. Interest, dividend and loan fee income was $29.0 million for the six months ended December 31, 2009 as compared to $31.4 million for the same period in the prior fiscal year, a decrease of $2.4 million or 7.7%. This decrease was primarily the result of declining average yields on the interest-earning assets. Loans and leases receivable had an average yield of 5.76% for the six months ended December 31, 2009, which is 50 basis points less than the average yield of 6.26% for the six months ended December 31, 2008. Investment securities also had a decline in average yield of 106 basis points when comparing the second quarter of fiscal 2010 against the same period of the prior year. The average interest-earning assets for loans and leases receivables increased $37.6 million, or 4.6% to $850.2 million for the six months ended December 31, 2009, when compared to the six months ended December 31, 2008. Investment securities decreased in average balance $11.1 million, or 4.7% to $223.4 million for the first six months of fiscal 2010, when compared to the average balance of the comparable period of fiscal 2009. The net revenue decrease from loans and leases receivable attributable to the overall declining yield and partially offset by the increasing average volume was $2.2 million and $1.2 million, respectively, which netted to a decrease of $1.0 million. The net revenue decrease from investment securities attributable to the overall declining yield and average volume was $1.2 million and $263,000, respectively.

Interest Expense. Interest expense was $11.4 million for the six months ended December 31, 2009 as compared to $13.7 million for the same period in the prior fiscal year, a decrease of $2.3 million or 17.0%. A $2.9 million decrease in interest expense was the result of a decrease in the average rate paid of 1.86% on interest-bearing deposits for the six months ended December 31, 2009 compared to an average rate paid of 2.52% for the six months ended December 31, 2008. The average balance of interest-bearing deposits increased by $45.7 million, or 6.7%, resulting in an increase of $1.1 million in interest expense. The average balance of FHLB advances and other borrowings decreased by $33.1 million, or 14.2% for the six month period ended December 31, 2009, as compared to the six month period ended December 31, 2008. This net decrease in volume accounted for a reduction in interest expense of $580,000. The average rate paid on total interest-bearing liabilities was 2.35% for the six months ended December 31, 2009 as compared to 2.87% for the same period in fiscal 2009.

Net Interest Income. The Company’s net interest income for the six months ended December 31, 2009 decreased $87,000 or 0.5%, to $17.6 million compared to $17.7 million for the same period in the prior fiscal year. The net effect of the reduction of rates earned for interest-earning assets in excess of the reduction of rates paid for interest-bearing liabilities resulted in a net decrease in net interest income of $526,000. This was offset by the net increase in volumes of interest-earning assets in excess of the increased volumes of interest-bearing liabilities and resulted in a net increase in net interest income of $439,000. The Company’s Net Interest Margin, TE was 3.27% for the six months ended December 31, 2009 as compared to 3.37% for the six months ended December 31, 2008. Net Interest Margin, TE is a non-GAAP financial measure. See “Analysis of Net Interest Income” for a calculation of this non-GAAP financial measure and for further discussion as to the reasons we believe this non-GAAP financial measure is useful.

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During the six months ended December 31, 2009, the Company recorded a provision for losses on loans and leases of $767,000 compared to $387,000 for the six months ended December 31, 2008. See “Asset Quality and Potentially Problem Loans and Leases” for further discussion.

Noninterest Income. Noninterest income was $5.0 million for the six months ended December 31, 2009 compared to $6.0 million for the six months ended December 31, 2008, a decrease of $1.0 million or 17.2%. This decrease is due primarily to net impairment credit losses on trust preferred securities recognized in earnings of $2.2 million for the six months ended December 31, 2009. Net gain on sale of loans and net gain on sale of securities increased $497,000 and $1.1 million, respectively, to partially offset the decrease caused by the net impairment losses.

Net impairment credit losses on trust preferred securities recognized in earnings were $2.2 million for the six months ended December 31, 2009. The Company determined that a total of $2.1 million of losses due to market value changes were incurred, but $117,000 of market value increases not related to credit impairment were recognized in other comprehensive income. The resulting net $2.2 million of credit loss was recognized as a reduction of other noninterest income. Fees on deposits decreased $220,000 to $2.8 million for the six months ended December 31, 2009 as compared to the six months ended December 31, 2008, due largely to a decrease in NSF and overdraft fees of $412,000 and partially offset by an increase in point-of-sale interchange and ATM fee income of $234,000. Loan servicing income decreased by $112,000 to $979,000 for the six months of fiscal 2010 due primarily to increased servicing rights amortization expense recorded during the period based upon the Company’s quarterly analysis of portfolio prepayment experience. Net gain on sale of loans increased $497,000 to $1.0 million for the six months ended December 31, 2009 as compared to $536,000 for the six months ended December 31, 2008, primarily due to an increase in mortgage loan activity and the related loan sales. Net gain on the sale of securities totaled $1.1 million, an increase of $1.0 million for the six months ended December 31, 2009 as compared to the same period in fiscal 2009. The Company took advantage of elevated fixed-rate mortgage-backed securities prices which were influenced by U.S. government participation in the mortgage-backed securities market, while also restructuring the portfolio for a higher rate environment.

Noninterest Expense. Noninterest expense was $17.7 million for the six months ended December 31, 2009 as compared to $17.6 million for the six months ended December 31, 2008, an increase of $149,000, or 0.8%. The increase was attributed to increases in FDIC insurance premiums of $397,000 and occupancy and equipment of $195,000. The increases in noninterest expense were neutralized primarily by a decrease in performance-based incentive pay and healthcare costs of $933,000 and $244,000, respectively.

Compensation and employee benefits were $10.3 million for the six months ended December 31, 2009, a decrease of $647,000 or 5.9% when compared to the six months ended December 31, 2008. Net healthcare costs, which are included in the total for compensation and employee benefits, decreased $244,000, or 18.7% to $1.1 million due to a reduction of specific high dollar claims and general overall utilization for the six month period of fiscal 2010 compared to the same period of the prior fiscal year. Management currently believes the self-insured structure is a reasonable alternative to traditional healthcare plans over the long term. The level of healthcare costs which the Company incurs may vary from year to year. Performance-based incentive pay decreased $933,000, or 62.2% due to a reduction in performance outcomes through the second quarter of fiscal 2010.

Occupancy and equipment increased $195,000, or 9.8% to $2.2 million for the six months ended December 31, 2009 as compared to the same period ended December 31, 2008. During fiscal 2009, a new facility in Watertown, South Dakota was built and placed in service in July 2009. The depreciation and expenses related to this new facility as well as other increases in information technology equipment accounted for an increase of $159,000 when compared to the six months of fiscal 2009.

FDIC insurance premiums increased $397,000, to $660,000 for the six months of fiscal 2010, compared to the same period of fiscal 2009. In the first quarter of fiscal 2009, the Bank applied previously unused credits in the payment of its insurance premiums. The credits were fully utilized in the second quarter of fiscal 2009. FDIC rate increases totaling 8 basis points were also added during the last twelve months, which increased the total expense for the six months of fiscal 2010 versus fiscal 2009.

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Income tax expense. The Company’s income tax expense for the six months ended December 31, 2009 decreased to $1.2 million compared to $1.9 million for the same period in the prior fiscal year. The effective tax rate was 30.7% and 33.1% for the six months ended December 31, 2009 and 2008, respectively. Permanent tax differences were relatively constant when comparing the six month periods of fiscal 2010 and 2009, but the taxable income was lower in the six months of fiscal 2010, which created a lesser tax effective rate than anticipated.

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, residential 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.

Although in-market deposits is one of 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. As of December 31, 2009, the Bank had the following sources of additional borrowings:

· $15.0 million in an uncommitted, unsecured line of federal funds with First Tennessee Bank, NA;

· $10.0 million in an uncommitted, unsecured line of federal funds with Zions Bank;

· $53.1 million of available credit from the Federal Reserve Bank (after deducting outstanding borrowings with the Federal Reserve Bank); and

· $102.9 million of available credit from FHLB of Des Moines (after deducting outstanding borrowings with FHLB of Des Moines).

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. There were no funds drawn on the uncommitted, unsecured lines of federal funds with First Tennessee Bank, NA and Zions Bank at December 31, 2009. The Bank, as a member of the FHLB of Des Moines, is required to acquire and hold shares of capital stock in the FHLB of Des Moines equal to 0.12% of the total assets of the Bank at December 31 annually. The Bank is also required to own activity-based stock, which is based on 4.45% of the Bank’s outstanding advances. These percentages are subject to change at the discretion of the FHLB Board of Directors.

In addition to the above sources of additional borrowings, the Bank has implemented arrangements to acquire out-of-market certificates of deposit as an additional source of funding. As of December 31, 2009, the Bank had $18.6 million in out-of-market certificates of deposit.

On September 30, 2009, the Company entered into a Loan Agreement (the “Loan Agreement”) with United Bankers’ Bank (the “Lender”) in order to refinance its outstanding borrowings of $5.966 million under its line of credit with First Tennessee Bank, NA (the “FTB Line of Credit”) that matured. Under the Loan Agreement, the Lender committed to lend to the Company an aggregate principal amount not to exceed $6.0 million. On November 25, 2009, the Company repaid its outstanding borrowings of $6.044 million (principal plus accrued interest) under the Loan Agreement. The loan is evidenced by a promissory note, accrues interest at the United Bankers’ Bank Rate with a

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The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification was effective for our first quarter fiscal 2010 financial statements and the principal impact on our financial statements is limited to disclosures as all future references to authoritative accounting literature will be referenced in accordance with the Codification. In order to ease the transition to the Codification, we are providing the Codification cross-reference alongside the references to the standards issued and adopted prior to the adoption of the Codification.

Fair Value Accounting

In 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (ASC Topic 820) which defines fair value, establishes a market-based framework or hierarchy for measuring fair value and expands disclosures about fair value measurements. This guidance is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. It does not expand or require any new fair value measures; however the application of this statement may change current practice. The Company adopted this guidance for financial assets and liabilities effective July 1, 2008 and for non financial assets and liabilities effective July 1, 2009. The adoption did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flow.

FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (ASC Topic 320-10-65). This update requires fair value disclosures for financial instruments that are not currently reflected on the balance sheet at fair value on a quarterly basis. The Company adopted this update effective June 30, 2009 and the adoption did not have a material effect on the Company’s consolidated financial condition or results of operations or cash flow.

In August 2009, FASB issued ASU No. 2009-05 which amends Fair Value Measurements and Disclosures — Overall (ASC Topic 820-10) to provide guidance on the fair value measurement of liabilities. This update requires clarification for circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques: 1) a valuation technique that uses either the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as an asset; or 2) another valuation technique that is consistent with the principles in ASC Topic 820 such as the income and market approach to valuation. The amendments in this update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This update further clarifies that if the fair value of a liability is determined by reference to a quoted price in an active market for an identical liability, that price would be considered a Level 1 measurement in the fair value hierarchy. Similarly, if the identical liability has a quoted price when traded as an asset in an active market, it is also a Level 1 fair value measurement if no adjustments to the quoted price of the asset are required. The Company adopted this update effective in the second quarter of fiscal 2010 and the adoption did not have a material effect on the Company’s consolidated financial condition or results of operations or cash flow.

Business Combinations and Noncontrolling Interests

In 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (ASC Topic 805). This guidance requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose the information necessary to evaluate and understand the nature and financial effect of the business combination. The Company adopted this guidance effective July 1, 2009 and the adoption did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flow.

In April 2009, the FASB issued Staff Position No. FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (ASC Topic 805-20). This updated guidance amended the accounting treatment for assets and liabilities arising from contingencies in a business combination and requires that pre-acquisition contingencies be recognized at fair value, if fair value can be reasonably determined. If fair value cannot be reasonably determined, measurement should be based on the best estimate in accordance with SFAS No. 5, “Accounting for Contingencies” (ASC Topic 405). This updated guidance was effective July 1, 2009 and the adoption did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flow.

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Other Accounting Changes

On June 12, 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets”, (ASC Topic 860). This updated guidance removed the concept of a qualifying special-purpose entity and removed the exception from applying consolidation guidance to these entities. This update also clarified the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. ASC Topic 860 is reportable for interim and annual reports and effective for the Company on reporting periods beginning July 1, 2010. Management is currently evaluating the impact of adopting this update on the Company’s consolidated financial condition, results of operations and cash flow.

On June 12 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities” (ASC Topic 810-10). This updated guidance requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. It also requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This update is effective for the Company for interim and annual reporting periods beginning January 1, 2010 and management is currently evaluating the impact of adopting this update on the Company’s consolidated financial condition, results of operations and cash flow.

In 2008, the FASB issued Staff Position No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (ASC Topic 715-20-65). This guidance will expand disclosure by requiring the following new disclosures: 1) how investment allocation decisions are made by management; 2) major categories of plan assets; and 3) significant concentrations of risk. Additionally, ASC 715-20-65 will require an employer to disclose information about the valuation of plan assets similar to that required in ASC Topic 820 Fair Value Measurements and Disclosures. ASC 715-20-65 is effective for the Company for annual reporting periods beginning July 1, 2010 and the Company does not expect the adoption to have a material effect on the Company’s consolidated financial condition, results of operations or cash flow.

During the second quarter of fiscal 2010, the FASB issued several ASU’s — ASU No. 2009-16 through ASU No. 2010-07. Except for ASU No. 2010-06, which modifies disclosure requirements related to ASC Topic 820 discussed above, and 2009-16, which modifies guidance related to ASC Topic 860 discussed above, the ASU’s entail technical corrections to existing guidance or affect guidance related to specialized industries or entities and therefore have minimal, if any, impact on the Company.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk Management

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.

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As set forth below, the volatility of a rate change, the change in asset or liability mix of the Company or other factors may produce a decrease in net interest margin in an upward moving rate environment even as the net portfolio value (“NPV”) estimate indicates an increase in net value. The inverse situation may also occur. One approach used by the Company to quantify interest rate risk is an NPV analysis. This analysis calculates the difference between the present value of the liabilities and the present value of expected cash flows from assets and off-balance sheet contracts. The following tables set forth, at December 31, 2009 and 2008, respectively, an analysis of the Company’s interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve. Management does not believe that the Company has experienced any material changes in its market risk position from that disclosed in the Company’s Annual Report on Form 10-K for fiscal 2009 or that the Company’s primary market risk exposures and how those exposures were managed during the six months ended December 31, 2009 changed significantly when compared to June 30, 2009.

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

December 31, 2009
			Estimated Increase
Change in	Estimated		(Decrease) in NPV
Interest Rates	NPV Amount		Amount			Percent
Basis Points	(Dollars in Thousands)

+300	$	117,289	$	11,193		11	%
+200	115,155		9,059			9
+100	111,573		5,477			5
—	106,096		—			—
-100	96,576		(9,520		)	(9	)

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

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

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

As of December 31, 2009, an evaluation was performed by the Company’s management, including the Company’s Chairman, President and Chief Executive Officer and the Company’s Executive Vice President, Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) to provide reasonable assurance that information required to be disclosed in the reports the Company files and submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based upon that evaluation, the

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Company’s Chairman, President and Chief Executive Officer and the Company’s Executive Vice President, Chief Financial Officer and Treasurer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2009. There were no changes in the Company’s internal control over financial reporting that occurred during the second quarter ended December 31, 2009, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company, the Bank and 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

The discussion of our business and operations should be read together with the risk factors contained in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2009, and our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2009, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. Other than as set forth below, there have been no material changes to the risk factors set forth in the above-referenced filing as of December 31, 2009.

We recorded other-than-temporary impairment (“OTTI”) charges in our trust preferred securities (“TRUPS”) portfolio in the third and fourth quarters of 2009 and in the first and second quarters of 2010, and we could record additional losses in the future.

We determine the fair value of our investment securities based on GAAP and three levels of informational inputs that may be used to measure fair value. The price at which a security may be sold in a market transaction could be significantly lower than the quoted market price for the security, particularly if the quoted market price is based on infrequent trading history, the market for the security is illiquid, or a significant amount of securities are being sold.

We held six TRUPS pools with an adjusted cost basis of $11.9 million and a fair value of $6.1 million at June 30, 2009. Rating downgrades on these investments occurred during fiscal year 2009, placing each in a below investment grade rating. Due to an inactive market for these securities, management utilized a “Level 3” fair value input according to Statement of Financial Accounting Standard No. 157, utilizing discounted cash flow methodologies to determine fair value and OTTI. During fiscal 2009, we determined that three debt securities exhibited OTTI. The aggregate OTTI losses recorded for the three securities for the fiscal year 2009 were $3.9 million, of which $3.5 million was recognized on the balance sheet in other comprehensive income, with the balance being $397,000 of credit loss recognized through earnings. The remaining difference between amortized cost basis and fair value of $2.3 million recognized in other comprehensive income is primarily attributable to the three TRUPS for which OTTI was not recognized for the fiscal year 2009.

At December 31, 2009, we carried the six TRUPS pools at an adjusted cost basis of $9.7 million and a fair value of $4.2 million. We determined that four debt securities exhibited OTTI of $2.1 million, of which $2.2 million of credit loss was recognized through earnings for the six months ended December 31, 2009, with the balance of $117,000 of net change recognized on the balance sheet in other comprehensive income since June 30, 2009.

The valuation of our TRUPS will continue to be influenced by external market and other factors, including implementation of Securities and Exchange Commission and Financial Accounting Standards Board guidance on fair value accounting, the financial condition of specific issuers within our pooled securities (including any credit deterioration thereof), deferral and default rates of specific issuer financial institutions, rating agency actions, and the prices at which

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observable market transactions occur. If we are required to record additional OTTI charges on our TRUPS portfolio, we could experience potentially significant earnings losses as well as an adverse impact to our capital position.

Liquidity risks could affect operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources to accommodate our existing and future lending and investment activities could have a substantial negative effect on our liquidity and severely constrain our financial flexibility. Our primary source of funding is retail deposits gathered through our network of branch offices. Our alternative funding sources include, without limitation, brokered certificates of deposit, federal funds purchased, Federal Reserve Discount Window borrowings, Federal Home Loan Bank of Des Moines (FHLB) advances and short- and long-term debt.

Until recently, the Bank has historically obtained funds principally through local deposits and it has a base of lower cost transaction deposits. Generally, we believe local deposits are a cheaper and more stable source of funds than other borrowings, because interest rates paid for local deposits are typically lower than interest rates charged for borrowings from other institutional lenders and reflect a mix of transaction and time deposits, whereas brokered deposits typically are higher cost time deposits.

Our costs of funds, profitability and liquidity will be adversely affected to the extent we have to rely upon higher cost borrowings from other institutional lenders or brokers to fund loan demand or liquidity needs, and changes in our deposit mix and growth could adversely affect our profitability and the ability to expand our loan portfolio.

On September 30, 2009, we entered into a Loan Agreement (the “Loan Agreement”) with United Bankers’ Bank (the “Lender”) in order to refinance our outstanding borrowings of $5.966 million under our line of credit with First Tennessee Bank, NA (the “FTB Line of Credit”). Our borrowings under the FTB Line of Credit were scheduled to mature on September 30, 2009. Under the Loan Agreement, the Lender committed to lend to us an aggregate principal amount not to exceed $6 million. As of November 25, 2009, we repaid the outstanding borrowings of $6.044 million (principal plus accrued interest) under the Loan Agreement. The loan is evidenced by a promissory note, accrues interest at the United Bankers’ Bank Rate with a minimum interest rate of 4.75% per annum, and the principal balance (plus any accrued and unpaid interest) is due and payable in full on October 1, 2010. To the extent we have to borrow funds from other institutional lenders to repay this indebtedness, our costs of funds, profitability and liquidity may be adversely affected.

We may look to sell production assets, such as mortgage loans, into the secondary market as a means to manage the size of our balance sheet and manage the use of our capital. The demand for these products in the capital markets is not driven by us and may not benefit us at the time we look to sell the loans.

Our liquidity, on a parent only basis, may be adversely affected by certain restrictions on receiving dividends from the Bank without prior regulatory approval.

Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.

FDIC insurance premiums have increased substantially in 2009 and we expect to pay significantly higher FDIC premiums in the future. Market developments have significantly depleted the DIF and reduced the ratio of reserves to insured deposits. The FDIC adopted a revised risk-based deposit insurance assessment schedule on February 27, 2009, which raised deposit insurance premiums. On May 22, 2009, the FDIC also implemented a five basis point special assessment of each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009, but no more than 10 basis points times the institution’s assessment base for the second quarter of 2009, that was collected on September 30, 2009. In imposing the special assessment, the FDIC noted that additional special assessments may be imposed by the FDIC for future periods.

On November 12, 2009, the FDIC adopted a final rule that requires insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009, along with each institution’s risk-based deposit insurance assessment for the third quarter of 2009. For purposes of calculating the prepaid amount, the base assessment rate in effect at September 30, 2009 would be used for 2010. That rate would be increased by an annualized 3 basis points for 2011 and 2012 assessments. The prepayment calculation would also assume a 5 percent annual growth rate, increased quarterly, through the end of 2012. Under the final rule, an institution will account for the prepayment by recording the entire amount of its prepaid assessment as a prepaid expense (an asset) as of

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December 30, 2009. Subsequently, each institution will record an expense (charge to earnings) for its regular quarterly assessment and an offsetting credit to the prepaid assessment until the asset is exhausted. Once the asset is exhausted, the institution would resume paying and accounting for quarterly deposit insurance assessments as they do currently. Under the final rule, the FDIC stated that its requirement for prepaid assessments does not preclude the FDIC from changing assessment rates or from further revising the risk-based assessment system during 2009, 2010, 2011, 2012, or thereafter, pursuant to notice-and-comment rulemaking procedures provided by statute, and therefore, continued actions by the FDIC could significantly increase the Bank’s noninterest expense in fiscal 2010 and for the foreseeable future. On December 30, 2009, the Company paid $4.9 million for its quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012, of which $4.3 million was recorded as a prepaid asset and will be proportionally expensed over the future periods.

The Bank participates in the FDIC’s Temporary Liquidity Guarantee Program, or TLGP, for noninterest-bearing transaction deposit accounts. Banks that participate in the TLGP’s noninterest-bearing transaction account guarantee program pay the FDIC an annual assessment of 10 basis points on the amounts in such accounts above the amounts covered by FDIC deposit insurance. The general termination date for the transaction account guarantee portion of the TLGP is December 31, 2009. To promote an orderly phase-out of the program, on August 26, 2009, the FDIC adopted a final rule extending the program for six months, through June 30, 2010. For institutions that choose to remain in the program, the fee will be raised and adjusted to reflect the institution’s risk profile. The Bank has decided to remain in the program, and therefore will be subject to additional fees for the extended portion of the program. Continued actions by the FDIC could significantly increase the Bank’s noninterest expense in fiscal 2010 and for the foreseeable future.

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

None

Item 3. Defaults upon Senior Securities

None

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

At the Company’s Annual Meeting of Stockholders held on November 18, 2009, (the “Annual Meeting”), the stockholders elected the two individuals nominated to serve as Class I directors until 2012 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 respected to each of them, is as follows:

David J. Horazdovsky		For: 3,046,458		Vote Withheld: 666,444
William G. Pederson		For: 3,039,619		Vote Withheld: 666,444

The following directors continue to serve on the Board of Directors following the Annual Meeting: Charles T. Day, Curtis L. Hage, Christine E. Hamilton, Robert L. Hanson and Thomas L. Van Wyhe.

The Company also voted and approved the ratification of the re-appointment of Eide Bailly, LLP as the Company’s auditors for fiscal year ending June 30, 2010. The number of votes for ratification and the related percentage of votes actually cast are as follows:

For:	3,582,711	Actually Cast:	96.49	%
Against:	99,316	Actually Cast:	2.68	%
Abstain:	30,875	Actually Cast:	0.83	%

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

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

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company x

Regulation S-K Exhibit Number		Document

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

			HF Financial Corp.
			(Registrant)


Date:	February 5, 2010	By:	/s/ Curtis L. Hage
			Curtis L. Hage, Chairman, President
			and Chief Executive Officer
			(Principal Executive Officer)

Date:	February 5, 2010	By:	/s/ Darrel L. Posegate
			Darrel L. Posegate, Executive Vice President,
			Chief Financial Officer and Treasurer
			(Principal Financial and Accounting Officer)

Exhibit Number		Description

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

		Page Number

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Consolidated Statements of Financial Condition At December 31, 2009 and June 30, 2009	1

	Consolidated Statements of Income for the Three and Six Months Ended December 31, 2009 and 2008	2

	Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2009 and 2008	3

	Notes to Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41

Item 4.	Controls and Procedures	42

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults upon Senior Securities	45

Item 4.	Submission of Matters to a Vote of Security Holders	45

Item 5.	Other Information	46

Item 6.	Exhibits	46

Form 10-Q	Signature Page	47