10-Q 1 a10-6179_110q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2010

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

Commission file number 0-19972

HF FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

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

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

(605) 333-7556

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o		Accelerated filer o

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

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

As of May 7, 2010, there were 6,938,538 shares of the registrant’s common stock outstanding.

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Quarterly Report on Form 10-Q

Table of Contents

		Page Number
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Consolidated Statements of Financial Condition At March 31, 2010 and June 30, 2009	1

	Consolidated Statements of Income for the Three and Nine Months Ended March 31, 2010 and 2009	2

	Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2010 and 2009	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	43

Item 4.	Controls and Procedures	44

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults upon Senior Securities	46

Item 4.	[Removed and Reserved]	46

Item 5.	Other Information	46

Item 6.	Exhibits	46

Form 10-Q	Signature Page	47

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except share data)

	March 31, 2010			June 30, 2009
	(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents	$	20,420		$	18,511
Securities available for sale	265,655			222,910
Federal Home Loan Bank stock	12,227			12,476
Loans held for sale	24,866			14,881

Loans and leases receivable	850,179			851,282
Allowance for loan and lease losses	(8,935		)	(8,470		)
Net loans and leases receivable	841,244			842,812

Accrued interest receivable	8,984			7,598
Office properties and equipment, net of accumulated depreciation	15,319			16,917
Foreclosed real estate and other properties	1,294			1,085
Cash value of life insurance	15,007			14,594
Servicing rights	12,526			11,768
Goodwill, net	4,951			4,951
Other assets	11,987			8,293
Total assets	$	1,234,480		$	1,176,796

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Deposits	$	839,560		$	837,868
Advances from Federal Home Loan Bank and other borrowings	243,387			212,869
Subordinated debentures payable to trusts	27,837			27,837
Advances by borrowers for taxes and insurance	16,517			11,899
Accrued expenses and other liabilities	13,467			17,648
Total liabilities	1,140,768			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 March 31, 2010 and June 30, 2009, respectively	90			61
Common stock subscribed for but not issued	—			224
Additional paid-in capital	44,291			22,911
Retained earnings, substantially restricted	83,653			80,735
Accumulated other comprehensive (loss), net of related deferred tax effect	(3,425		)	(4,359		)
Less cost of treasury stock, 2,083,455 and 2,083,455 shares at March 31, 2010 and June 30, 2009, respectively	(30,897		)	(30,897		)
Total stockholders’ equity	93,712			68,675
Total liabilities and stockholders’ equity	$	1,234,480		$	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						Nine Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
Interest, dividend and loan fee income:
Loans and leases receivable	$	12,192		$	12,045		$	36,887		$	37,709
Investment securities and interest-earning deposits	1,928			2,963			6,213			8,696
	14,120			15,008			43,100			46,405
Interest expense:
Deposits	2,826			3,515			9,682			12,224
Advances from Federal Home Loan Bank and other borrowings	1,941			2,343			6,456			7,335
	4,767			5,858			16,138			19,559
Net interest income	9,353			9,150			26,962			26,846
Provision for losses on loans and leases	981			414			1,748			801

Net interest income after provision for losses on loans and leases	8,372			8,736			25,214			26,045

Noninterest income:
Fees on deposits	1,293			1,304			4,142			4,373
Loan servicing income	527			617			1,506			1,708
Gain on sale of loans, net	369			543			1,402			1,079
Trust income	173			158			637			533
Gain on sale of securities, net	229			387			1,365			512

Total other-than-temporary impairment losses	59			(3,158		)	(2,022		)	(3,158		)
Portion of loss recognized in other comprehensive income (before taxes)	(263		)	2,797			(380		)	2,797
Net impairment losses recognized in earnings	(204		)	(361		)	(2,402		)	(361		)

Other	423			356			1,111			1,138
	2,810			3,004			7,761			8,982
Noninterest expense:
Compensation and employee benefits	5,078			5,232			15,380			16,181
Occupancy and equipment	1,161			1,034			3,345			3,023
FDIC insurance	325			272			985			535
Check and data processing expense	659			671			2,034			1,945
Professional fees	338			397			1,275			1,352
Marketing and community development	319			222			1,284			1,108
Foreclosed real estate and other properties, net	34			6			101			219
Other	609			574			1,847			1,624
	8,523			8,408			26,251			25,987

Income before income taxes	2,659			3,332			6,724			9,040

Income tax expense	868			1,161			2,117			3,048
Net income	1,791			2,171			4,607			5,992

Preferred stock dividends and accretion	—			340			—			340

Net income available to common shareholders	$	1,791		$	1,831		$	4,607		$	5,652

Comprehensive income	$	2,042		$	2,980		$	5,541		$	5,554

Basic earnings per common share:	$	0.26		$	0.45		$	0.86		$	1.41
Diluted earnings per common share:	0.26			0.45			0.86			1.40
Dividends declared per common share	0.11			0.11			0.34			0.34

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)

	Nine Months Ended March 31,
	2010			2009
Cash flows from operating activities
Net income	$	4,607		$	5,992
Adjustments to reconcile net income to net cash (used in) operating activities
Provision for losses on loans and leases	1,748			801
Depreciation	1,499			1,292
Amortization of discounts and premiums on securities and other	2,418			1,255
Stock based compensation	525			303
Net change in loans held for resale	(8,583		)	(11,318		)
(Gain) on sale of loans, net	(1,402		)	(1,079		)
Realized (gain) on sale of securities, net	(1,365		)	(512		)
Other-than-temporary impairments recognized in noninterest income	2,402			361
(Gains) losses and provision-for-losses on sales of foreclosed real estate and other properties, net	(5		)	19
(Gain) loss on disposal of office properties and equipment, net	4			—
Change in other assets and liabilities	(10,839		)	(4,562		)
Net cash (used in) operating activities	(8,991		)	(7,448		)
Cash flows from investing activities
Loan participations purchased	(2,250		)	(969		)
Net change in loans outstanding	1,330			(34,385		)
Securities available for sale
Sales, maturities, repayments and adjustments	78,618			74,921
Purchases	(122,163		)	(99,288		)
Purchase of Federal Home Loan Bank stock	(4,104		)	(5,565		)
Redemption of Federal Home Loan Bank stock	4,353			4,334
Proceeds from sale of office properties and equipment	2,048			—
Purchase of office properties and equipment	(1,953		)	(1,965		)
Purchase of servicing rights	(1,108		)	(857		)
Proceeds from sale of foreclosed real estate and other properties	330			451
Net cash (used in) investing activities	(44,899		)	(63,323		)
Cash flows from financing activities
Net increase in deposit accounts	1,692			19,971
Proceeds of advances from Federal Home Loan Bank and other borrowings	1,357,120			4,054,528
Payments on advances from Federal Home Loan Bank and other borrowings	(1,326,602		)	(4,042,647		)
Increase in advances by borrowers	4,618			7,352
Proceeds from issuance of preferred stock	—			25,000
Proceeds from issuance of common stock	20,660			821
Cash dividends paid	(1,689		)	(1,692		)
Net cash provided by financing activities	55,799			63,333
Increase (decrease) in cash and cash equivalents	1,909			(7,438		)
Cash and cash equivalents
Beginning	18,511			21,170
Ending	$	20,420		$	13,732
Supplemental disclosures of cash flows information
Cash payments for interest	$	18,146		$	21,054
Cash payments for income and franchise taxes, net	1,957			2,795

See accompanying notes to unaudited consolidated financial statements.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2010 AND 2009

(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 May 14, 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 March 31, 2010:

	Amount		Percent
	(Dollars in Thousands)
Tier I (core) capital (to adjusted total assets):
Required	$	61,428	5.00	%
Actual	106,028		8.63
Excess over required	44,600		3.63

Total Risk-based capital (to risk-weighted assets):
Required	$	97,757	10.00	%
Actual	114,597		11.72
Excess over required	16,840		1.72

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 March 31, 2010 and 2009 was 6,938,538 and 4,024,335, respectively. The weighted average number of basic common shares outstanding for the nine months ended March 31, 2010 and 2009 was 5,378,964 and 4,000,456, respectively.

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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 March 31, 2010 and 2009 was 6,940,628 and 4,034,659, respectively. The weighted average number of common and dilutive potential common shares outstanding for the nine months ended March 31, 2010 and 2009 was 5,384,144 and 4,025,426, 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:

	March 31, 2010									March 31, 2009
			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	$	5,183	$	16	$	(3	)	$	5,196	$	2,617	$	54	$	—		$	2,671
Municipal bonds	13,435		429		(56		)	13,808		14,419		389		(136		)	14,672
Trust preferred securities	9,510		—		(5,108		)	4,402		11,934		—		(5,647		)	6,287
	28,128		445		(5,167		)	23,406		28,970		443		(5,783		)	23,630

Equity securities:
FNMA	—		—		—			—		8		—		(8		)	—
Federal Ag Mortgage	7		—		(2		)	5		7		—		(7		)	—
Other investments	253		—		—			253		253		—		—			253
	260		—		(2		)	258		268		—		(15		)	253

Residential mortgage-backed securities	238,741		3,929		(679		)	241,991		223,771		3,625		(1,234		)	226,162
	$	267,129	$	4,374	$	(5,848	)	$	265,655	$	253,009	$	4,068	$	(7,032	)	$	250,045

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 March 31, 2010:

	Less than 12 Months					12 Months or More					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		(Losses)			Value		(Losses)			Value		(Losses)
	(Dollars in Thousands)
Debt securities:
U.S. government agencies	$	2,547	$	(3	)	$	—	$	—		$	2,547	$	(3	)
Municipal bonds	779		(8		)	1,881		(48		)	2,660		(56		)
Trust preferred securities	—		—			4,402		(5,108		)	4,402		(5,108		)
	3,326		(11		)	6,283		(5,156		)	9,609		(5,167		)
Equity securities:
Federal Ag Mortgage	5		(2		)	—		—			5		(2		)
	5		(2		)	—		—			5		(2		)
Residential mortgage-backed securities	73,336		(543		)	11,107		(136		)	84,443		(679		)
	$	76,667	$	(556	)	$	17,390	$	(5,292	)	$	94,057	$	(5,848	)

For the three months ended March 31, 2010, gross proceeds from the securities sold at a gain were $12.1 million, resulting in a gain on sale of securities of $230,000. This compares to gross proceeds of $15.7 million, resulting in a gain on sale of securities of $387,000 for the three months ended March 31, 2009. For the three months ended March 31, 2010, gross proceeds from the securities sold at a loss were $1.2 million, resulting in a loss on sale of securities of $1,000 compared to the three month period ended March 31, 2009, which had no securities sold at a loss.

For the nine months ended March 31, 2010, gross proceeds from the securities sold at a gain were $36.4 million, resulting in a gain on sale of securities of $1.4 million. This compares to gross proceeds of $28.6 million, resulting in a gain on sale of securities of $559,000 for the nine months ended March 31, 2009. For the nine months ended March 31, 2010, gross proceeds from the securities sold at a loss were $1.2 million, resulting in a loss on sale of securities of $1,000 compared to $8.3 million received in gross proceeds for the nine months ended March 31, 2009, which resulted in a net loss of $47,000.

The unrealized losses reported for municipal bonds relate to 17 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 March 31, 2010, 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 41 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. Management does not believe any of these unrealized losses as of March 31, 2010, 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, $2.3 million rated Caa1, and $5.3 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 third quarter ended March 31, 2010, and also 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 $204,000. The amount of unrealized loss recognized in other comprehensive income, net of applicable taxes, was reduced by $263,000. 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 $7.7 million are quarterly variable-rate securities tied to 3-month LIBOR.

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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:

	Nine Months Ended
	March 31, 2010
	(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	71

Increases to the amount related to the credit losses for which other-than-temporary was previously recognized	2,331

Ending balance of credit losses on securities held as of March 31, 2010 for which a portion of other-than-temporary impairment was recognized in other comprehensive income	$	2,807

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

	At March 31, 2010
									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	$	1,132	$	4,051	$	—	$	—	$	5,183	$	5,196
Municipal bonds	650		4,036		6,173		2,576		13,435		13,808
Trust preferred securities	—		—		—		9,510		9,510		4,402
Residential mortgage-backed securities	—		3,397		17,512		217,832		238,741		241,991
Total investment securities	$	1,782	$	11,484	$	23,685	$	229,918	$	266,869	$	265,397

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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.

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

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
	(Dollars in Thousands)

Balance, beginning	$	12,351		$	11,412		$	11,768		$	11,189
Additions	528			265			1,957			1,223
Amortization	(353		)	(303		)	(1,199		)	(1,038		)
Balance, ending	$	12,526		$	11,374		$	12,526		$	11,374

Servicing fees received	$	880		$	920		$	2,705		$	2,745
Balance of loans serviced at:
Beginning of period	1,111,380			1,033,884			1,046,600			994,065
End of period	1,131,979			1,026,498			1,131,979			1,026,498

Amortization of servicing rights is adjusted each quarter as the result of the evaluation of historical prepayment activity. For the third quarter ended March 31, 2010 and 2009, the constant prepayment rates (CPR) used to calculate the amortization was 7.29% and 6.39%, 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 March 31,
	2010									2009
	Banking			Other			Total			Banking			Other			Total
	(Dollars in Thousands)

Net interest income	$	9,796		$	(443	)	$	9,353		$	9,574		$	(424	)	$	9,150
Provision for losses on loans and leases	(981		)	—			(981		)	(414		)	—			(414		)
Non-interest income	2,624			186			2,810			2,968			36			3,004
Intersegment non-interest income	(60		)	(3		)	(63		)	(21		)	(40		)	(61		)
Non-interest expense	(8,208		)	(315		)	(8,523		)	(8,105		)	(303		)	(8,408		)
Intersegment non-interest expense	—			63			63			—			61			61
Income (loss) before income taxes	$	3,171		$	(512	)	$	2,659		$	4,002		$	(670	)	$	3,332

Total assets at March 31	$	1,218,814		$	15,666		$	1,234,480		$	1,146,675		$	25,316		$	1,171,991

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	Nine Months Ended March 31,
	2010									2009
	Banking			Other			Total			Banking			Other			Total
	(Dollars in Thousands)

Net interest income	$	28,386		$	(1,424	)	$	26,962		$	28,152		$	(1,306	)	$	26,846
Provision for losses on loans and leases	(1,748		)	—			(1,748		)	(801		)	—			(801		)
Non-interest income	7,389			372			7,761			8,746			236			8,982
Intersegment non-interest income	(108		)	(79		)	(187		)	(85		)	(97		)	(182		)
Non-interest expense	(25,103		)	(1,148		)	(26,251		)	(24,878		)	(1,109		)	(25,987		)
Intersegment non-interest expense	—			187			187			—			182			182
Income (loss) before income taxes	$	8,816		$	(2,092	)	$	6,724		$	11,134		$	(2,094	)	$	9,040

Total assets at March 31	$	1,218,814		$	15,666		$	1,234,480		$	1,146,675		$	25,316		$	1,171,991

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								Nine Months Ended
		March 31,								March 31,
		2010				2009				2010				2009
	(Dollars in Thousands)

Service cost	$		142		$		119		$		426		$		356
Interest cost	143				120				430				360
Amortization of prior losses	45				16				136				46
Expected return on plan assets	(138			)	(115			)	(416			)	(368			)
Total costs recognized in expense	$		192		$		140		$		576		$		394

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 third 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 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.

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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	486		704
Quarter ended June 30	—		555
Net healthcare costs	$	1,545	$	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 nine months ended March 31:

	2010		2009

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 nine months ended March 31, 2010 was 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	3.27	$	24,912

Vested and exercisable	139,919	$	12.89	3.27	$	24,912

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Stock appreciation rights activity for the nine months ended March 31, 2010 was 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	8.75	$	—

Vested and exercisable	35,463		$	15.62	7.44	$	—

The total intrinsic value of options exercised during the nine months ended March 31, 2010 and 2009 was $0 and $188,000, respectively. Cash received from the exercise of these options was $0 and $546,000, 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 nine months ended March 31, 2010 and 2009 was $1.75 and $2.06, respectively. The total unrecognized compensation cost related to nonvested SARs awards at March 31, 2010 was $281,000. The unrecognized cost at March 31, 2010 is expected to be recognized over a weighted average period of 29 months.

Nonvested share activity for the nine months ended March 31 follows:

	2010				2009
			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	(55,716	)	15.31		(49,295	)	16.43
Forfeited	(506	)	16.53		(1,551	)	16.70

Nonvested balance, ending	72,548		$	13.56	94,502		$	15.83

Pretax compensation expense recognized for nonvested shares for the nine months ended March 31, 2010, and 2009 was $366,000 and $276,000, respectively. The tax benefit for the nine months ended March 31, 2010, and 2009 was $124,000 and $94,000, 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 March 31, 2010, there was $477,000 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 22 months. The total fair value of shares vested during the nine months ended March 31, 2010 and 2009 was $673,000 and $618,000, 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 March 31, 2010, there was $136,000 of total unrecognized compensation cost related to nonvested shares, which are expected to be recognized over the remaining period of 9 months. For the nine months ended March 31, 2010, amortization expense was recorded in the amount of $105,000. The total fair value of shares vested during the nine months ended March 31, 2010 and 2009 was $181,000 and $109,000, respectively.

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 $505,000 unrealized loss at March 31, 2010.

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 $192,000 unrealized loss at March 31, 2010.

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 $137,000 unrealized loss, while the fair value of the $2.0 million notional amount derivative was a $120,000 unrealized loss at March 31, 2010.

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 and $5.0 million notional amount derivatives were unrealized gains of $67,000 and $30,000, respectively, at March 31, 2010. The fair value of the $7.0 million notional amount derivative was an unrealized loss of $39,000 at March 31, 2010.

No gain or loss was recognized in earnings for the nine months ended March 31, 2010, and 2009 related to interest rate swaps. No deferred net losses on interest rate swaps in other comprehensive loss as of March 31, 2010, 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 March 31, 2010, to satisfy collateral requirements associated with our interest rate swap contracts.

The following table summarizes the derivative financial instruments utilized as of March 31, 2010:

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

(993

)

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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 March 31, 2010:

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

Interest rate swap contracts	$	17,000	1.7	$	(954	)	3.0	%	6.5	%
Interest rate swap contracts purchased-not effective	22,000		4.4	58			na		na

Totals	$	39,000		$	(896	)

NOTE 12—ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss are as follows:

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
	(Dollars in Thousands)
Net income	$	1,791		$	2,171		$	4,607		$	5,992
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	59			(3,158		)	(2,022		)	(3,158		)
Change in unrealized gain (losses) on other securities available for sale	748			4,589			2,432			3,683
Reclassification adjustment:
Net impairment credit loss recognized in earnings	204			361			2,402			361
Security (gains) recognized in earnings	(229		)	(387		)	(1,365		)	(512		)
Net unrealized gains (losses)	782			1,405			1,447			374
Income tax benefit (expense)	(298		)	(534		)	(550		)	(143		)
Other comprehensive income (loss) on securities available for sale	484			871			897			231

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

Cash flow hedging activities-interest rate swap contracts:
Net unrealized gains (losses)	(353		)	(94		)	56			(1,014		)
Income tax benefit (expense)	120			32			(19		)	345
Other comprehensive income (loss) on cash flow hedging activities-interest rate swap contracts	(233		)	(62		)	37			(669		)

Total other comprehensive income (loss)	251			809			934			(438		)

Comprehensive income	$	2,042		$	2,980		$	5,541		$	5,554

Cumulative other comprehensive (loss) balances were:

Unrealized loss on securities available for sale, net of related tax effect of $560 and $1,127							$	(914	)	$	(1,837	)
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 $305 and $385							(591		)	(749		)
							$	(3,425	)	$	(3,439	)

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NOTE 13—FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENT

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of amounts recognized in the consolidated statements of financial condition. The contract or notional amounts of those instruments reflect the extent of the Bank’s involvement in particular classes of financial instruments.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and financial guarantees written is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Unless noted otherwise, the Bank does not require collateral or other security to support financial instruments with credit risk.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash and cash equivalents—The carrying amounts reported in the statements of financial condition for cash and cash equivalents approximate their fair values.

Securities—Fair values for investment securities are based on quoted market prices or whose value is determined using discounted cash flow methodologies, except for stock in the Federal Home Loan Bank for which fair value is assumed to equal cost.

Loans and leases, net—The fair values for loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms and credit quality. Leases are stated at cost which equals fair value.

Accrued interest receivable—The carrying value of accrued interest receivable approximates its fair value.

Servicing rights—Fair values are estimated using discounted cash flows based on current market rates of interest.

Interest rate swap contracts—Valuations of interest rate swap contracts are based on inputs observed in active markets for similar instruments. Typical inputs include the LIBOR curve, option volatility and option skew.

Off-balance sheet instruments - Loan commitments are negotiated at current market rates and are relatively short-term in nature. Therefore, the estimated value of loan commitments approximates the face amount. Rates for these commitments are set at time of loan closing, such that no adjustment is necessary to reflect these commitments at market value.

Deposits—The fair values for deposits with no defined maturities equal their carrying amounts, which represent the amount payable on demand. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on a comparably termed wholesale funding alternative (i.e., FHLB borrowings).

Borrowed funds—The carrying amounts reported for variable rate advances approximate their fair values. Fair values for fixed-rate advances and other borrowings are estimated using a discounted cash flow calculation that applies interest rates currently being offered on advances and borrowings with corresponding maturity dates.

Subordinated debentures payable to trusts—Fair values for subordinated debentures are estimated using a discounted cash flow calculation that applies interest rates on comparable borrowing instruments with corresponding maturity dates.

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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:

	March 31, 2010						June 30, 2009
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
	(Dollars in Thousands)
Financial Assets
Cash and cash equivalents	$	20,420		$	20,420		$	18,511		$	18,511
Securities	265,655			265,655			222,910			222,910
Federal Home Loan Bank Stock	12,227			12,227			12,476			12,476
Loans and leases	866,110			868,783			857,693			863,453
Accrued interest receivable	8,984			8,984			7,598			7,598
Servicing rights	12,526			17,338			11,768			15,055
Interest rate swap contracts	(896		)	(896		)	(952		)	(952		)

Financial liabilities
Deposits	839,560			846,078			837,868			844,243
Borrowed funds	243,387			249,974			212,869			219,249
Subordinated debentures payable to trusts	27,837			13,763			27,837			9,990
Accrued interest payable and advances by borrowers for taxes and insurance	20,031			20,031			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 March 31, 2010:

	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	$	5	$	261,248		$	4,402	$	265,655
Interest rate swap contracts	—		(896		)	—		(896		)
Total assets	$	5	$	260,352		$	4,402	$	264,759

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

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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			Nine Months Ended
	March 31, 2010
	(Dollars in Thousands)

Beginning balance	$	4,213		$	6,051
Total realized/unrealized gains (losses)
Included in earnings	(204		)	(2,402		)
Included in other comprehensive loss	380			716
Purchases, issuances, (paydowns) and (sales)	13			37
Transfers into or (out) of Level 3	—			—
Ending balance	$	4,402		$	4,402

The table below presents the Company’s assets subject to the nonrecurring fair value measurements by level within the hierarchy at March 31, 2010:

	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	$	—	$	24,866	$	—	$	—
Impaired loans	—		6,476		1,072		—
Mortgage servicing rights	—		—		12,526		—
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 consistent with the market approach, income approach, and/or cost approach were used to measure fair value and primarily included observable inputs such as recent sales of similar assets or observable market data for operational or carrying costs.

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Foreclosed assets’ values are originally derived from the estimated value of the collateral based asset upon repossession by the Bank. During the period the foreclosed asset remains in the possession of the Bank, the asset is evaluated periodically for any valuation adjustments. Those foreclosed assets, for which a reduction in asset value is needed, are adjusted and determined to be an impaired asset of the Company. These assets will remain an impaired asset until ultimately sold or disposed.

Mortgage servicing rights do not trade in an active, open market with readily observable prices. While sales of mortgage servicing rights do occur, the precise terms and conditions typically are not readily available to allow for a “quoted price for similar assets” comparison. Accordingly, the Company relies on an internal discounted cash flow model to estimate the fair value of its mortgage servicing rights. The Company uses a valuation model to project mortgage servicing rights cash flows based on the current interest rate scenario, which is then discounted to estimate an expected fair value of the mortgage servicing rights. The valuation model considers portfolio characteristics of the underlying mortgages, contractually specified servicing fees, prepayment assumptions, discount rate assumptions, other ancillary revenue, costs to service, and other economic factors. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the model to reflect market conditions and assumptions that a market participant would consider in valuing the mortgage servicing rights asset. In addition, the Company compares its fair value estimates and assumptions to observable market data for mortgage servicing rights, where available, and to recent market activity and actual portfolio experience. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the fair value hierarchy. The Company uses the amortization method (i.e., lower of amortized cost or estimated fair value measured on a nonrecurring basis), not fair value measurement accounting, for its mortgage servicing rights assets.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Form 10-Q”), as well as other reports issued by the Company include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, the Company’s management may make forward-looking statements orally to the media, securities analyst, investors and others from time to time. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as “optimism,” “look-forward,” “bright,” “believe,” “expect,” “anticipate,” “intend,” “hope,” “plan,” “estimate” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may,” are intended to identify these forward-looking statements.

These forward-looking statements might include one or more of the following:

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

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

· forecasts of future economic performance.

· use and descriptions of assumptions and estimates underlying or relating to such matters.

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Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

· adverse economic and market conditions of the financial services industry in general, including, without limitation, the credit markets;

· the effect of recent legislation to help stabilize the financial markets or the effect of the phase-out of existing recovery programs;

· future losses on our holdings of trust preferred securities;

· increase of non-performing loans and additional provisions for loan losses;

· the failure of assumptions underlying the establishment of reserves for loan losses and other estimates;

· the failure to maintain our reputation in our market area;

· prevailing economic, political and business conditions in South Dakota;

· the effects of competition from a wide variety of local, regional, national and other providers of financial services;

· compliance with existing and future banking laws and regulations, including, without limitation, regulatory capital requirements and FDIC insurance coverages and costs;

· changes in the availability and cost of credit and capital in the financial markets;

· the effects of FDIC deposit insurance premiums and assessments;

· the risks of changes in market interest rates on the composition and costs of deposits, loan demand, net interest income, and the values and liquidity of loan collateral, and our ability or inability to manage interest rate and other risks;

· changes in the prices, values and sales volumes of residential and commercial real estate;

· an extended period of low commodity prices, significantly reduced yields on crops, reduced levels of governmental assistance to the agricultural industry, and reduced farmland values;

· soundness of other financial institutions;

· the risks of future acquisitions and other expansion opportunities, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and expense savings from such transactions;

· security and operations risks associated with the use of technology;

· the loss of one or more of our key personnel, or the failure to attract, assimilate and retain other highly qualified personnel in the future;

· changes in or interpretations of accounting standards, rules or principles; and

· other factors and risks described under Part I, Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 3—“Quantitative and Qualitative Disclosures About Market Risk” in this Form 10-Q.

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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 third quarter of fiscal 2010 was $1.8 million, or $0.26 in diluted earnings per common share, compared to $1.8 million, or $0.45 in diluted earnings per common share, for the third quarter of fiscal 2009. The Company’s net income available to common shareholders for the nine months ended March 31, 2010 was $4.6 million, or $0.86 in diluted earnings per common share, compared to $5.7 million, or $1.40 in diluted earnings per common share, for the nine months ended March 31, 2009.

Net interest income for the first nine months of fiscal 2010 was $27.0 million, an increase of $116,000, or 0.4%, compared to the same period a year ago. For the nine months ended March 31, 2010, average interest-earning assets and average interest-bearing liabilities increased 2.4% and 2.0%, respectively, compared to the same period a year ago. Yields on earning assets decreased to 5.22% in the first nine months of fiscal 2010, compared to 5.76% a year ago, a decrease of 54 basis points. For the same period, interest-bearing cost of funds decreased to 2.22%, compared to 2.75%, a decrease of 53 basis points.

The net interest margin on a fully taxable equivalent basis (“Net Interest Margin, TE”) for the nine months ended March 31, 2010 was 3.32%, compared to 3.39% for the same period a year ago, a decrease of 7 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 allowance for loan and lease losses increased $465,000 to $8.9 million at March 31, 2010, compared to June 30, 2009. The ratio of allowance for loan and lease losses to total loans and leases was 1.02% as of March 31, 2010 compared to 0.98% at June 30, 2009. Total nonperforming assets at March 31, 2010 were $11.1 million as compared to $12.6 million at June 30, 2009, a decrease of $1.4 million. The ratio of nonperforming assets to total assets decreased to 0.90% at March 31, 2010, 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 nonperforming 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 $9.5 million in trust preferred securities at March 31, 2010 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 which place each in a below investment grade rating. 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 contracted. Based upon the analysis, the Company recognized total other-than-temporary impairment of $2.0 million for four trust preferred securities for the nine months ended March 31, 2010. 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 $2.4 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 $380,000 and is recognized in other comprehensive income, net of applicable taxes.

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Total deposits at March 31, 2010, were $839.6 million, an increase of $1.7 million, or 0.2%, from June 30, 2009. During the nine month period, money market account balances increased $30.1 million, or 20.7%, while in-market certificates of deposits decreased $24.3 million, or 6.1% due in part to the transfer of maturing certificates to money market accounts based upon customer preference. Public fund account balances decreased $37.1 million which are categorized in multiple categories of deposits. The decrease in public funds was offset by the overall increase in the non-public funds included in total deposits. The primary factor affecting interest expense was the decrease in the average rates paid on total deposits for the nine month period ended March 31, 2010, of 1.76% compared to 2.38% for the nine month period ended March 31, 2009.

On April 26, 2010, the Company announced it will pay a quarterly cash dividend of 11.25 cents per common share for the third quarter of fiscal 2010. The dividend will be paid on May 14, 2010, to stockholders of record on May 7, 2010.

The total risk-based capital ratio of 11.72% at March 31, 2010, increased by 67 basis points from 11.05% at June 30, 2009. This continues to place the Bank in the “well-capitalized” category within OTS regulation at March 31, 2010 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 $7.8 million for the nine months ended March 31, 2010 compared to $9.0 million for the same period in the prior fiscal year, a decrease of $1.2 million or 13.6%. This decrease is due primarily to net impairment credit losses recognized in earnings of $2.4 million for the nine months ended March 31, 2010, compared to $361,000 for the nine months ended March 31, 2009. Net gain on sale of loans and net gain on sale of securities increased $323,000 and $853,000, respectively, which partially offset the decrease for the comparable period.

Noninterest expense was $26.3 million for the nine months ended March 31, 2010, as compared to $26.0 million for the nine months ended March 31, 2009, an increase of $264,000, or 1.0%. The increase was attributed to an increase in FDIC insurance premiums and occupancy and equipment of $450,000 and $322,000, respectively. The increase in noninterest expense was neutralized by a decrease in compensation and employee benefits of $801,000, 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 which was recorded as a prepaid asset and will be proportionally expensed over future periods. At March 31, 2010, the remaining balance recorded as a prepaid asset was $4.0 million. 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 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.

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General

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

Financial Condition Data

At March 31, 2010, the Company had total assets of $1.2 billion, and exhibited an increase of $57.7 million from the level at June 30, 2009. The increase in assets in the nine months of fiscal 2010 was due primarily to an increases in securities available for sale and loans held for sale of $42.7 million and $10.0 million, respectively. Total liabilities increased $32.6 million at March 31, 2010, as compared to June 30, 2009. This increase was primarily due to an increases in advances from the FHLB and other borrowings of $30.5 million. Stockholders’ equity increased $25.0 million to $93.7 million at March 31, 2010, from $68.7 million at June 30, 2009, due primarily to the equity offering in November 2009 and current earnings.

The increase in securities available for sale of $42.7 million indicated above, was primarily the result of net increases of agency residential mortgage-backed securities of $41.5 million during the third quarter of fiscal 2010. Loans held for sale increased $10.0 million at March 31, 2010, 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 $1.9 million at March 31, 2010 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 nine months ended March 31, 2010.

Deposits increased $1.7 million at March 31, 2010 as compared to June 30, 2009. Money market accounts increased $30.1 million during the nine month period ended March 31, 2010, while in-market certificates of deposits decreased $24.3 million to offset this increase. Public fund account balances, which are included in money markets, savings and certificates of deposits, decreased $37.1 million to $145.4 million at March 31, 2010 in part as a result of seasonal fluctuations typical with these types of municipal deposits.

Advances from the FHLB and other borrowings increased $30.5 million at March 31, 2010 as compared to June 30, 2009. This increase was primarily the result of a net increase in securities available for sale and loans held for sale of $42.7 million and $10.0 million, respectively, and partially offset by the cash raised in the equity offering of $20.7 million.

Stockholders’ equity increased $25.0 million at March 31, 2010 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 nine months ended March 31, 2010 of $4.6 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

	March 31, 2010				June 30, 2009
	Amount		Percent		Amount		Percent
	(Dollars in Thousands)

One-to four-family (1)	$	74,029	8.71	%	$	84,849	9.97	%
Commercial business and real estate (2)	307,137		36.13		322,416		37.87
Multi-family real estate	50,460		5.94		48,342		5.68
Equipment finance leases	11,828		1.39		16,010		1.88
Consumer direct (3)	120,475		14.17		116,777		13.72
Consumer indirect (4)	10,808		1.27		21,394		2.51
Agricultural	252,276		29.67		231,315		27.17
Construction	23,166		2.72		10,179		1.20
Total loans and leases receivable (5)	$	850,179	100.00	%	$	851,282	100.00	%

(1) Excludes $15,562 and $8,888 loans held for sale at March 31, 2010 and June 30, 2009, respectively.

(2) Includes $2,706 and $2,810 tax exempt leases at March 31, 2010 and June 30, 2009, respectively.

(3) Excludes $9,304 and $5,993 student loans held for sale at March 31, 2010 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

	March 31, 2010				June 30, 2009
	Amount		Percent		Amount		Percent
	(Dollars in Thousands)

Noninterest bearing checking accounts	$	96,774	11.53	%	$	94,067	11.23	%
Interest bearing checking accounts	94,773		11.29		94,846		11.32
Money market accounts	175,295		20.88		145,214		17.33
Savings accounts	77,337		9.21		81,417		9.72
In-market certificates of deposit	376,999		44.90		401,291		47.89
Out-of-market certificates of deposit	18,382		2.19		21,033		2.51
Total deposits	$	839,560	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 March 31,
	2010						2009
	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)	$	856,414	$	12,192	5.77	%	$	837,501	$	12,045	5.83	%
Investment securities (2) (3)	259,318		1,872		2.93	%	252,812		2,937		4.71	%
FHLB stock	11,207		56		2.03	%	12,476		26		0.85	%

Total interest-earning assets	1,126,939		$	14,120	5.08	%	1,102,789		$	15,008	5.52	%
Noninterest-earning assets	79,250						66,679
Total assets	$	1,206,189					$	1,169,468

Interest-bearing liabilities:
Deposits:
Checking and money market	$	244,753	$	353	0.58	%	$	214,277	$	310	0.59	%
Savings	81,077		72		0.36	%	70,165		74		0.43	%
Certificates of deposit	416,991		2,401		2.34	%	397,126		3,131		3.20	%
Total interest-bearing deposits	742,821		2,826		1.54	%	681,568		3,515		2.09	%
FHLB advances and other borrowings	215,165		1,488		2.80	%	241,338		1,896		3.19	%
Subordinated debentures payable to trusts	27,837		453		6.60	%	27,837		447		6.51	%

Total interest-bearing liabilities	985,823		4,767		1.96	%	950,743		5,858		2.50	%
Noninterest-bearing deposits	90,084						79,969
Other liabilities	37,618						45,995
Total liabilities	1,113,525						1,076,707
Equity	92,664						92,761
Total liabilities and equity	$	1,206,189					$	1,169,468

Net interest income; interest rate spread (4)			$	9,353	3.12	%			$	9,150	3.02	%

Net interest margin (4) (5)					3.37	%					3.36	%

Net interest margin, TE (6)					3.42	%					3.43	%

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

(2) Includes federal funds sold.

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

(4) Percentages for the three months ended March 31, 2010 and March 31, 2009 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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	Nine Months Ended March 31,
	2010						2009
	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)	$	852,249	$	36,887	5.77	%	$	820,766	$	37,709	6.12	%
Investment securities (2) (3)	235,183		5,991		3.39	%	240,551		8,512		4.71	%
FHLB stock	11,873		222		2.49	%	12,207		184		2.01	%

Total interest-earning assets	1,099,305		$	43,100	5.22	%	1,073,524		$	46,405	5.76	%
Noninterest-earning assets	77,148						66,772
Total assets	$	1,176,453					$	1,140,296

Interest-bearing liabilities:
Deposits:
Checking and money market	$	230,015	$	968	0.56	%	$	233,156	$	1,727	0.99	%
Savings	72,158		197		0.36	%	68,298		462		0.90	%
Certificates of deposit	432,630		8,517		2.62	%	383,205		10,035		3.49	%
Total interest-bearing deposits	734,803		9,682		1.76	%	684,659		12,224		2.38	%
FHLB advances and other borrowings	205,067		5,084		3.30	%	235,778		5,952		3.36	%
Subordinated debentures payable to trusts	27,837		1,372		6.57	%	27,837		1,383		6.62	%

Total interest-bearing liabilities	967,707		16,138		2.22	%	948,274		19,559		2.75	%
Noninterest-bearing deposits	93,956						76,360
Other liabilities	33,526						37,091
Total liabilities	1,095,189						1,061,725
Equity	81,264						78,571
Total liabilities and equity	$	1,176,453					$	1,140,296

Net interest income; interest rate spread (4)			$	26,962	3.00	%			$	26,846	3.01	%

Net interest margin (4) (5)					3.27	%					3.33	%

Net interest margin, TE (6)					3.32	%					3.39	%

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

(2) Includes federal funds sold.

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

(4) Percentages for the nine months ended March 31, 2010 and March 31, 2009 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 mea- sure, 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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The reconciliation of the net interest income (GAAP) to Net Interest Margin, TE (non-GAAP) is as follows:

	Three Months Ended						Nine Months Ended
	March 31,			March 31,			March 31,			March 31,
	2010			2009			2010			2009
	(Dollars in Thousands)
Net interest income	$	9,353		$	9,150		$	26,962		$	26,846
Taxable equivalent adjustment	140			181			428			502
Adjusted net interest income	9,493			9,331			27,390			27,348
Average interest-earning assets	1,126,939			1,102,789			1,099,305			1,073,524
Net interest margin, TE	3.42		%	3.43		%	3.32		%	3.39		%

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).

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For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

	Three Months Ended March 31,									Nine Months Ended March 31,
	2010 vs 2009									2010 vs 2009
	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)	$	273		$	(126	)	$	147		$	1,435		$	(2,257	)	$	(822	)
Investment securities (2)	76			(1,141		)	(1,065		)	(190		)	(2,331		)	(2,521		)
FHLB stock	(3		)	33			30			(5		)	43			38

Total interest-earning assets	$	346		$	(1,234	)	$	(888	)	$	1,240		$	(4,545	)	$	(3,305	)

Interest-bearing liabilities:
Deposits:
Checking and money market	$	48		$	(5	)	$	43		$	(23	)	$	(736	)	$	(759	)
Savings	12			(14		)	(2		)	26			(291		)	(265		)
Certificates of deposit	157			(887		)	(730		)	1,299			(2,817		)	(1,518		)
Total interest-bearing deposits	217			(906		)	(689		)	1,302			(3,844		)	(2,542		)
FHLB advances and other borrowings	(204		)	(204		)	(408		)	(776		)	(92		)	(868		)
Subordinated debentures payable to trusts	—			6			6			—			(11		)	(11		)

Total interest-bearing liabilities	$	13		$	(1,104	)	$	(1,091	)	$	526		$	(3,947	)	$	(3,421	)

Net interest income increase	$	333		$	(130	)	$	203		$	714		$	(598	)	$	116

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

(2) Includes federal funds sold.

Application of Critical Accounting Policies

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

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

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

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

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

The Company has included MSRs as a critical accounting policy because the use of estimates for determining fair value using present value concepts may produce results which may significantly differ from other fair value analysis perhaps even to the point of recording impairment. The risk to earnings is when the underlying mortgages pay off significantly faster than the assumptions used in the previously recorded amortization. Estimating future cash flows on the underlying mortgages is a difficult analysis and requires judgment based on the best information available. The Company looks at alternative assumptions and projections when preparing a reasonable and supportable analysis. Based on the Company’s quarterly analysis of MSRs, there was no impairment to the MSRs at March 31, 2010.

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 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.

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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) decreased to $11.1 million at March 31, 2010 from $12.6 million at June 30, 2009, a decrease of $1.4 million, or 11.3%. Nonaccruing loans and leases decreased $4.5 million from June 30, 2009 to March 31, 2010, to a total of $4.8 million. Accruing loans and leases delinquent more than 90 days increased $2.9 million to $5.0 million at March 31, 2010 from $2.1 million at June 30, 2009. Foreclosed assets increased $209,000 to $1.3 million at March 31, 2010, 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 0.90% at March 31, 2010, which is a decrease from 1.07% as reported at June 30, 2009.

Nonaccruing loans and leases decreased $4.5 million to $4.8 million at March 31, 2010 compared to $9.4 million at June 30, 2009. In the third fiscal quarter of 2010, a troubled debt restructuring of $6.5 million of loans for one agricultural relationship returned $4.0 million to performing status at March 31, 2010. The reported amount in nonaccrual status from this relationship consists of one loan totaling $2.5 million secured by agricultural business assets. The remaining loans and leases included in nonaccruing loans and leases at March 31, 2010 were six loans totaling $92,000 secured by one- to four-family real estate, eight loans totaling $732,000 secured by commercial real estate, 10 loans totaling $619,000 secured by commercial business assets, 23 leases totaling $350,000 secured by equipment, and 22 loans totaling $464,000 secured by consumer assets.

Accruing loans and leases delinquent more than 90 days increased $2.9 million, to $5.0 million at March 31, 2010 compared to $2.1 million at June 30, 2009. Included in accruing loans and leases delinquent more than 90 days at March 31, 2010 were four loans totaling $351,000 secured by commercial real estate, nine loans totaling $1.4 million secured by agricultural real estate, five loans totaling $1.5 million secured by commercial business assets, 19 loans totaling $1.1 million secured by agricultural business assets, six leases totaling $666,000 secured by equipment and three loans totaling $11,000 of unsecured overdraft and reserve accounts.

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

As of March 31, 2010, foreclosed assets increased by $209,000, or 19.3%, to $1.3 million as compared to $1.1 million at June 30, 2009. The balance at March 31, 2010 consisted of $401,000 of one- to four-family collateral owned, $346,000 of leased equipment owned, $482,000 of agricultural collateral owned, and $65,000 of consumer collateral owned.

At March 31, 2010, the Company had designated $32.3 million of its assets as special mention and $24.7 million of its assets as classified that management has determined need to be closely monitored because of possible credit problems of the borrowers or the cash flows of the secured properties. The Company also classified $9.5 million of trust preferred securities in accordance with OTS debt security classification guidelines. At March 31, 2010, the Company had $12.7 million in multi-family, commercial business, commercial real estate and agricultural participation loans purchased, of which $1.4 million were classified. These loans and leases were considered in determining the adequacy of the allowance for loan and lease losses. The allowance for loan and lease losses is established based on management’s evaluation of the risks probable in the loan and lease portfolio and changes in the nature and volume of loan and lease activity. Such evaluation, which includes a review of all loans and leases for which full collectability may not be reasonably assured, considers the estimated fair market value of the underlying collateral, present value of expected principal and interest payments, economic conditions, historical loss experience and other factors that warrant recognition in providing for an adequate loan and lease loss allowance.

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Although the Company’s management believes the March 31, 2010 recorded allowance for loan and lease losses was adequate to provide for probable losses on the related loans and leases, there can be no assurance the allowance will be adequate in the future.

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

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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
	March 31, 2010			June 30, 2009
	(Dollars in Thousands)
Nonaccruing loans and leases:
One- to four-family	$	92		$	977
Commercial real estate	732			177
Commercial business	620			405
Equipment finance leases	350			272
Consumer	464			355
Agricultural	2,591			7,195
Total	4,849			9,381

Accruing loans and leases delinquent more than 90 days:
Commercial real estate	351			277
Commercial business	1,511			349
Equipment finance leases	666			264
Consumer	10			8
Agricultural	2,456			1,194
Total	4,994			2,092

Foreclosed assets:
One- to four-family	401			406
Equipment finance leases	346			105
Consumer	65			92
Agricultural	482			482
Total (1)	1,294			1,085

Total nonperforming assets (2)	$	11,137		$	12,558

Ratio of nonperforming assets to total assets (3)	0.90		%	1.07		%

Ratio of nonperforming loans and leases to total loans and leases (4) (5)	1.12		%	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.

	Nine Months Ended March 31,
	2010			2009
	(Dollars in Thousands)

Balance at beginning of period	$	8,470		$	5,933
Charge-offs:
One-to four-family	(108		)	(97		)
Commercial real estate	(11		)	(108		)
Commercial business	(319		)	(36		)
Equipment finance leases	(263		)	(45		)
Consumer	(704		)	(661		)
Construction	(11		)	(35		)
Total charge-offs	(1,416		)	(982		)

Recoveries:
One-to four-family	4			4
Commercial business	—			2,217
Equipment finance leases	5			—
Consumer	124			162
Agricultural	—			5
Total recoveries	133			2,388

Net recoveries(charge-offs)	(1,283		)	1,406

Additions charged to operations	1,748			801

Balance at end of period	$	8,935		$	8,140

Ratio of allowance for loan and lease losses to total loans and leases at end of period (1)	1.02		%	0.97		%

Ratio of allowance for loan and lease losses to nonperforming loans and leases at end of period (2)	90.78		%	180.09		%

Ratio of net charge offs to average loans and leases for the year-to-date period (3)	0.20		%	(0.23		)%

(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 nine months ended March 31, 2010 and March 31, 2009 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	March 31, 2010				June 30, 2009
	(Dollars in Thousands)

One- to four-family	$	321	$	—	$	416	$	—
Commercial real estate	1,450		165		1,110		—
Multi-family real estate	190		—		192		—
Commercial business	1,741		67		2,136		153
Equipment finance leases	347		—		409		—
Consumer	1,378		—		1,280		—
Agricultural	3,226		50		2,724		50
Total	$	8,653	$	282	$	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	March 31, 2010					June 30, 2009
	(Dollars in Thousands)

Commercial real estate	4	$	896	165		3	177		$	—
Commercial business	6	591		67		4	453		153
Agricultural	3	6,343		50		2	7,997		50
Total	13	$	7,830	$	282	9	$	8,627	$	203

The allowance for loan and lease losses was $8.9 million at March 31, 2010, as compared to $8.1 million at March 31, 2009. The ratio of the allowance for loan and lease losses to total loans and leases was 1.02% at March 31, 2010, compared to 0.97% at March 31, 2009. 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 March 31, 2010, and March 31, 2009

General. The Company’s net income available to common shareholders was $1.8 million, or $0.26 in basic and $0.26 in diluted earnings per common share for the three months ended March 31, 2010, a $40,000 decrease in earnings available to common shareholders compared to $1.8 million, or $0.45 in basic and $0.45 in diluted earnings per common share for the same period in the prior fiscal year. For the three months ended March 31, 2010, the return on average equity and the return on average assets was 7.84% and 0.60%, respectively, compared to 9.49% and 0.75%, respectively, for the same period in the prior fiscal year.

Interest, Dividend and Loan Fee Income. Interest, dividend and loan fee income was $14.1 million for the three months ended March 31, 2010, as compared to $15.0 million for the same period in the prior fiscal year, a decrease of $888,000 or 5.9%. 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 March 31, 2010, which is 6 basis points less than the average yield of 5.83% for the three months ended March 31, 2009. Investment securities had a decline in average yield of 178 basis points when comparing the third quarter of fiscal 2010 against the same period of the prior year. The average interest-earning assets for loans and leases receivables increased $18.9 million, or 2.3% to $856.4 million for the three months ended March 31, 2010, when compared to the three months ended March 31, 2009. Investment securities increased in average balance $6.5 million, or 2.6% to $259.3 million for the third 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 interest-earning assets was $1.2 million, which was partially offset by the revenue increase due to an increase in average interest-earning assets balances of $346,000.

Interest Expense. Interest expense was $4.8 million for the three months ended March 31, 2010, as compared to $5.9 million for the same period in the prior fiscal year, a decrease of $1.1 million or 18.6%. A $906,000 decrease in interest expense was the result of a decrease in the average rate paid of 1.54% on interest-bearing deposits for the three months ended March 31, 2010, compared to an average rate paid of 2.09% for the three months ended March 31, 2009. The average balance of interest-bearing deposits increased by $61.3 million, or 9.0%, which increased interest expense by $217,000 for the three months ended March 31, 2010, as compared to the same period of fiscal 2009. The net effect of interest-bearing deposits on interest expense due to rate and volume was a decrease of $689,000 for the third quarter of fiscal 2010 as compared to the third quarter of 2009. FHLB advances and other borrowings decreased by $26.2 million, or 10.8% for the three month period ended March 31, 2010, as compared to the three month period ended March 31, 2009, while the rate decreased to 2.80% from 3.19% for the periods. The resulting reduction in volume and rate decreased interest expense by $408,000 due to these liabilities. The average rate paid on total interest-bearing liabilities, which include interest-bearing deposits and liabilities, was 1.96% for the three months ended March 31, 2010 as compared to 2.50% for the same period in fiscal 2009.

Net Interest Income. The Company’s net interest income for the three months ended March 31, 2010, increased $203,000 or 2.2%, to $9.4 million compared to $9.2 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 $333,000. This was partially 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 $130,000. The Company’s Net Interest Margin, TE was 3.42% for the three months ended March 31, 2010, as compared to 3.43% for the three months ended March 31, 2009. 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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Provision for Losses on Loans and Leases. The allowance for loan and lease losses is maintained at a level which is considered by management to be adequate to absorb probable losses on existing loans and leases that may become uncollectible, based on an evaluation of the collectability of loans and leases and prior loan and lease loss experience. The evaluation takes into consideration such factors as changes in the nature and volume of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases, and current economic conditions that may affect the borrower’s ability to pay. The allowance for loan and lease losses is established through a provision for losses on loans and leases charged to expense.

During the three months ended March 31, 2010, the Company recorded a provision for losses on loans and leases of $981,000 compared to $414,000 for the three months ended March 31, 2009. See “Asset Quality and Potentially Problem Loans and Leases” for further discussion.

Noninterest Income. Noninterest income was $2.8 million for the quarter ended March 31, 2010, compared to $3.0 million for the quarter ended March 31, 2009, a decrease of $194,000 or 6.5%. This decrease is due primarily to decreases in net gain on sale of loans and net gain on sale of securities of $174,000 and $158,000, respectively. Net impairment credit losses on trust preferred securities recognized in earnings of $204,000 for the quarter ended March 31, 2010 was $157,000 less than the impairment credit losses recognized for the quarter ended March 31, 2009, which partially offset the decrease in noninterest income when comparing the two periods.

Loan servicing income decreased by $90,000 to $527,000 for the third 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 decreased $174,000 to $369,000 for the three months ended March 31, 2010 from $543,000 for the three months ended March 31, 2009, primarily due to a decrease in mortgage loan activity and the related loan sales when comparing the quarter-over-quarter activity. Net gain on the sale of securities totaled $229,000, a decrease of $158,000 for the three months ended March 31, 2010, as compared to the same period in fiscal 2009. In the third quarter of fiscal 2009, rates initially decreased enabling the Company to take advantage of elevated fixed-rate mortgage-backed securities prices while restructuring the portfolio for a higher rate environment. Net impairment credit losses on trust preferred securities recognized in earnings were $204,000 for the quarter ended March 31, 2010, compared to a net credit loss of $361,000 recognized in earnings for the third quarter of fiscal 2009.

Noninterest Expense. Noninterest expense was $8.5 million for the three months ended March 31, 2010 as compared to $8.4 million for the three months ended March 31, 2009, an increase of $115,000, or 1.4%. Occupancy and equipment, marketing and community development, and FDIC insurance increased $127,000, $97,000 and $53,000, respectively, for the third quarter of fiscal 2010 compared to the same period of fiscal 2009. Compensation and employee benefits decreased $154,000, or 2.9%, for the quarter ended March 31, 2010 compared to March 31, 2009. Net healthcare costs, also a component of compensation and employee benefits, decreased $218,000, to $486,000, the result of a reduction in specific high dollar claims from the prior year.

Compensation and employee benefits were $5.1 million for the three months ended March 31, 2010, a decrease of $154,000 or 2.9% when compared to the three months ended March 31, 2009. Performance-based incentives decreased $403,000, or 62.4%, due to a reduction in performance outcomes through the third quarter of fiscal 2010 as compared to the prior year’s outcomes. This decrease was partially offset by an increase in salaries and wages of $198,000, or 5.8% to $3.6 million for the same comparable period. The salary and wage expense increase was due to year-over-year salary increases and personnel additions. Net healthcare costs, which are included in the total for compensation and employee benefits, decreased $218,000, or 31.0% to $486,000 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. Retirement costs and other compensation costs increased $92,000 and $197,000, respectively, which partially offset the decreases from the compensation and healthcare costs. Retirement costs increased primarily due to higher pension costs as determined by an actuarial valuation in the first quarter of fiscal 2010, while other compensation costs increased primarily from payroll taxes, recruiting expenses and other related costs.

Occupancy and equipment increased $127,000, or 12.3% to $1.2 million for the three months ended March 31, 2010 as compared to the same period ended March 31, 2009. A new facility in Watertown, South Dakota was placed in service in July 2009, and subsequently sold as a leased back facility to an unrelated group in the third quarter of fiscal 2010. The depreciation of equipment, rental expense, and other operating expenses related to this new facility accounted for the majority of increased costs. Other equipment purchased since the third quarter of fiscal 2009 also contributed to the increase in depreciation expense since the prior fiscal year.

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Marketing and community development increased $97,000, or 43.7% to $319,000 for the third quarter of fiscal 2010, compared to the third quarter of fiscal 2009. Community development increases for the quarter as compared to the prior year’s period and an ancillary rewards program implemented during the current fiscal year were the main factors in the increase when compared to the third quarter of fiscal 2009.

FDIC insurance premiums increased $53,000, or 19.5%, to $325,000 for the third 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.

Income tax expense. The Company’s income tax expense for the three months ended March 31, 2010 decreased to $868,000 compared to $1.2 million for the same period in the prior fiscal year. The effective tax rate was 32.6% and 34.8% for the three months ended March 31, 2010 and 2009, respectively. The amount of permanent tax difference as a net deduction was a higher percentage to income before income taxes in the third quarter of fiscal 2010 than the same period of fiscal 2009. Permanent tax differences as a net deduction increased by $90,000 for the three months ended March 31, 2010 as compared to the same period of the prior year, while income before income tax decreased $673,000 in comparing the current quarter to the prior year’s quarter.

Comparison of the Nine Months Ended March 31, 2010, and March 31, 2009

General. The Company’s net income available to common shareholders was $4.6 million, or $0.86 in basic and $0.86 in diluted earnings per common share for the nine months ended March 31, 2010, a $1.0 million decrease in earnings available to common shareholders compared to $5.7 million, or $1.41 in basic and $1.40 in diluted earnings per common share for the same period in the prior fiscal year. For the nine months ended March 31, 2010, the return on average equity and the return on average assets was 7.55% and 0.52%, respectively, compared to 10.16% and 0.70%, 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 $2.4 million for the first nine months of fiscal 2010 compared to net impairment credit losses of $361,000 for the comparable period of fiscal 2009.

Interest, Dividend and Loan Fee Income. Interest, dividend and loan fee income was $43.1 million for the nine months ended March 31, 2010 as compared to $46.4 million for the same period in the prior fiscal year, a decrease of $3.3 million or 7.1%. This decrease was primarily the result of declining average yields on the interest-earning assets. Loans and leases receivable had an average yield of 5.77% for the nine months ended March 31, 2010, which is 35 basis points less than the average yield of 6.12% for the nine months ended March 31, 2009. Investment securities had a decline in average yield of 132 basis points when comparing the nine months of fiscal 2010 against the same period of the prior year. The average interest-earning assets for loans and leases receivables increased $31.5 million, or 3.8% to $852.2 million for the nine months ended March 31, 2010, when compared to the nine months ended March 31, 2009. Investment securities decreased in average balance $5.4 million, or 2.2% to $235.2 million for the first nine 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 $2.3 million and $1.4 million, respectively, which netted to a decrease of $822,000. The net revenue decrease from investment securities attributable to the overall declining yield and declining average volume was $2.3 million and $190,000, respectively.

Interest Expense. Interest expense was $16.1 million for the nine months ended March 31, 2010 as compared to $19.6 million for the same period in the prior fiscal year, a decrease of $3.4 million or 17.5%. A $3.8 million decrease in interest expense was the result of a decrease in the average rate paid of 1.76% on interest-bearing deposits for the nine months ended March 31, 2010 compared to an average rate paid of 2.38% for the nine months ended March 31, 2009. The average balance of interest-bearing deposits increased by $50.1 million, or 7.3%, resulting in an increase of $1.3 million in interest expense. The average balance of FHLB advances and other borrowings decreased by $30.7 million, or 13.0% for the nine month period ended March 31, 2010, as compared to the nine month period ended March 31, 2009. This net decrease in volume of FHLB advances and other borrowings accounted for a reduction in interest expense of $776,000. The average rate paid on total interest-bearing liabilities was 2.22% for the nine months ended March 31, 2010 as compared to 2.75% for the same period in fiscal 2009.

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Net Interest Income. The Company’s net interest income for the nine months ended March 31, 2010, increased $116,000 or 0.4%, to $27.0 million compared to $26.8 million for the same period in the prior fiscal year. The net effect of the net increase in volumes of interest-earning assets in excess of the increased volumes of interest-bearing liabilities, resulted in a net increase in net interest income of $714,000. 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 $598,000. The Company’s Net Interest Margin, TE was 3.32% for the nine months ended March 31, 2010, as compared to 3.39% for the nine months ended March 31, 2009. 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.

During the nine months ended March 31, 2010, the Company recorded a provision for losses on loans and leases of $1.7 million compared to $801,000 for the nine months ended March 31, 2009. See “Asset Quality and Potentially Problem Loans and Leases” for further discussion.

Noninterest Income. Noninterest income was $7.8 million for the nine months ended March 31, 2010 compared to $9.0 million for the nine months ended March 31, 2009, a decrease of $1.2 million or 13.6%. This decrease is due primarily to the net increase in net impairment credit losses on trust preferred securities recognized in earnings of $2.0 million for the nine months ended March 31, 2010. Net gain on sale of loans and net gain on sale of securities increased $323,000 and $853,000, respectively, which partially offset the decrease caused by the net impairment credit losses.

Net impairment credit losses on trust preferred securities recognized in earnings were $2.4 million for the nine months ended March 31, 2010 compared to $361,000 for the same period of the prior fiscal year. Fees on deposits decreased $231,000 to $4.1 million for the nine months ended March 31, 2010 as compared to the nine months ended March 31, 2009, due largely to a decrease in NSF and overdraft fees of $530,000 and partially offset by an increase in point-of-sale interchange and ATM fee income of $350,000. Loan servicing income decreased by $202,000 to $1.5 million for the nine 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 $323,000 to $1.4 million for the nine months ended March 31, 2010 as compared to $1.1 million for the nine months ended March 31, 2009, primarily due to an increase in mortgage loan activity and the related loan sales. Net gain on the sale of securities totaled $1.4 million, an increase of $853,000 for the nine months ended March 31, 2010 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 $26.3 million for the nine months ended March 31, 2010 as compared to $26.0 million for the nine months ended March 31, 2009, an increase of $264,000, or 1.0%. The increase was attributed to increases in salaries and wages of $679,000, occupancy and equipment of $322,000, and FDIC insurance premiums of $450,000. The increases in noninterest expense were neutralized primarily by a decrease in performance-based incentive pay and healthcare costs of $1.3 million and $462,000, respectively.

Compensation and employee benefits were $15.4 million for the nine months ended March 31, 2010, a decrease of $801,000 or 5.0% when compared to the nine months ended March 31, 2009. Performance-based incentive pay decreased $1.3 million, or 62.2% due to a reduction in performance outcomes through the third quarter of fiscal 2010 as compared to the prior year’s outcomes. This decrease in compensation was partially offset by an increase in salaries and wages of $679,000, or 6.5% to $11.2 million for this same comparable period. The salary and wage expense increase was due to year-over-year salary increases and personnel additions. Net healthcare costs, which are included in the total for compensation and employee benefits, decreased $462,000, or 23.0% to $1.5 million due to a reduction of specific high dollar claims and general overall utilization for the nine 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. Retirement costs, which are included in the total for compensation and employee benefits, increased $269,000, or 41.3% to $919,000 for the year-to-date amounts in fiscal 2010 compared to fiscal 2009 primarily due to the increased costs determined during the actuarial valuation in the first quarter of fiscal 2010.

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Occupancy and equipment increased $322,000, or 10.7% to $3.3 million for the nine months ended March 31, 2010 as compared to the same period ended March 31, 2009. A new facility in Watertown, South Dakota was placed in service in July 2009, and subsequently sold as a leased back facility to an unrelated group in the third quarter of fiscal 2010. The depreciation of equipment, rental expense, and other operating expenses related to this new facility accounted for the majority of increased costs. Other equipment purchased since the third quarter of fiscal 2009 also contributed to the increase in depreciation expense since the prior fiscal year.

FDIC insurance premiums increased $450,000, to $985,000 for the nine 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 nine months of fiscal 2010 versus fiscal 2009.

Income tax expense. The Company’s income tax expense for the nine months ended March 31, 2010 decreased to $2.1 million compared to $3.0 million for the same period in the prior fiscal year. The effective tax rate was 31.5% and 33.7% for the nine months ended March 31, 2010 and 2009, respectively. The amount of permanent tax difference as a net deduction was a higher percentage to income before income taxes in the first three quarters of fiscal 2010 than the same period of fiscal 2009. Permanent tax differences as a net deduction increased by $16,000 for the nine months ended March 31, 2010 as compared to the same period of the prior year, while income before income tax decreased $2.3million in comparing the current quarter to the prior year’s quarter.

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 March 31, 2010, 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;

· $6.0 million in an uncommitted, unsecured line of federal funds with United Bankers’ Bank;

· $57.4 million of available credit from the Federal Reserve Bank; and

· $56.9 million of available credit from FHLB of Des Moines (after deducting outstanding borrowings with FHLB of Des Moines).

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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 March 31, 2010. 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.

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 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.

In connection with entering into the Loan Agreement, the Company also entered into a Commercial Pledge Agreement with the Lender, granting the Lender a first security interest in all of the stock of the Bank. The Loan Agreement contains customary events of default and affirmative covenants with which the Company and Bank were in compliance at March 31, 2010.

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 March 31, 2010, the Bank had $18.4 million in out-of-market certificates of deposit.

The Bank anticipates that it will have sufficient funds available to meet current loan commitments. At March 31, 2010, the Bank had outstanding commitments to originate and purchase mortgage and commercial loans of $40.9 million and to sell mortgage loans of $31.6 million. Commitments by the Bank to originate loans are not necessarily executed by the customer. The Bank monitors the ratio of commitments to funding for use in liquidity management. At March 31, 2010, the Bank had outstanding commitments to sell and purchase $3.1 million and $125,000, respectively, of investment securities available for sale.

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

Savings institutions insured by the Federal Deposit Insurance Corporation are required by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 to meet three regulatory capital requirements. If a requirement is not met, regulatory authorities may take legal or administrative actions, including restrictions on growth or operations or, in extreme cases, seizure. Institutions not in compliance may apply for an exemption from the requirements and submit a recapitalization plan. At March 31, 2010, the Bank met all current regulatory capital requirements.

The minimum OTS Tier 1 (core) capital requirement for well-capitalized institutions is 5.00% of total adjusted assets for thrifts. The Bank had Tier 1 (core) capital of 8.63% at March 31, 2010. The minimum OTS total risk-based capital requirement for well-capitalized institutions is 10.00% of risk-weighted assets. The Bank had total risk-based capital of 11.72% at March 31, 2010.

Impact of Inflation and Changing Prices

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

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Recent Accounting Pronouncements

FASB Establishes Accounting Standards Codification

In June 2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB Accounting Standards Codification (“the Codification” or “ASC”) as the official single source of authoritative U.S. generally accepted accounting principles (“GAAP”). All existing accounting standards are superseded. All other accounting guidance not included in the Codification will be considered non-authoritative. The Codification also includes all relevant Securities and Exchange Commission (“SEC”) guidance organized using the same topical structure in separate sections within the Codification.

Following the Codification, the Board will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.

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.

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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.

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 updated guidance was effective January 1, 2010, and the adoption did not have a material effect on the Company’s consolidated financial condition, results of operations or 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.

In April, 2010, the FASB issued ASU No. 2010-18,”Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset”. As a result of this update, modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU No. 2010-18 is effective for the Company in the first interim period of Fiscal 2011 (September 30, 2010) and the annual reporting period beginning June 30, 2011. Management is currently evaluating the impact of adopting this update on the Company’s consolidated financial condition, results of operations and cash flow.

During the third quarter of fiscal 2010, the FASB issued several ASUs: ASU No. 2010-08 through ASU No. 2010-18. Except for ASU no. 2010-18 mentioned above, the ASUs issued entail technical corrections or clarifications to existing guidance or affect guidance related to specialized industries or entities and therefore have minimal, if any, impact on the Company.

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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.

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 March 31, 2010 and 2009, 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 nine months ended March 31, 2010 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.

March 31, 2010
			Estimated Increase
Change in	Estimated		(Decrease) in NPV
Interest Rates	NPV Amount		Amount			Percent
Basis Points	(Dollars in Thousands)

+300	$	120,720	$	7,216		6	%
+200	120,421		6,917			6
+100	118,279		4,775			4
—	113,504		—			—
-100	101,355		(12,149		)	(11	)

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

+300	$	113,963	$	4,196		4	%
+200	114,842		5,075			5
+100	114,075		4,308			4
—	109,767		—			—
-100	100,012		(9,755		)	(9	)

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 March 31, 2010, 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 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 March 31, 2010. There were no changes in the Company’s internal control over financial reporting that occurred during the third quarter ended March 31, 2010, 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 quarters ended September 30, 2009 and December 31, 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 March 31, 2010.

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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 three 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(ASC Topic 820), 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 March 31, 2010, we carried the six TRUPS pools at an adjusted cost basis of $9.5 million and a fair value of $4.4 million. We determined that four debt securities exhibited OTTI of $2.0 million, of which $2.4 million of credit loss was recognized through earnings for the nine months ended March 31, 2010, with the balance of $380,000 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 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.

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 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. At March 31, 2010 $4.0 million is recorded as a prepaid asset.

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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. [Removed and Reserved]

Item 5. Other Information

None

Item 6. Exhibits

Regulation S-K Exhibit Number		Document

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

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SIGNATURES

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

			HF Financial Corp.
			(Registrant)


Date:	May 14, 2010	By:	/s/ Curtis L. Hage
			Curtis L. Hage, Chairman, President and Chief Executive Officer (Principal Executive Officer)

Date:	May 14, 2010	By:	/s/ Darrel L. Posegate
			Darrel L. Posegate, Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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Exhibit Index

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