HF Financial (HFFC) 10-Q 2012 Q3 Quarterly report

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, 2012

OR

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 x 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 April 30, 2012, there were 7,042,471 shares of the registrant’s common stock outstanding.

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, 2012 and June 30, 2011	1
	Consolidated Statements of Income for the Three and Nine Months Ended March 31, 2012 and 2011	2
	Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2012 and 2011	3
	Notes to Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	52
Item 4.	Controls and Procedures	53
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	54
Form 10-Q	Signature Page	55

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except share data)

	March 31, 2012			June 30, 2011
	(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents	$	70,002		$	55,617
Securities available for sale	337,912			234,860
Correspondent bank stock	8,065			8,065
Loans held for sale	8,561			11,991
Loans and leases receivable	711,016			825,493
Allowance for loan and lease losses	(10,540		)	(14,315		)
Net loans and leases receivable	700,476			811,178
Accrued interest receivable	5,744			7,607
Office properties and equipment, net of accumulated depreciation	15,234			14,969
Foreclosed real estate and other properties	2,611			712
Cash value of life insurance	16,133			15,704
Servicing rights, net	12,632			12,952
Goodwill, net	4,366			4,366
Other assets	14,390			13,300
Total assets	$	1,196,126		$	1,191,321
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits	$	892,833		$	893,157
Advances from Federal Home Loan Bank and other borrowings	147,399			147,395
Subordinated debentures payable to trusts	27,837			27,837
Advances by borrowers for taxes and insurance	18,719			11,587
Accrued expenses and other liabilities	12,788			16,899
Total liabilities	1,099,576			1,096,875
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized, none outstanding	—			—
Common stock, $.01 par value, 10,000,000 shares authorized, 9,121,992 and 9,057,727 shares issued at March 31, 2012 and June 30, 2011, respectively	91			91
Additional paid-in capital	45,504			45,116
Retained earnings, substantially restricted	82,566			81,554
Accumulated other comprehensive (loss), net of related deferred tax effect	(714		)	(1,418		)
Less cost of treasury stock, 2,083,455 and 2,083,455 shares at March 31, 2012 and June 30, 2011, respectively	(30,897		)	(30,897		)
Total stockholders’ equity	96,550			94,446
Total liabilities and stockholders’ equity	$	1,196,126		$	1,191,321

See accompanying notes to unaudited consolidated financial statements.

1

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2012			2011			2012			2011
Interest, dividend and loan fee income:
Loans and leases receivable	$	9,833		$	11,781		$	32,513		$	37,029
Investment securities and interest-earning deposits	1,184			1,396			3,591			4,350
	11,017			13,177			36,104			41,379
Interest expense:
Deposits	1,664			2,280			5,692			7,320
Advances from Federal Home Loan Bank and other borrowings	1,608			1,851			4,824			5,747
	3,272			4,131			10,516			13,067
Net interest income	7,745			9,046			25,588			28,312
Provision for losses on loans and leases	264			1,949			2,906			6,584
Net interest income after provision for losses on loans and leases	7,481			7,097			22,682			21,728
Noninterest income:
Fees on deposits	1,360			1,399			4,528			4,598
Loan servicing income, net	8			306			873			1,225
Gain on sale of loans	671			624			1,884			2,474
Earnings on cash value of life insurance	168			165			512			499
Trust income	206			170			560			486
Gain on sale of securities, net	539			132			874			623
Loss on disposal of closed-branch fixed assets	(233		)	—			(245		)	—
Total other-than-temporary impairment losses	—			(399		)	—			(399		)
Portion of loss recognized in other comprehensive income (before taxes)	—			(150		)	—			(150		)
Net impairment losses recognized in earnings	—			(549		)	—			(549		)
Other	288			327			818			841
	3,007			2,574			9,804			10,197
Noninterest expense:
Compensation and employee benefits	4,910			5,400			15,532			16,479
Occupancy and equipment	1,076			1,185			3,269			3,462
FDIC insurance	261			471			796			1,222
Check and data processing expense	728			719			2,169			2,085
Professional fees	560			499			2,464			1,663
Marketing and community investment	323			215			1,087			1,090
Foreclosed real estate and other properties, net	137			31			222			166
Other	701			569			1,989			1,990
	8,696			9,089			27,528			28,157
Income before income taxes	1,792			582			4,958			3,768
Income tax expense	580			123			1,590			1,076
Net income	$	1,212		$	459		$	3,368		$	2,692
Comprehensive income	$	1,922		$	1,810		$	4,072		$	2,926
Basic earnings per common share:	$	0.17		$	0.07		$	0.48		$	0.39
Diluted earnings per common share:	0.17			0.07			0.48			0.39
Dividends declared per common share	0.11			0.11			0.34			0.34

See accompanying notes to unaudited consolidated financial statements.

2

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except share data)

(Unaudited)

	Nine Months Ended March 31,
	2012			2011
Cash flows from operating activities
Net income	$	3,368		$	2,692
Adjustments to reconcile net income to net cash provided by operating activities
Provision for losses on loans and leases	2,906			6,584
Provision for allowance on servicing rights	330			—
Depreciation	1,350			1,437
Amortization of discounts and premiums on securities and other	4,350			3,998
Stock based compensation	253			386
Net change in loans held for resale	5,314			21,092
(Gain) on sale of loans, net	(1,884		)	(2,474		)
Realized (gain) on sale of securities, net	(874		)	(623		)
Other-than-temporary impairments recognized in noninterest income	—			549
(Gains) losses and provision-for-losses on sales of foreclosed real estate and other properties, net	24			44
Loss on disposal of office properties and equipment, net	270			—
Change in other assets and liabilities	(5,705		)	(3,244		)
Net cash provided by operating activities	9,702			30,441
Cash flows from investing activities
Loan participations purchased	—			(412		)
Net change in loans outstanding	105,439			30,644
Securities available for sale
Sales, maturities, repayments and adjustments	91,945			75,973
Purchases	(195,421		)	(77,848		)
Purchase of correspondent bank stock	(997		)	(3,604		)
Redemption of correspondent bank stock	997			5,267
Proceeds from sale of office properties and equipment	115			—
Purchase of office properties and equipment	(2,000		)	(1,469		)
Purchase of servicing rights from external sources	(426		)	(590		)
Proceeds from sale of foreclosed real estate and other properties	440			854
Net cash provided by investing activities	92			28,815
Cash flows from financing activities
Net (decrease) in deposit accounts	(324		)	(25,866		)
Proceeds of advances from Federal Home Loan Bank and other borrowings	79,634			509,876
Payments on advances from Federal Home Loan Bank and other borrowings	(79,630		)	(538,209		)
Increase in advances by borrowers	7,132			7,239
Proceeds from issuance of common stock	135			140
Cash dividends paid	(2,356		)	(2,351		)
Net cash provided by (used in) financing activities	4,591			(49,171		)
Increase in cash and cash equivalents	14,385			10,085
Cash and cash equivalents
Beginning	55,617			20,805
Ending	$	70,002		$	30,890
Supplemental disclosures of cash flows information
Cash payments for interest	$	11,785		$	13,598
Cash payments for income and franchise taxes, net	2,028			1,443

See accompanying notes to unaudited consolidated financial statements.

3

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2012 AND 2011

(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, 2011 (“fiscal 2011”), 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”), 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 11 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 4, 2012, the date of the filing of the consolidated financial statements with the Securities and Exchange Commission.

Reclassification

Certain balances in the consolidated financial statements of prior periods have been reclassified to conform to the current period’s presentation.

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, 2012:

	Amount		Percent
	(Dollars in Thousands)
Tier I (core) capital (to adjusted total assets):
Required	$	59,256	5.00	%
Actual	112,578		9.50
Excess over required	53,322		4.50
Total Risk-based capital (to risk-weighted assets):
Required	$	80,897	10.00	%
Actual	122,645		15.16
Excess over required	41,748		5.16

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

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outstanding include the nonvested shares of the Company.  See Note 10 “Stock-Based Compensation Plans” for additional information related to the nonvested share activity.  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, 2012 and 2011 was 6,992,886 and 6,978,561, respectively.  The weighted average number of basic common shares outstanding for the nine months ended March 31, 2012 and 2011 was 6,979,858 and 6,965,120, respectively.

Dilutive earnings per common share is similar to the computation of basic earnings per common share except the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive options outstanding had been exercised. The weighted average number of common and dilutive potential common shares outstanding for the three months ended March 31, 2012 and 2011 was 6,996,215 and 6,981,533, respectively.  The weighted average number of common and dilutive potential common shares outstanding for the nine months ended March 31, 2012 and 2011 was 6,980,280 and 6,966,878, 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, 2012
			Total Other-Than
			Temporary
			Impairment
			Recognized in			Adjusted		Gross		Gross
	Amortized		Accumulated Other			Carrying		Unrealized		Unrealized			Fair
	Cost		Comprehensive Income			Cost		Gains		(Losses)			Value
Debt securities:
U.S. government agencies	$	2,010	$	—		$	2,010	$	11	$	—		$	2,021
Municipal bonds	10,317		—			10,317		344		(3		)	10,658
	12,327		—			12,327		355		(3		)	12,679
Equity securities:
FNMA	8		(8		)	—		—		—			—
Federal Ag Mortgage	7		—			7		2		—			9
Other investments	253		—			253		—		—			253
	268		(8		)	260		2		—			262
Agency residential mortgage-backed securities	321,020		—			321,020		4,280		(329		)	324,971
	$	333,615	$	(8	)	$	333,607	$	4,637	$	(332	)	$	337,912

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	March 31, 2011
			Total Other-Than
			Temporary
			Impairment
			Recognized in			Adjusted		Gross		Gross
	Amortized		Accumulated Other			Carrying		Unrealized		Unrealized			Fair
	Cost		Comprehensive Income			Cost		Gains		(Losses)			Value
Debt securities:
U.S. government agencies	$	4,018	$	—		$	4,018	$	7	$	(34	)	$	3,991
Municipal bonds	13,045		—			13,045		394		(20		)	13,419
Trust preferred securities	12,431		(3,629		)	8,802		—		(5,399		)	3,403
	29,494		(3,629		)	25,865		401		(5,453		)	20,813
Equity securities:
FNMA	8		(8		)	—		—		—			—
Federal Ag Mortgage	7		—			7		—		—			7
Other investments	253		—			253		—		—			253
	268		(8		)	260		—		—			260
Agency residential mortgage-backed securities	238,697		—			238,697		4,596		(423		)	242,870
	$	268,459	$	(3,637	)	$	264,822	$	4,997	$	(5,876	)	$	263,943

Management has a process to identify securities that could potentially have a credit impairment that is other-than-temporary. This process involves evaluating the length of time and extent to which the fair value has been less than the amortized cost basis, reviewing available information regarding the financial position of the issuer, monitoring the rating of the security, and projecting cash flows. Management also determines if 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.

The following table presents the fair value and age of gross unrealized losses by investment category at March 31, 2012:

	Less than 12 Months					12 Months or More					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		(Losses)			Value		(Losses)			Value		(Losses)
	(Dollars in Thousands)
Debt securities:
Municipal bonds	$	573	$	(3	)	$	—	$	—		$	573	$	(3	)
Agency residential mortgage-backed securities	$	61,020	$	(325	)	$	358	$	(4	)	$	61,378	$	(329	)
	$	61,593	$	(328	)	$	358	$	(4	)	$	61,951	$	(332	)

The unrealized losses reported for municipal bonds relate to five 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

6

unrealized losses as of March 31, 2012 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 amortized cost.

The unrealized losses reported for agency residential mortgage-backed securities relate to 27 securities issued by 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, 2012, 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 balance of credit losses on securities held for which a portion of other-than-temporary impairment was recognized in other comprehensive income at the beginning of the fiscal year was $8,000, which was all attributed to FNMA common stock.  There were no additional credit losses for which an other-than-temporary impairment was recognized for the nine months ended March 31, 2012.

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

	March 31, 2012
									TOTAL
	Less than		1 to 5		5 to 10		Over 10		Adjusted		Fair
	1 Year		Years		Years		Years		Carrying Cost		Values
	(Dollars in Thousands)
U.S. government agencies	$	—	$	2,010	$	—	$	—	$	2,010	$	2,021
Municipal bonds	1,246		4,684		3,190		1,197		10,317		10,658
Agency residential mortgage- backed securities	—		—		3,313		317,707		321,020		324,971
Total investment securities	$	1,246	$	6,694	$	6,503	$	318,904	$	333,347	$	337,650

For the three months ended March 31, 2012, gross proceeds from the securities sold at a gain were $31.7 million, resulting in a gain on sale of securities of $539,000.  This compares to gross proceeds of $7.2 million, resulting in a gain on sale of securities of $132,000 for the three months ended March 31, 2011.  No securities were sold for a loss during the third quarter of fiscal 2012 or fiscal 2011.

For the nine months ended March 31, 2012, gross proceeds from the securities sold at a gain were $50.6 million, resulting in a gain on sale of securities of $874,000.  This compares to gross proceeds of $25.1 million, resulting in a gain on sale of securities of $623,000 for the nine months ended March 31, 2011.  No securities were sold for a loss for the first nine months of fiscal 2012 or fiscal 2011.

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NOTE 5—LOANS AND LEASES RECEIVABLE

Loans and leases receivable by classes within portfolio segments at March 31, 2012 and June 30, 2011, consist of the following:

	March 31, 2012				June 30, 2011
	Amount		Percent		Amount		Percent
	(Dollars in Thousands)
Residential:
One-to four-family	$	56,133	7.9	%	$	57,766	7.0	%
Construction	3,089		0.4	%	4,186		0.5	%
Commercial:
Commercial business (1)	78,527		11.0	%	104,227		12.6	%
Equipment finance leases	3,771		0.5	%	6,279		0.8	%
Commercial real estate:
Commercial real estate	236,859		33.3	%	219,800		26.6	%
Multi-family real estate	44,479		6.3	%	49,307		6.0	%
Construction	14,351		2.0	%	13,584		1.7	%
Agricultural:
Agricultural real estate	81,018		11.4	%	111,808		13.5	%
Agricultural business	83,665		11.8	%	138,818		16.8	%
Consumer:
Consumer direct	20,379		2.9	%	20,120		2.4	%
Consumer home equity	85,408		12.0	%	94,037		11.4	%
Consumer overdraft & reserve	2,897		0.4	%	3,426		0.4	%
Consumer indirect	440		0.1	%	2,135		0.3	%
Total loans and leases receivable (2)	$	711,016	100.0	%	$	825,493	100.0	%

(1) Includes $2,377 and $2,377 tax exempt leases at March 31, 2012 and June 30, 2011, respectively.

(2) Net of undisbursed portion of loans in process and deferred loan fees and discounts.

The following table summarizes the activity in the allowance for loan and lease losses by portfolio segment for the three months ended March 31, 2012 and 2011:

							Commercial
March 31, 2012	Residential			Commercial			Real Estate			Agricultural			Consumer			Total
	(Dollars in Thousands)
Balance at beginning of period	$	246		$	1,198		$	1,697		$	6,179		$	1,701		$	11,021
Charge-offs	(1		)	(339		)	(550		)	(219		)	(182		)	(1,291		)
Recoveries	5			38			10			473			20			546
Provisions	(14		)	141			762			(1,140		)	515			264
Balance at end of period	$	236		$	1,038		$	1,919		$	5,293		$	2,054		$	10,540

						Commercial
March 31, 2011	Residential		Commercial			Real Estate			Agricultural			Consumer			Total
	(Dollars in Thousands)
Balance at beginning of period	$	234	$	1,920		$	1,823		$	7,268		$	1,804		$	13,049
Charge-offs	—		(209		)	(55		)	(951		)	(316		)	(1,531		)
Recoveries	—		—			—			—			28			28
Provisions	4		214			(169		)	1,722			178			1,949
Balance at end of period	$	238	$	1,925		$	1,599		$	8,039		$	1,694		$	13,495

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The following table summarizes the activity in the allowance for loan and lease losses by portfolio segment for the nine months ended March 31, 2012 and 2011:

							Commercial
March 31, 2012	Residential			Commercial			Real Estate			Agricultural			Consumer			Total
	(Dollars in Thousands)
Balance at beginning of period	$	333		$	1,464		$	1,683		$	9,266		$	1,569		$	14,315
Charge-offs	(100		)	(1,053		)	(941		)	(4,490		)	(837		)	(7,421		)
Recoveries	10			85			32			509			104			740
Provisions	(7		)	542			1,145			8			1,218			2,906
Balance at end of period	$	236		$	1,038		$	1,919		$	5,293		$	2,054		$	10,540

							Commercial
March 31, 2011	Residential			Commercial			Real Estate			Agricultural			Consumer			Total
	(Dollars in Thousands)
Balance at beginning of period	$	216		$	2,558		$	1,885		$	3,633		$	1,283		$	9,575
Charge-offs	(15		)	(576		)	(64		)	(1,231		)	(932		)	(2,818		)
Recoveries	1			15			—			—			138			154
Provisions	36			(72		)	(222		)	5,637			1,205			6,584
Balance at end of period	$	238		$	1,925		$	1,599		$	8,039		$	1,694		$	13,495

The following tables summarize the related statement balances by portfolio segment at March 31, 2012 and June 30, 2011:

						Commercial
March 31, 2012	Residential			Commercial		Real Estate		Agricultural		Consumer		Total
	(Dollars in Thousands)
Individually evaluated for impairment	$	32		$	60	$	59	$	2,146	$	30	$	2,327
Collectively evaluated for impairment	204			978		1,860		3,147		2,024		8,213
Allowance for loan and lease losses	236		��	1,038		1,919		5,293		2,054		10,540
Individually evaluated for impairment	335			110		270		15,675		121		16,511
Collectively evaluated for impairment	58,887			82,188		295,419		149,008		109,003		694,505
Loans and leases receivable	$	59,222		$	82,298	$	295,689	$	164,683	$	109,124	$	711,016

					Commercial
June 30, 2011	Residential		Commercial		Real Estate		Agricultural		Consumer		Total
	(Dollars in Thousands)
Individually evaluated for impairment	$	28	$	127	$	272	$	6,177	$	34	$	6,638
Collectively evaluated for impairment	305		1,337		1,411		3,089		1,535		7,677
Allowance for loan and lease losses	333		1,464		1,683		9,266		1,569		14,315
Individually evaluated for impairment	338		659		784		28,997		178		30,956
Collectively evaluated for impairment	61,614		109,847		281,907		221,629		119,540		794,537
Loans and leases receivable	$	61,952	$	110,506	$	282,691	$	250,626	$	119,718	$	825,493

9

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. For loans other than residential and consumer, the Company analyzes loans individually, by classifying the loans as to credit risk. This analysis includes non-term loans, regardless of balance and term loans with an outstanding balance greater than $100,000.  Each loan is reviewed annually, at a minimum.  Specific events applicable to the loan may trigger an additional review prior to its scheduled review, if such event is determined to possibly modify the risk classification.  The summary of the analysis for the portfolio is calculated on a monthly basis. The Company uses the following definitions for risk ratings:

Pass -  Loans classified as pass represent loans that are evaluated and are performing under the stated terms. Pass rated assets are analyzed by the pay capacity, the current net worth, and the value of the loan collateral of the obligor.

Special Mention -  Loans classified as special mention possess potential weaknesses that require management attention, but do not yet warrant adverse classification. While the status of a loan put on this list may not technically trigger their classification as Substandard or Doubtful, it is considered a proactive way to identify potential issues and address them before the situation deteriorates further and does result in a loss for the Bank.

Substandard -  Loans classified as substandard are inadequately protected by the current net worth, paying capacity of the obligor, or by the collateral pledged. Substandard loans must have a well-defined weakness or weaknesses that jeopardize the repayment of the debt as originally contracted. They are characterized by the distinct possibility that the Bank will sustain a loss if the deficiencies are not corrected.

Doubtful -  Loans classified as doubtful have the weaknesses of those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that fall into this class are deemed collateral dependent and an individual impairment analysis is performed on all relationships. Loans in this category are allocated a specific reserve if the estimated discounted cash flows from the loan (or collateral value less cost to sell for collateral dependent loans) do not support the outstanding loan balance or are charged off if deemed uncollectible.

The following tables summarize the credit quality indicators used to determine the credit quality by class within the portfolio segments at March 31, 2012 and June 30, 2011:

Credit risk profile by internally assigned grade - Commercial, Commercial real estate and Agricultural portfolio segments:

	March 31, 2012								June 30, 2011
			Special								Special
	Pass		Mention		Substandard		Doubtful		Pass		Watch		Substandard		Doubtful
	(Dollars in Thousands)
Commercial:
Commercial business	$	71,605	$	2,584	$	4,338	$	—	$	94,475	$	1,344	$	8,422	$	659
Equipment finance leases	3,595		114		63		—		5,928		134		111		60
Commercial real estate:
Commercial real estate	217,803		88		18,968		—		217,069		4,437		3,459		784
Multi-family real estate	43,470		—		1,009		—		48,650		—		1,032		—
Construction	14,351		—		—		—		20,996		—		—		—
Agricultural:
Agricultural real estate	63,913		4,438		10,854		1,813		76,622		18,638		3,915		13,736
Agricultural business	74,715		3,011		5,669		269		102,356		20,435		3,673		12,705
	$	489,452	$	10,235	$	40,901	$	2,082	$	566,096	$	44,988	$	20,612	$	27,944

Residential and consumer loans are managed on a pool basis due to their homogeneous nature.  Loans that are delinquent 90 days or more or are not accruing interest are considered nonperforming.

10

The following table presents the recorded investment in residential and consumer loans by class within the portfolio segment based on payment activity at March 31, 2012 and June 30, 2011:

Credit risk profile based on payment activity - Residential and Consumer portfolio segments:

	March 31, 2012				June 30, 2011
	Performing		Nonperforming		Performing		Nonperforming
	(Dollars in Thousands)
Residential:
One- to four-family	$	55,200	$	933	$	56,143	$	1,979
Construction	3,089		—		4,199		—
Consumer:
Consumer direct	20,359		21		20,066		54
Consumer home equity	85,147		260		93,586		451
Consumer OD & reserves	2,897		—		3,426		—
Consumer indirect	439		1		2,081		42
	$	167,131	$	1,215	$	179,501	$	2,526

The following table summarizes the aging of the past due financing receivables by classes within the portfolio segments and related accruing and nonaccruing balances at March 31, 2012 and June 30, 2011:

											Nonperforming Loans
											Recorded
	Accruing and Nonaccruing Loans										Investment >
	30- 59 Days		60- 89 Days		Greater Than		Total				90 Days and		Nonaccrual
At March 31, 2012	Past Due		Past Due		89 Days		Past Due		Current		Accruing (1)		Balance		Total
	(Dollars in Thousands)
Residential:
One-to four-family	$	25	$	204	$	904	$	1,133	$	55,000	$	107	$	826	$	933
Construction	—		—		—		—		3,089		—		—		—
Commercial:
Commercial business	142		34		599		775		77,752		—		685		685
Equipment finance leases	27		11		—		38		3,733		—		28		28
Commercial real estate:
Commercial real estate	81		346		117		544		236,315		—		1,834		1,834
Multi-family real estate	—		—		32		32		44,447		—		32		32
Construction	—		—		—		—		14,351		—		—		—
Agricultural:
Agricultural real estate	—		611		3,177		3,788		77,230		396		12,470		12,866
Agricultural business	1,341		—		5,052		6,393		77,272		633		4,613		5,246
Consumer:
Consumer direct	27		2		—		29		20,350		—		21		21
Consumer Home equity	444		263		242		949		84,459		—		260		260
Consumer OD & Reserve	3		4		—		7		2,890		—		—		—
Consumer indirect	5		1		1		7		433		—		1		1
Total	$	2,095	$	1,476	$	10,124	$	13,695	$	697,321	$	1,136	$	20,770	$	21,906

(1)   Loans accruing which are delinquent greater than 90 days have either government guarantees or acceptable loan-to-value ratios.

11

											Nonperforming Loans
											Recorded
	Accruing and Nonaccruing Loans										Investment >
	30- 59 Days		60- 89 Days		Greater Than		Total				90 Days and		Nonaccrual
At June 30, 2011	Past Due		Past Due		89 Days		Past Due		Current		Accruing (1)		Balance		Total
	(Dollars in Thousands)
Residential:
One-to four-family	$	6	$	137	$	1,949	$	2,092	$	56,030	$	113	$	1,866	$	1,979
Construction	—		—		—		—		4,199		—		—		—
Commercial:
Commercial business	875		—		736		1,611		103,289		214		687		901
Equipment finance leases	14		—		126		140		6,093		—		126		126
Commercial real estate:
Commercial real estate	1,696		154		801		2,651		223,098		56		784		840
Multi-family real estate	—		—		—		—		49,682		—		—		—
Construction	—		—		—		—		20,996		—		—		—
Agricultural:
Agricultural real estate	1,326		902		4,339		6,567		106,344		1,399		14,001		15,400
Agricultural business	246		806		8,012		9,064		130,105		3,855		12,839		16,694
Consumer:
Consumer direct	32		3		54		89		20,031		—		54		54
Consumer Home equity	429		10		450		889		93,148		—		451		451
Consumer OD & Reserve	8		1		—		9		3,417		—		—		—
Consumer indirect	25		2		37		64		2,059		6		36		42
Total	$	4,657	$	2,015	$	16,504	$	23,176	$	818,491	$	5,643	$	30,844	$	36,487

(1)  Loans accruing which are delinquent greater than 90 days have either government guarantees or acceptable loan-to-value ratios.

At March 31, 2012, the Company has identified $16.5 million of loans as impaired which includes performing troubled debt restructurings.  A loan is identified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement and thus are placed on non-accrual status. Interest income on impaired loans is recognized on a cash basis. The average carrying amount is calculated for each quarter by using the daily average balance, which is then averaged with the other quarters’ averages to determine an annual average balance.

12

The following table summarizes the Company’s impaired loans by class of loans and the specific valuation allowance at March 31, 2012 and June 30, 2011:

	At March 31, 2012						At June 30, 2011
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance (1)		Allowance		Investment		Balance (1)		Allowance
	(Dollars in Thousands)
With no related allowance recorded:
Commercial business	$	—	$	—	$	—	$	440	$	540	$	—
Commercial real estate	—		—		—		145		145		—
Agricultural real estate	476		476		—		1,130		1,130		—
Agricultural business	—		—		—		397		816		—
Consumer direct	—		—		—		55		54		—
	476		476		—		2,167		2,685		—
With an allowance recorded:
One-to four-family	335		335		32		338		338		28
Commercial business	110		329		60		219		439		127
Commercial real estate	270		270		59		639		639		272
Agricultural real estate	11,401		11,818		1,847		12,992		12,992		1,210
Agricultural business	3,798		5,513		299		14,478		14,478		4,967
Consumer direct	—		—		—		123		123		34
Consumer home equity	121		121		30		—		—		—
	16,035		18,386		2,327		28,789		29,009		6,638
Total:
One-to four-family	335		335		32		338		338		28
Commercial business	110		329		60		659		979		127
Commercial real estate	270		270		59		784		784		272
Agricultural real estate	11,877		12,294		1,847		14,122		14,122		1,210
Agricultural business	3,798		5,513		299		14,875		15,294		4,967
Consumer direct	—		—		—		178		177		34
Consumer home equity	121		121		30		—		—		—
	$	16,511	$	18,862	$	2,327	$	30,956	$	31,694	$	6,638

(1)  Represents the borrower’s loan obligation, gross of any previously charged-off amounts.

13

The following table summarizes the Company’s average recorded investment in impaired loans by class of loans and the related interest income recognized for the three and nine months ended March 31, 2012:

	For the Three Months				For the Nine Months
	Ended March 31, 2012				Ended March 31, 2012
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
	(Dollars in Thousands)
One-to four-family	$	336	$	6	$	336	$	17
Commercial business	113		—		124		—
Commercial real estate	271		5		272		16
Agricultural real estate	12,080		18		12,315		39
Agricultural business	3,888		2		3,893		6
Consumer home equity	122		2		122		6
	$	16,810	$	33	$	17,062	$	84

Modifications of terms for loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve reduction of the interest rate or renewing at an interest rate below current market rates, extension of the term of the loan and/or forgiveness of principal, regardless of the period of the modification. Generally, the Company will allow interest rate reductions for a period of less than two years after which the loan reverts back to the current market rate of interest. Each of the loans included as troubled debt restructurings at March 31, 2012, had interest rate modifications from 6 months to 2 years before reverting back to the original interest rate or had extended repayment terms with increased interest rates. All of the loans were modified due to financial stress of the borrower.

The following is a summary of performing troubled debt restructurings which are in compliance with their modified terms at March 31, 2012 and June 30, 2011:

		Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding
At March 31, 2012	Customers	Recorded Balance		Recorded Balance
		(Dollars in Thousands)
Troubled Debt Restructuring
Residential	2	$	338	$	335
Commercial real estate	1	370		270
Agricultural (1)	8	11,716		11,026
Consumer	3	123		122
	14	$	12,547	$	11,753

(1)Includes four customers, which are in compliance with their restructured terms, that are not accruing interest and have a recorded investment balance of $10,295.

14

		Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding
At June 30, 2011	Customers	Recorded Balance		Recorded Balance
		(Dollars in Thousands)
Troubled Debt Restructuring
Residential	2	$	41	$	41
Agricultural (1)	9	15,423		13,151
Consumer	3	366		358
	14	$	15,830	$	13,550

(1)Includes six customers, which are in compliance with their restructured terms, that are not accruing interest and have a recorded investment balance of $10,856.

Excluded from above, the Company has one commercial business and one agricultural customer with a recorded balance of $110,000 and $4.6 million, respectively, at March 31, 2012, which are not in compliance with their restructured terms and are in nonaccrual status.  The commercial customer’s loan and one of the three agricultural customer’s loans were in nonaccrual status, while the remaining two of the three agricultural customers’ loans were accruing interest at the time of the original restructuring.  Loans can retain their accrual status at the time of their modification if the restructuring is not a result of terminated loan payments. For nonaccruing loans, a minimum of nine months of performance related to the restructured terms are required before a loan is returned to accruing status.

NOTE 6—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,
	2012			2011			2012			2011
	(Dollars in Thousands)
Mortgage servicing rights, beginning	$	13,128		$	13,215		$	12,952		$	12,733
Additions	370			490			1,505			1,851
Amortization	(536		)	(583		)	(1,495		)	(1,462		)
Mortgage servicing rights, ending	$	12,962		$	13,122		$	12,962		$	13,122
Valuation allowance, beginning	$	—-		$	—-		$	—		$	—
Additions	(330		)	—			(330		)	—
Valuation allowance, ending	$	(330	)	$	—		$	(330	)	$	—
Mortgage servicing rights, net	$	12,632		$	13,122		$	12,632		$	13,122
Servicing fees received	$	874		$	889		$	2,698		$	2,687
Balance of loans serviced at:
Beginning of period	1,206,214			1,178,515			1,199,059			1,138,793
End of period	1,196,786			1,194,427			1,196,786			1,194,427

Amortization of mortgage servicing rights (“MSRs”) is adjusted each quarter as the result of the evaluation of historical prepayment activity.  For the third quarter ended March 31, 2012 and 2011, the constant prepayment rates (CPR) used to calculate the amortization was 12.8% and 12.1%, respectively.  Management utilized a discount rate of 9.0% for valuation purposes for both periods.  Prepayment speeds calculated at March 31, 2012 and 2011 were 14.4% and 12.5%, respectively, which are used in the calculation of the amortization expense for the subsequent quarter.  Prepayment speeds are analyzed and adjusted each quarter.

15

Capitalized MSRs are evaluated for impairment based on the estimated fair value of those rights.  If temporary impairment exists, a valuation allowance is established through a charge to income equal to the amount by which the carrying value exceeds the fair value.  If it is later determined all or a portion of the temporary impairment no longer exists, the valuation allowance is reduced.

NOTE 7—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.

The following tables summarize segment reporting information:

	Three Months Ended March 31,
	2012									2011
	Banking			Other			Total			Banking			Other			Total
	(Dollars in Thousands)
Net interest income	$	8,235		$	(490	)	$	7,745		$	9,485		$	(439	)	$	9,046
Provision for losses on loans and leases	(264		)	—			(264		)	(1,949		)	—			(1,949		)
Noninterest income	2,941			66			3,007			2,424			150			2,574
Intersegment noninterest income	(62		)	(4		)	(66		)	(92		)	28			(64		)
Noninterest expense	(8,208		)	(488		)	(8,696		)	(8,711		)	(378		)	(9,089		)
Intersegment noninterest expense	—			66			66			—			64			64
Income (loss) before income taxes	$	2,642		$	(850	)	$	1,792		$	1,157		$	(575	)	$	582
Total assets at March 31	$	1,186,026		$	10,100		$	1,196,126		$	1,195,631		$	11,652		$	1,207,283

16

	Nine Months Ended March 31,
	2012									2011
	Banking			Other			Total			Banking			Other			Total
	(Dollars in Thousands)
Net interest income	$	26,938		$	(1,350	)	$	25,588		$	29,652		$	(1,340	)	$	28,312
Provision for losses on loans and leases	(2,906		)	—			(2,906		)	(6,584		)	—			(6,584		)
Noninterest income	9,561			243			9,804			9,838			359			10,197
Intersegment noninterest income	(191		)	(8		)	(199		)	(219		)	25			(194		)
Noninterest expense	(25,268		)	(2,260		)	(27,528		)	(26,748		)	(1,409		)	(28,157		)
Intersegment noninterest expense	—			199			199			—			194			194
Income (loss) before income taxes	$	8,134		$	(3,176	)	$	4,958		$	5,939		$	(2,171	)	$	3,768
Total assets at March 31	$	1,186,026		$	10,100		$	1,196,126		$	1,195,631		$	11,652		$	1,207,283

NOTE 8—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,
	2012			2011			2012			2011
	(Dollars in Thousands)
Service cost	$	196		$	147		$	588		$	441
Interest cost	176			153			529			461
Amortization of prior losses	—			24			—			71
Expected return on plan assets	(199		)	(165		)	(584		)	(484		)
Total costs recognized in expense	$	173		$	159		$	533		$	489

The Company previously disclosed in its consolidated financial statements for fiscal 2011, which are included in Part II, Item 8 “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K, that it contributed $455,000 in fiscal 2011 to fund its qualified pension plan.  During the second quarter of fiscal 2012, the Company made contributions of $470,000 to fund its qualified pension plan. The Company anticipates no additional contributions will be made in fiscal 2012.

NOTE 9—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.

17

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.

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,
	2012		2011
	(Dollars in Thousands)
Quarter ended September 30	$	445	$	587
Quarter ended December 31	451		483
Quarter ended March 31	438		451
Quarter ended June 30	—		461
Net healthcare costs	$	1,334	$	1,982

NOTE 10—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.  There were no stock appreciation rights (SARs) granted in the nine months ended March 31, 2012 and 2011.

Stock option activity for the nine months ended March 31, 2012 was as follows:

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Options		Price		Term	Value
Beginning balance	113,638		$	13.46
Granted	—		—
Forfeited	(39,607	)	13.61
Exercised	(13,667	)	9.92
Ending balance	60,364		$	14.16	2.02	$	24,194
Vested and exercisable	60,364		$	14.16	2.02	$	24,194

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Stock appreciation rights activity for the nine months ended March 31, 2012 was as follows:

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	SARs		Price		Term	Value
Beginning balance	179,951		$	13.69
Granted	—		—
Forfeited	(50,956	)	13.75
Exercised	—		—
Ending balance	128,995		$	13.67	6.76	$	—
Vested and exercisable	88,288		$	14.07	6.51	$	—

The total intrinsic value of options exercised during the nine months ended March 31, 2012 and 2011 was $27,000 and $5,000, respectively.  Cash received from the exercise of these options was $136,000 and $139,000, respectively.  There were no cashless option exercises or related tax benefit realized for the nine months ended March 31, 2012 and 2011.  There were no stock appreciation rights (SARs) granted during the nine months ended March 31, 2012 and 2011.  The total unrecognized compensation cost related to nonvested SARs awards at March 31, 2012 was $70,000.  This unrecognized cost is expected to be recognized over a weighted average period of 16 months.

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

	2012				2011
			Weighted				Weighted
			Average				Average
			Grant Date				Grant Date
	Shares		Fair Value		Shares		Fair Value
Nonvested balance, beginning	37,810		$	11.77	69,475		$	13.68
Granted	53,559		11.75		23,266		10.70
Vested	(23,399	)	11.64		(49,551	)	13.84
Forfeited	(2,961	)	12.92		(897	)	13.27
Nonvested balance, ending	65,009		$	11.75	42,293		$	11.87

Pretax compensation expense recognized for nonvested shares for the nine months ended March 31, 2012, and 2011 was $71,000 and $162,000, respectively.  The tax benefit for the nine months ended March 31, 2012, and 2011 was $24,000 and $55,000, respectively.  During the third quarter of fiscal 2012, 32,800 shares of nonvested stock were awarded which fully vest on the third anniversary of the date of grant.  As of March 31, 2012, there was $458,000 of total unrecognized compensation cost related to nonvested shares granted to employees 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 31 months.  The total fair value of shares vested during the nine months ended March 31, 2012 and 2011 was $91,000 and $526,000, respectively.

In association with the 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 fourth quarter of fiscal 2011, 2,358 shares of nonvested stock were awarded which vest on the first anniversary of the date granted.  During the third quarter of fiscal 2012, 20,409 shares of nonvested stock were awarded which vest on the first anniversary of the date granted.  As of March 31, 2012, there was $194,000 of total unrecognized compensation cost related to nonvested shares to outside directors, which is expected to be recognized over the remaining period of nine months.  For the nine months ended March 31, 2012, amortization expense was recorded in

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the amount of $132,000.  The total fair value of shares vested during the nine months ended March 31, 2012 and 2011 was $181,000 and $160,000, 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 2011, under Note 16 of “Notes to Consolidated Financial Statements.”

NOTE 11—SUBORDINATED DEBENTURES PAYABLE TO TRUSTS

The Company has issued and outstanding 27,000 shares totaling $27.0 million of Company Obligated Mandatorily Redeemable Preferred Securities. These four Trusts were established and exist 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 assets of the four Trusts. The securities provide for cumulative cash distributions calculated at a rate based on three-month LIBOR plus a range from 1.65% to 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 the respective maturity date. At the end of the deferral period, all accumulated and unpaid distributions must be paid. The capital securities have redemption dates ranging from January 7, 2033 to October 1, 2037; however, the Company has the option to shorten the respective maturity date for three of the four securities as the call option date has passed. The remaining security of $5.0 million has a call option dates of 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.

NOTE 12—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 counterparties. The Company anticipates the counterparties will be able to fully satisfy its obligations under the remaining agreements.  These contracts are typically designated as cash flow hedges.

The Company has outstanding interest rate swap agreements totaling $27.0 million notional amount to convert four variable-rate Trust Preferred securities into fixed-rate instruments.  The agreements have a weighted average maturity of 2.7 years and have fixed rates ranging from 5.68% to 6.91% with a weighted average rate of 6.12%.  The fair value of the derivatives was an unrealized loss of $2.1 million and $1.4 million at March 31, 2012, and 2011, respectively.  The Company also has two forward-starting interest rate swap agreements totaling $7.0 million, which will replace the existing swap agreements upon their expiration.  The agreements have a weighted average effective date of 0.5 years and have fixed rates ranging from 5.95% to 6.58% with a weighted average rate of 6.13%.  The fair value of the derivatives was an unrealized loss of $802,000 and $185,000 at March 31, 2012, and 2011, respectively.  The Company pledged $3.0 million in cash under collateral arrangements as of March 31, 2012, to satisfy collateral requirements associated with these interest rate swap contracts.

The Company has outstanding five interest rate swap agreements with notional amounts totaling $35.0 million to convert the variable-rate attributes of a pool of deposits into fixed-rate instruments.  The agreements have a weighted average maturity of 2.1 years and have fixed rates ranging from 2.09% to 2.56% with a weighted average rate of 2.36%.  The fair value of the agreements is an unrealized loss of $1.6 million at March 31, 2012 and $1.1 million at March 31, 2011.  The Company pledged $1.8 million in investment securities under collateral arrangements as of March 31, 2012, to satisfy collateral requirements associated with these interest rate swap contracts.

The Company has outstanding two borrower interest rate swap agreements with notional amounts totaling $1.9 million to facilitate customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty and therefore, has no credit risk.  The swap positions are offset to minimize the potential impact on the Company’s financial statements.  The fair value of these derivatives were an unrealized gain of $108,000 reported in other assets and an unrealized loss of $108,000 reported as accrued expenses and other liabilities at March 31, 2012.  The derivatives had no

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impact on the consolidated statements of income for the nine months ended March 31, 2012.  Any amounts due to the Company are expected to be collected from the borrower.  Credit risk exists if the borrower’s collateral or financial condition indicates that the underlying collateral or financial condition of the borrower makes it probable that amounts due will be uncollectible.  Management monitors this credit exposure on a quarterly basis.

No gain or loss was recognized in earnings for the nine months ended March 31, 2012, and 2011 related to interest rate swaps.  No deferred net losses on interest rate swaps in other comprehensive loss as of March 31, 2012, are expected to be reclassified into earnings during the current fiscal year.  See Note 13 “Accumulated Other Comprehensive Loss” for amounts reported as other comprehensive loss.

The following table summarizes the derivative financial instruments utilized as of March 31, 2012:

		Notional		Estimated Fair Value
	Balance Sheet Location	Amount		Gain		Loss
Cash flow hedge	Other assets	$	34,000	$	—	$	(2,890	)
Non-designated derivatives	Other assets	1,891		108		—
Cash flow hedge	Accrued expenses and other liabilities	35,000		—		(1,620		)
Non-designated derivatives	Accrued expenses and other liabilities	1,891		—		(108		)
		$	72,782	$	108	$	(4,618	)

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, 2012:

			Average	Fair
	Notional		Maturity	Value			Weighted Average Rate
	Value		(years)	(Loss)			Receive		Pay
Liability conversion swaps	$	69,000	2.6	$	(4,510	)	1.35	%	4.00	%
Back-to-back customer interest rate swaps	3,782		4.1	—			4.13		4.13
	$	72,782		$	(4,510	)

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NOTE 13—ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss are as follows:

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2012			2011			2012			2011
	(Dollars in Thousands)
Net income	$	1,212		$	459		$	3,368		$	2,692
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	—			(399		)	—			(399		)
Change in unrealized gain on other securities available for sale	1,293			1,614			2,424			552
Reclassification adjustment:
Net impairment credit loss recognized in earnings	—			549			—			549
Security (gains) recognized in earnings	(539		)	(132		)	(874		)	(623		)
Net unrealized gains	754			1,632			1,550			79
Income tax (expense)	(286		)	(620		)	(589		)	(30		)
Other comprehensive income on securities available for sale	468			1,012			961			49
Defined benefit plan:
Other comprehensive (loss) on defined benefit plan	—			—			—			—
Cash flow hedging activities-interest rate swap contracts:
Net unrealized gains (losses)	391			514			(663		)	280
Income tax benefit (expense)	(149		)	(175		)	406			(95		)
Other comprehensive income (loss) on cash flow hedging activities-interest rate swap contracts	242			339			(257		)	185
Total other comprehensive income	710			1,351			704			234
Comprehensive income	$	1,922		$	1,810		$	4,072		$	2,926
Cumulative other comprehensive (loss) balances were:
Unrealized gain (loss) on securities available for sale, net of related tax effect of $1,636 and ($334)							$	2,669		$	(545	)
Unrealized loss on defined benefit plan, net of related tax effect of $360 and $441							(587		)	(719		)
Unrealized loss on cash flow hedging activities, net of related tax effect of $1,713 and $910							(2,796		)	(1,767		)
							$	(714	)	$	(3,031	)

NOTE 14—FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENT

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 available for sale—Fair values for investment securities are based on quoted market prices or are determined using discounted cash flow methodologies.

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Correspondent bank stock—The carrying amounts reported in the statements of financial condition for correspondent bank stock, such as the Federal Home Loan Bank, approximate their fair values.

Loans held for sale— The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics.

Net loans and leases receivable—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, net—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-statement-of-financial-condition instruments—Fair values for the Company’s off-statement-of-financial-condition instruments (unused lines of credit and letters of credit), which are based upon fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and counterparties’ credit standing, are not significant.

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.

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:

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				Fair Value Measurements at March 31, 2012
	Carrying			Fair
	Amount			Value			Level 1		Level 2			Level 3
	(Dollars in Thousands)
Financial Assets
Cash and cash equivalents	$	70,002		$	70,002		$	70,002	$	—		$	—
Securities available for sale	337,912			337,912			—		337,912			—
Correspondent bank stock	8,065			8,065			—		8,065			—
Loans held for sale	8,561			8,561			—		8,561			—
Net loans and leases receivable	709,037			713,401			—		7,182			706,219
Accrued interest receivable	5,744			5,744			—		5,744			—
Servicing rights, net	12,632			12,632			—		—			12,632
Interest rate swap contracts	(2,782		)	(2,782		)	—		(2,782		)	—
Financial liabilities	—			—			—		—			—
Deposits	892,833			895,803			—		—			895,803
Interest rate swap contracts	1,728			1,728			—		1,728			—
Borrowed funds	147,399			155,990			—		155,990			—
Subordinated debentures payable to trusts	27,837			24,881			—		—			24,881
Accrued interest payable and advances by borrowers for taxes and insurance	— 20,683			20,683			—		20,683			—

				Fair Value Measurements at June 30, 2011
	Carrying			Fair
	Amount			Value			Level 1		Level 2			Level 3
	(Dollars in Thousands)
Financial Assets
Cash and cash equivalents	$	55,617		$	55,617		$	55,617	$	—		$	—
Securities available for sale	234,860			234,860			—		234,860			—
Correspondent bank stock	8,065			8,065			—		8,065			—
Loans held for sale	11,991			11,991			—		11,991			—
Net loans and leases receivable	811,178			813,914			—		6,689			807,225
Accrued interest receivable	7,607			7,607			—		7,607			—
Servicing rights, net	12,952			15,396			—		—			15,396
Interest rate swap contracts	(2,161		)	(2,161		)	—		(2,161		)	—
Financial liabilities	—			—			—		—			—
Deposits	893,157			896,388			—		—			896,388
Interest rate swap contracts	1,685			1,685			—		1,685			—
Borrowed funds	147,395			154,521			—		154,521			—
Subordinated debentures payable to trusts	27,837			28,933			—		—			28,933
Accrued interest payable and advances by borrowers for taxes and insurance	— 14,820			14,820			—		14,820			—

Fair Value Measurement

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  The fair value of a financial instrument is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Company’s various financial instruments.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

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Fair value accounting guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.  If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate.  In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment.  The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

The Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine 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.

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, 2012:

	Quoted Prices		Significant			Significant
	In Active		Other Observable			Unobservable
	Markets		Inputs			Inputs		Total at
	(Level 1)		(Level 2)			(Level 3)		Fair Value
	(Dollars in Thousands)
Securities available for sale
Debt securities:
U.S. government agencies	$	—	$	2,021		$	—	$	2,021
Municipal bonds	—		10,658			—		10,658
Equity securities:
Federal Ag Mortgage	9		—			—		9
Other investments	—		253			—		253
Agency residential mortgage-backed securities	—		324,971			—		324,971
Securities available for sale	9		337,903			—		337,912
Interest rate swap contracts	—		(2,782		)	—		(2,782		)
Total assets	9		335,121			—		335,130
Interest rate swap contracts	—		1,728			—		1,728
Total liabilities	$	—	$	1,728		$	—	$	1,728

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

25

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 yield 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 interest rate spreads and municipal yield curves.  Management reviews this third party analysis and has approved the values estimated for the fair values.

Interest rate swap contracts:  The fair values of interest rate swap contracts relate to cash flow hedges of trust preferred debt securities issued by the Company, cash flow hedges of variable rate deposits, and for specific borrower interest rate swap contracts classified as non-designated derivatives.  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.  Management reviews this third party analysis and has approved the values estimated for the fair values.

The table below presents the Company’s assets subject to the nonrecurring fair value measurements by level within the hierarchy at March 31, 2012:

	Quoted Prices		Significant Other		Significant
	In Active		Observable		Unobservable		Fiscal 2012
	Markets		Inputs		Inputs		Incurred
	(Level 1)		(Level 2)		(Level 3)		Losses/(Gains)
Impaired loans	$	—	$	7,182	$	7,002	$	47
Servicing rights, net	—		—		12,632		330
Foreclosed real estate and other properties	—		—		175		(9		)

The significant unobservable inputs used in the fair value measurement of impaired loans not dependent on collateral primarily relate to present value of cash flows.  Cash flows are derived from scenarios which estimate the probability of default and factor in the amount of estimated principal loss.  The resulting fair value is then compared to the carrying value of each credit and a specific valuation allowance is recorded when the carrying value exceeds the fair value.

The significant unobservable inputs used in the fair value measurement of collateral for collateral-dependent impaired loans primarily relate to customized discounting criteria applied to the customer’s reported amount of collateral. The amount of the collateral discount depends upon the marketability of the underlying collateral. The Company’s primary objective in the event of default would be to monetize the collateral to settle the outstanding balance of the loan, in which collateral with lesser marketability characteristics would receive a larger discount.

The Credit Administration department evaluates the valuations on impaired loans and other real estate owned monthly. The results of these valuations are reviewed at least quarterly by the internal Asset Classification Committee and are considered in the overall calculation of the allowance for loan and lease losses. Unobservable inputs are monitored and adjusted if market conditions change.

Servicing rights, net 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

26

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), not fair value measurement accounting, for its servicing rights assets.  During the quarter, the estimated fair value was less than the amortized cost and a valuation allowance was recorded, which classifies servicing rights, net as a nonrecurring valuation.

Foreclosed real estate and other properties include those assets which have subsequent market adjustments after the original possession as a foreclosed asset.  The estimated fair value is based on what the local markets are currently offering for assets with similar characteristics, less costs to sell, which the Company classifies as a Level 3 fair value measurement.  Foreclosed assets which have market adjustments due to the modifications in values that are not reflected in the most recent appraisal or valuation, or have updated appraisals with valuation changes since its inclusion as a foreclosed asset are included as a nonrecurring valuation.

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of March 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value at		Valuation	Unobservable	Range
	3/31/2012		Technique	Input	(Weighted Averages)
	(Dollars in Thousands)
Impaired loans	$	7,002	Discounted cash flow	Discount rate	5.0% - 8.0% (6.1%)
				Principal loss severity	0% - 30.0% (11.5%)
			Collateral valuation	Discount from appraised value	15% - 25% (24.8%)
				Costs to sell	7.5%
Servicing rights, net	12,632		Discounted cash flow	Constant prepayment rate	14.4%
				Discount rate	9.0%
Foreclosed real estate and other properties	175		Collateral valuation	Costs to sell	10% - 30% (16.4%)

NOTE 15—Subsequent Event

Subsequent to the third fiscal quarter, assets of a $5.0 million nonperforming agricultural credit were sold at public auction.  The aggregate loans to this borrower represent the largest nonperforming loan relationship at the Bank.  The auction and additional grain and other asset liquidation proceeds are expected to net a sufficient amount to substantially resolve this credit relationship during the fourth fiscal quarter.  The Bank does not expect to realize any further material losses or impairments on these loans.

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 analysts, 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:

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

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

·forecasts of future economic performance.

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

Forward-looking statements 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;

·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;

28

·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.

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

HF Financial Corp. is a unitary thrift holding company that was formed in November 1991 for the purpose of owning all of the outstanding stock of Home Federal Bank (the “Bank”), its principal banking subsidiary. The Company is incorporated under the laws of the State of Delaware and generally is authorized to engage in any activity that is permitted by the Delaware General Corporation Law. The Company’s primary business is to operate the Bank.  Unless otherwise indicated, all matters discussed in this Form 10-Q relate to the Company and its direct and indirect subsidiaries, including, without limitation, the Bank.

The Bank was founded in 1929 and is a federally chartered stock savings bank headquartered in Sioux Falls, South Dakota. The Bank provides full-service consumer and commercial business banking, including an array of financial products and services, to meet the needs of its marketplace. The Bank attracts deposits from the general public and uses such deposits, together with borrowings and other funds, to originate one- to four-family residential loans, commercial business loans, agriculture loans, consumer loans, multi family and commercial real estate loans and construction loans. The Bank’s consumer direct loan portfolio includes, among other things, automobile loans, home equity loans, loans secured by deposit accounts and student loans.

The Company’s net income for the first nine months of fiscal 2012 was $3.4 million, or $0.48 in diluted earnings per common share, compared to $2.7 million, or $0.39 in diluted earnings per common share, for the same period of fiscal 2011.

Net interest income for the first nine months of fiscal 2012 was $25.6 million, a decrease of $2.7 million, or 9.6%, compared to the same period a year ago.  For the nine months ended March 31, 2012, average interest-earning assets and average interest-bearing liabilities decreased 3.2% and 5.1%, respectively, compared to the same period a year ago.  Yields on earning assets decreased to 4.31% for the first nine months of fiscal 2012, compared to 4.79% a year ago, a decrease of 48 basis points.  For the same period, cost of deposits, which include all interest-bearing and noninterest- bearing deposits, decreased to 0.85%, compared to 1.10%, a decrease of 25 basis points.

The net interest margin expressed on a fully taxable equivalent basis (“Net Interest Margin, TE”) for the nine months ended March 31, 2012 was 3.09%, which is a decrease of 23 basis points from the same period of the prior fiscal year.  This margin declined due primarily to the decreases in yield associated with the loan and investment rates in excess of the decrease in the deposit rates paid.  A sustained overall decline in the interest rate yield curve has affected both the yield for the interest-earning assets and the interest-bearing liabilities, and the average balances for these categories decreased when compared to the same 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.

Total loans decreased to $711.0 million from $759.5 million during the most recent quarter, and compared to $825.5 million at June 30, 2011.  Agricultural borrowers typically pay down seasonal balances in the winter, and this

29

fiscal year has not been an exception.  In addition, many of the loan customers have been substantially deleveraging during the last three years as they have been reducing their debt while waiting for better or less risky opportunities for their businesses. We believe this phenomenon may be starting to change back to a more normal situation as the economy recovers, but we cannot precisely predict when or by how much our loan portfolio will start to grow due to existing customer demand.

The allowance for loan and lease losses decreased $3.8 million to $10.5 million at March 31, 2012, compared to June 30, 2011.  The ratio of allowance for loan and lease losses to total loans and leases was 1.48% as of March 31, 2012 compared to 1.45% and 1.73% at December 31, 2011 and June 30, 2011, respectively.  Although overall loan balances declined during the fiscal year, the general reserve increased in part due to the effects of historical charge-off activity and management’s assessment of environmental factors.  This analysis contributed to a provision for loan and lease losses of $2.9 million for the first nine months of fiscal 2012.  For the third quarter, the provision for loan and lease losses was $264,000, which was $1.7 million less than the $1.9 million reported for the third quarter of fiscal 2011.  Total nonperforming assets at March 31, 2012 were $24.5 million as compared to $27.7 million and $37.2 million at December 31, 2011 and June 30, 2011, respectively.  The ratio of nonperforming assets to total assets decreased to 2.05% at March 31, 2012, compared to 2.26% and 3.12% at December 31, 2011 and June 30, 2011.  The overall decrease in nonperforming assets from the previous quarter was primarily attributed to improving conditions in the regional agricultural market, which had previously negatively impacted the ratio.  The valuation allowance recorded in accordance with ASC 310 on identified impaired loans decreased to $2.3 million at March 31, 2012, compared to $2.7 million at December 31, 2011.  During the third fiscal quarter of 2012, the Company recorded charge-offs of $1.3 million, compared to $2.2 million in the previous quarter.  These charge-offs have reduced the amount of valuation allowance required on classified assets since June 30, 2011.  Approximately 92% of the valuation allowance on impaired loans are agricultural loans and, more specifically, 87% are within the dairy sector.  All identified impaired loans are reviewed to assess the borrower’s ability to make payments under the terms of the loan and/or a shortfall in collateral value that would result in charging off the loan or the portion of the loan that was impaired.

Foreclosed real estate and other properties increased by $1.9 million to $2.6 million at March 31, 2012 from $712,000 at June 30, 2011, primarily consisting of residential, commercial real estate, and agricultural business and real estate loans that were foreclosed and unsold at quarter end.   When compared to the prior quarter, these assets increased by $1.2 million. Approximately $1.0 million of the increase in foreclosed real estate was sold at public auction on March 28, 2012, and the Company expects settlement of proceeds to occur in the fourth fiscal quarter.

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 the loan portfolio and is working to clarify and resolve the credit, credit administration, and environmental factor issues related to these assets to obtain the most favorable outcome for the Company.

Total deposits at March 31, 2012, were $892.8 million, a decrease of $324,000 from June 30, 2011.  During the nine month period, in-market deposits, exclusive of public funds, increased $36.9 million, while out-of-market deposits and public funds decreased $3.1 million and $34.1 million, respectively.  Interest rates on these deposits, which are one of the primary factors affecting the amount of interest expense paid,  decreased to the average rate paid of 0.98% on interest-bearing deposits for the nine month period ended March 31, 2012, compared to 1.24% for the nine month period ended March 31, 2011.

On April 30, 2012, the Company announced it will pay a quarterly cash dividend of 11.25 cents per common share for the third quarter of fiscal 2012.  The dividend will be paid on May 18, 2012, to stockholders of record on May 11, 2012.

The total risk-based capital ratio of 15.16% at March 31, 2012, increased by 188 basis points from 13.28% at June 30, 2011.  Tier I capital increased six basis points to 9.50% at March 31, 2012 when compared to 9.44% at June 30, 2011. This continues to place the Bank in the “well-capitalized” category within financial institution regulation at March 31, 2012 and is consistent with the “well-capitalized” regulatory 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.

30

Noninterest income was $9.8 million for the nine months ended March 31, 2012, compared to $10.2 million for the same period in the prior fiscal year, a decrease of $393,000.  This decrease was primarily due to the provision for an allowance on servicing rights of $330,000 and the loss on disposal of closed-branch fixed assets of $245,000.  In addition, the gain on sale of loans decreased by $590,000, but were partially offset by the increase in the gain on sale of securities of $251,000.  No other-than-temporary impairment security losses have been recorded in the current fiscal year, compared to $549,000 in the prior fiscal year.

Noninterest expense was $27.5 million for the nine months ended March 31, 2012, as compared to $28.2 million for the same period of the prior fiscal year, a decrease of $629,000, or 2.2%.  The decrease was attributed primarily to decreases in compensation and employee benefits of $947,000, decreases in the cost of FDIC insurance, marketing and community development, and occupancy and equipment for a total of $622,000.  These decreases were partially offset by an increase in professional fees of $801,000 for the nine months ended March 31, 2012 when compared to the same period in the prior fiscal year.  Compensation costs decreased due to a reduced number of average full-time equivalents (“FTE’s”) for the first nine months compared to the same period in the prior fiscal year, while professional fees increased due to certain employment, regulatory and governance matters.

During the second and third fiscal quarters, the Company completed two branch closures within the Sioux Falls area market as it merged two branches into other nearby branches, and has announced four additional branch closures in other markets within South Dakota to occur in the fourth fiscal quarter.  Fiscal year costs through the third quarter related to the streamlining effort included $245,000 for the disposition of two closed-branches fixed assets. Fiscal fourth quarter streamlining costs are estimated to include one-time expenses of $550,000 for severance and lease terminations and $230,000 for the disposition of four closed-branch fixed assets.  In return, management anticipates annual cost savings of all announced branch closures to approach $1.3 million. The Company focuses on balancing operating costs with operating revenue levels in order to provide better efficiency ratios over time and continues to review its operations for ways to reduce its cost structure while continuing to support long-term revenue enhancements.

During the second fiscal quarter, the Company was informed by the South Dakota Housing Development Authority (“SDHDA”) that a change in business model was necessary for SDHDA to continue to meet the financing needs of its single family mortgage program in South Dakota.  This change would include the development of a new bond resolution, to support a mortgage-backed securities program.  As such, a request for proposal for a master servicer with a two year commitment period was provided to interested parties, and the Company was informed that a new master servicer would begin effective April 1, 2012.  This change in business model will effectively end the new flow of servicing assets from SDHDA to the Company beginning in the fourth fiscal quarter.  The Company does not expect this event to have a material impact on the fiscal 2012 income statement. The single family mortgage segment of the Company’s servicing portfolio is expected to decrease in value over time, as principal is reduced.  The Company continues to evaluate potential acquisition of servicing assets dependent upon market conditions and characteristics desirable by the Company, which may include bidding as the master servicer for SDHDA after the initial two year commitment is complete.

On November 12, 2009, the FDIC Board approved a rule requiring prepayment of the quarterly assessments for the fourth quarter of calendar year 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 is being proportionally expensed as each quarter elapses. At March 31, 2012, the remaining balance recorded as a prepaid asset was $1.6 million.

During the first nine months of fiscal 2012, the FDIC assessed a charge of $736,000 compared to $1.0 million for the first three quarters of the prior year.  This decrease from the prior year is the result of modifying the assessment to an asset based computation compared to the prior method, which was based on the amount of deposits.

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

31

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, 2012, the Company had total assets of $1.2 billion, an increase of $4.8 million from the level at June 30, 2011.  Securities available for sale increased $103.1 million and cash and cash equivalents increased $14.4 million.  Loans and leases receivable decreased by $114.5 million, but were partially offset by a decrease in the allowance for loan and lease losses of $3.8 million.  Total liabilities increased by $2.7 million for the nine months ended March 31, 2012.  Advances by borrowers for taxes and insurance increased $7.1 million, while accrued expenses and other liabilities decreased $4.1 million during this period.  Stockholders’ equity increased $2.1 million to $96.6 million at March 31, 2012 due primarily to an increase in retained earnings from net income in excess of dividends paid of $1.0 million.  Stockholders’ equity also increased due to net gains in accumulated other comprehensive loss of $704,000.  Additional paid-in capital increased by $388,000  due to amortization of stock compensation programs and the issuance of stock during the year.

Securities available for sale increased by $103.1 million primarily due to the increase in agency mortgage-backed securities of $104.6 million for the nine months ended March 31, 2012.  The net purchase of agency residential mortgage-backed securities in excess of maturities and sales during the third quarter was $35.9 million, increasing the nine month total to $145.1 million.  The net increase in the balance is also affected by principal payments, amortization and market value adjustments.

Net loans and leases receivable decreased $110.7 million at March 31, 2012, as compared to June 30, 2011, due to decreases in agricultural loans of $85.9 million and commercial loans of $28.2 million.  Commercial real estate loans increased by $13.0 million to partially offset the decreases in agricultural and commercial loans.  There was a decrease in the allowance for loan and lease losses of $3.8 million since June 30, 2011 which reduced the overall decline in net loans and leases receivable.

Cash and cash equivalents increased $14.4 million at March 31, 2012, as compared to June 30, 2011, due in part to an increase in the balances due from the Federal Reserve Bank.  See the “Consolidated Statement of Cash Flows” for an in-depth analysis of the change in cash and cash equivalents for the nine months ended March 31, 2012.

Deposits of $892.8 million at March 31, 2012 were comparable to the balance at June 30, 2011.  The mix of deposits has continued to shift towards transactional deposit accounts as a result of maturities of time certificates. Interest-bearing checking, money market accounts and savings accounts increased $30.0 million, $11.3 million, and $35.8 million, respectively, since June 30, 2011.   Certificates of deposits and noninterest-bearing accounts decreased $75.7 million, and $1.7 million, respectively, to offset the increases during the nine month period ended March 31, 2012.  Public fund account balances, which are included in the various deposit categories, decreased $34.1 million to $156.0 million at March 31, 2012 due in part to seasonal fluctuations typical with these types of municipal deposits.  Deposit accounts, excluding public funds and out-of-market certificates, increased by $36.9 million during the nine month period ended March 31, 2012.

Stockholders’ equity increased $2.1 million to $96.6 million at March 31, 2012. Net income increased retained earnings by $3.4 million, and stock amortization and stock issuances increased additional paid in capital by $253,000 and $135,000, respectively. Accumulated other comprehensive losses, net of deferred taxes increased stockholders’ equity by $704,000 during the first nine months of fiscal 2012.  Dividends paid to shareholders reduced retained earnings by $2.4 million during the period.

The following table shows the composition of the Company’s deposit accounts:

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	March 31, 2012				June 30, 2011
	Amount		Percent		Amount		Percent
	(Dollars in Thousands)
Noninterest bearing checking accounts	$	130,645	14.63	%	$	132,389	14.82	%
Interest bearing checking accounts	143,348		16.06		113,367		12.69
Money market accounts	208,936		23.40		197,624		22.13
Savings accounts	120,256		13.47		84,449		9.46
In-market certificates of deposit	276,991		31.02		349,606		39.14
Out-of-market certificates of deposit	12,657		1.42		15,722		1.76
Total deposits	$	892,833	100.00	%	$	893,157	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.

33

	Three Months Ended March 31,
	2012						2011
	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)	$	743,977	$	9,833	5.32	%	$	852,532	$	11,781	5.60	%
Investment securities (2) (3)	356,436		1,124		1.27	%	262,793		1,316		2.03	%
Correspondent bank stock	8,068		60		2.99	%	9,036		80		3.59	%
Total interest-earning assets	1,108,481		$	11,017	4.00	%	1,124,361		$	13,177	4.75	%
Noninterest-earning assets	84,723						91,326
Total assets	$	1,193,204					$	1,215,687
Interest-bearing liabilities:
Deposits:
Checking and money market	$	334,647	$	469	0.56	%	$	293,567	$	382	0.53	%
Savings	133,518		90		0.27	%	91,433		75		0.33	%
Certificates of deposit	297,306		1,105		1.49	%	403,093		1,823		1.83	%
Total interest-bearing deposits	765,471		1,664		0.87	%	788,093		2,280		1.17	%
FHLB advances and other borrowings	147,401		1,108		3.02	%	165,654		1,401		3.43	%
Subordinated debentures payable to trusts	27,837		500		7.22	%	27,837		450		6.56	%
Total interest-bearing liabilities	940,709		3,272		1.40	%	981,584		4,131		1.71	%
Noninterest-bearing deposits	125,909						103,120
Other liabilities	31,057						35,810
Total liabilities	1,097,675						1,120,514
Equity	95,529						95,173
Total liabilities and equity	$	1,193,204					$	1,215,687
Net interest income; interest rate spread (4)			$	7,745	2.60	%			$	9,046	3.04	%
Net interest margin (4) (5)					2.81	%					3.26	%
Net interest margin, TE (6)					2.84	%					3.31	%

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

(2)  Includes federal funds sold and Federal Reserve demand deposits.

(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, 2012 and March 31, 2011 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,
	2012						2011
	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)	$	792,551	$	32,513	5.46	%	$	877,233	$	37,029	5.62	%
Investment securities (2) (3)	313,159		3,407		1.45	%	263,243		4,107		2.08	%
Correspondent bank stock	8,201		184		2.99	%	10,272		243		3.15	%
Total interest-earning assets	1,113,911		$	36,104	4.31	%	1,150,748		$	41,379	4.79	%
Noninterest-earning assets	83,472						83,924
Total assets	$	1,197,383					$	1,234,672
Interest-bearing liabilities:
Deposits:
Checking and money market	$	323,823	$	1,532	0.63	%	$	277,647	$	1,108	0.53	%
Savings	125,585		250		0.26	%	82,543		207		0.33	%
Certificates of deposit	323,466		3,910		1.61	%	423,409		6,005		1.89	%
Total interest-bearing deposits	772,874		5,692		0.98	%	783,599		7,320		1.24	%
FHLB advances and other borrowings	147,918		3,389		3.05	%	188,635		4,376		3.09	%
Subordinated debentures payable to trusts	27,837		1,435		6.86	%	27,837		1,371		6.56	%
Total interest-bearing liabilities	948,629		10,516		1.48	%	1,000,071		13,067		1.74	%
Noninterest-bearing deposits	122,153						104,126
Other liabilities	31,644						36,036
Total liabilities	1,102,426						1,140,233
Equity	94,957						94,439
Total liabilities and equity	$	1,197,383					$	1,234,672
Net interest income; interest rate spread (4)			$	25,588	2.83	%			$	28,312	3.05	%
Net interest margin (4) (5)					3.06	%					3.28	%
Net interest margin, TE (6)					3.09	%					3.32	%

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

(2)  Includes federal funds sold.

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

(4)  Percentages for the nine months ended March 31, 2012 and March 31, 2011 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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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,
	2012			2011			2012			2011
	(Dollars in Thousands)
Net interest income	$	7,745		$	9,046		$	25,588		$	28,312
Taxable equivalent adjustment	83			131			285			377
Adjusted net interest income	7,828			9,177			25,873			28,689
Average interest-earning assets	1,108,481			1,124,361			1,113,911			1,150,748
Net interest margin, TE	2.84		%	3.31		%	3.09		%	3.32		%

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 resulting from the levels and volatility of interest rates.  For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume).

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

	Three Months Ended March 31,									Nine Months Ended March 31,
	2012 vs 2011									2012 vs 2011
	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)	$	(1,451	)	$	(497	)	$	(1,948	)	$	(3,566	)	$	(950	)	$	(4,516	)
Investment securities (2)	477			(669		)	(192		)	781			(1,481		)	(700		)
Correspondent bank stock	(9		)	(11		)	(20		)	(49		)	(10		)	(59		)
Total interest-earning assets	$	(983	)	$	(1,177	)	$	(2,160	)	$	(2,834	)	$	(2,441	)	$	(5,275	)
Interest-bearing liabilities:
Deposits:
Checking and money market	$	59		$	28		$	87		$	183		$	241		$	424
Savings	35			(20		)	15			108			(65		)	43
Certificates of deposit	(472		)	(246		)	(718		)	(1,416		)	(679		)	(2,095		)
Total interest-bearing deposits	(378		)	(238		)	(616		)	(1,125		)	(503		)	(1,628		)
FHLB advances and other borrowings	(149		)	(144		)	(293		)	(943		)	(44		)	(987		)
Subordinated debentures payable to trusts	—			50			50			—			64			64
Total interest-bearing liabilities	$	(527	)	$	(332	)	$	(859	)	$	(2,068	)	$	(483	)	$	(2,551	)
Net interest income decrease	$	(456	)	$	(845	)	$	(1,301	)	$	(766	)	$	(1,958	)	$	(2,724	)

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

(2)  Includes federal funds sold and Federal Reserve demand deposits.

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Application of Critical Accounting Policies

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

Loans and Leases Receivable.  Loans receivable are stated at unpaid principal balances and net of deferred loan origination fees, costs and discounts.

The Company’s leases receivable are classified as direct finance leases. Under the direct financing method of accounting for leases, the total net payments receivable under the lease contracts and the residual value of the leased equipment, net of unearned income, are recorded as a net investment in direct financing leases and the unearned income is recognized each month on a basis which approximates the interest method.

In accordance with ASC 310, the loan portfolio is disaggregated into segments and then further disaggregated into classes for certain disclosures. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. A class is generally determined based on the initial measurement attribute, risk characteristics of the loan, and an entity’s method for monitoring and assessing credit risk. Residential and Consumer loan portfolio segments include classes of one-to- four family, construction, consumer direct, consumer home equity, consumer overdraft and reserves, and consumer indirect. Commercial, Commercial Real Estate and Agriculture loan portfolio segments include the classes of commercial business, equipment finance leases, commercial real estate, multi-family real estate, construction, agricultural business, and agricultural real estate.

Interest on loans is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loan origination fees and direct costs as well as premiums and discounts are amortized as level yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans. Loan commitment fees are generally deferred and amortized on a straight-line basis over the commitment period.

Impaired loans are generally carried on a nonaccrual status when there are reasonable doubts as to the collectability of principal and/or interest and/or when payment becomes 90 days past due, except loans which are well secured and in the process of collection. For all portfolio segments and classes accrued but uncollected, interest is reversed and charged against interest income when the loan is placed on nonaccrual status. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to recover the principal balance and accrued interest. Interest payments received on nonaccrual and impaired loans are normally applied to principal. Once all principal has been received, additional interest payments are recognized on a cash basis as interest income.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and insignificant payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial, commercial real estate and agricultural loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

Loans that are reported as troubled debt restructurings (“TDRs”) apply the identical criteria in the determination of whether the loan should be accruing or nonaccruing.  Typically, the event of classifying the loan as a TDR due to a modification of terms is independent from the determination of accruing interest on a loan in accordance with accounting standards.

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For all non-homogeneous loans (including TDRs) that have been placed on nonaccrual status, our policy for returning nonaccruing loans to accrual status requires the following criteria:  six months of continued performance, timely payments, positive cash flow and an acceptable loan to value ratio.  For homogeneous loans (including TDRs), typical in our residential and consumer portfolio, the policy requires six months of consecutive timely loan payments for returning nonaccrual loans to accruing status.

Allowance for Loan and Lease Losses.  GAAP requires the Company to maintain an allowance for probable loan and lease losses in the loan and lease portfolio. Management must develop a consistent and systematic approach to estimate the appropriate balances that will cover the probable losses.

The allowance for loan and lease losses is maintained at a level that management determines is sufficient to absorb estimated probable incurred losses in the loan portfolio through a provision for loan losses charged to net income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Management charges off loans, or portions of loans, in the period that such loans, or portions thereof, are deemed uncollectible. The collectability of individual impaired loans is determined through an estimate of the fair value of the underlying collateral and/or an assessment of the financial condition and repayment capacity of the borrower.  The allowances for loan and lease losses are comprised of both specific valuation allowances and general valuation allowances that are determined in accordance with authoritative accounting guidance. Additions are made to the allowance through periodic provisions charged to current operations and recovery of principal on loans previously charged off.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Specific valuation allowances are established based on the Company’s analyses of individual loans that are considered impaired. If a loan is deemed to be impaired, management measures the extent of the impairment and establishes a specific valuation allowance for that amount. The Company applies this classification to loans individually evaluated for impairment in the loan portfolio segments of commercial, commercial real estate and agricultural loans. Smaller balance homogenous loans are evaluated for impairment on a collective rather than an individual basis. The Company measures impairment on an individual loan and the extent to which a specific valuation allowance is necessary by comparing the loan’s outstanding balance to the fair value of the collateral, less the estimated cost to sell, if the loan is collateral dependent, or to the present value of expected cash flows, discounted at the loan’s effective interest rate. A specific valuation allowance is established when the fair value of the collateral, net of estimated costs, or the present value of the expected cash flows is less than the recorded investment in the loan.

The Company also follows a process to assign general valuation allowances to loan portfolio segment categories. General valuation allowances are established by applying the Company’s loan loss provisioning methodology, and reflect the estimated probable incurred losses in loans outstanding. The loan loss provisioning methodology considers various factors in determining the appropriate quantified risk factors to use in order to determine the general valuation allowances. The factors assessed begin with the historical loan loss experience for each of the loan portfolio segments. The Company’s historical loan loss experience is then adjusted by considering qualitative or environmental factors that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience, including, but not limited to, the following:

·Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices;

·Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;

·Changes in the nature and volume of the portfolio and in the terms of loans;

·Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans;

·Changes in the quality of the Company’s loan review system;

·Changes in the value of the underlying collateral for collateral-dependent loans;

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·The existence and effect of any concentrations of credit, and changes in the level of such concentrations;

·Changes in the experience, ability, and depth of lending management and other relevant staff; and

·The effect of other external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the existing portfolio.

By considering the factors discussed above, the Company determines quantified risk factors that are applied to each non-impaired loan or loan type in the loan portfolio to determine the general valuation allowances.

The time periods considered for historical loss experience are the last five years, the last three years and the last twelve months. The Company also evaluates the sufficiency of the overall allocations used for the loan loss allowances by considering the loss experience in the most recent twelve month period.

The process of establishing the loan loss allowances may also involve:

·Periodic inspections of the loan collateral;

·Regular meetings of executive management with the pertinent Board committee, during which observable trends in the local economy, commodity prices and/or the real estate market are discussed; and

·Analysis of the portfolio in the aggregate, as well as on an individual loan basis, taking into consideration payment history, underwriting analyses, and internal risk ratings.

In order to determine the overall adequacy, each loan portfolio segment’s respective loan loss allowance is reviewed quarterly by management and by the Audit Committee of the Company’s Board of Directors, as applicable.

Future adjustments to the allowance for loan and lease losses and methodology may be necessary if economic or other conditions differ substantially from the assumptions used in making the estimates or, if required by regulators, based upon information at the time of their examinations. Such adjustments to estimates are made in the period in which these factors and other relevant considerations indicate that loss levels vary from previous estimates.

Although management believes that it uses the best information available to determine the allowance, unforeseen market or borrower conditions could result in adjustments and net income being significantly affected if circumstances differ substantially from the assumptions used in making the final determinations.

Mortgage Servicing Rights (“MSRs”).  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 from the South Dakota Housing Development Authority’s 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 a present value of future cash flow analysis. If the fair value is greater than or equal to the amortized book value of the MSRs, no impairment is recognized. If the fair value is less than the book value, an expense for the difference is charged to net income by initiating a MSR valuation account. If the Company determines this impairment is temporary, any future changes in impairment are recorded as a change in net income and the valuation account. 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 net income is when the underlying mortgages are paid 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, a temporary impairment valuation charge of $330,000 was recorded during the third fiscal quarter to the MSRs at March 31, 2012.

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Security Impairment.  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 management determines 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 net income for the difference between amortized cost and fair value. If management does not expect to recover the amortized cost basis, management does 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 its 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 net income, 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. At March 31, 2012, the Company does not have other-than-temporarily impaired debt securities for which credit losses exist.

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

Self-Insurance.  The Company has a self-insured healthcare plan for its employees up to certain limits. To mitigate a portion of the risks involved with a self-insurance health plan, the Company has a stop-loss insurance policy through a commercial insurance carrier for coverage in excess of $75,000 per individual occurrence. The estimate of self-insurance liability is based upon known claims and an estimate of incurred, but not reported (“IBNR”) claims. IBNR claims are estimated using historical claims lag information received by a third party claims administrator. Due to the uncertainty of health claims, the approach includes a process that may differ significantly from other methodologies and still produce an estimate that is in accordance with GAAP. Although management believes that it uses the best information available to determine the accrual, unforeseen health claims could result in adjustments to the accrual. These adjustments could significantly affect net income if circumstances differ substantially from the assumptions used in estimating the accrual.

Asset Quality and Potential Problem Loans and Leases

When a borrower fails to make a required payment on a loan within 10 to 15 days after the payment is due, the Bank generally institutes collection procedures by issuing a late notice. The customer is contacted again when the payment is between 17 and 40 days past due. In most cases, delinquencies are cured promptly; however, if a loan has been delinquent for more than 40 days, the Bank attempts additional written as well as verbal contacts and, if necessary, personal contact with the borrower in order to determine the reason for the delinquency and to effect a cure.  Where appropriate, Bank personnel review the condition of the property and the financial circumstances of the borrower. Based upon the results of any such investigation, the Bank may: (i) accept a repayment program which under appropriate circumstances could involve an extension in the case of consumer loans for the arrearage from the borrower, (ii) seek evidence, in the form of a listing contract, of efforts by the borrower to sell the property if the borrower has stated that he is attempting to sell, or (iii) initiate foreclosure proceedings. When a loan payment is delinquent for 90 days, the Bank generally will initiate foreclosure proceedings unless management is satisfied the credit problem is correctable.

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Loans are generally classified as nonaccrual when there are reasonable doubts as to the collectability of principal and/or interest and/or when payment becomes 90 days past due, except loans which are well secured and in the process of collection. Interest collections on nonaccrual loans, for which the ultimate collectability of principal is uncertain, are applied as principal reductions.

Leases are generally classified as nonaccrual when there are reasonable doubts as to the collectability of principal and/or interest. Leases may be placed on nonaccrual when the lease has experienced either four consecutive months with no payments or once the account is five months in arrears. Interest collections on nonaccrual leases, for which the ultimate collectability of principal is uncertain, are applied as principal reductions.

When a lessee fails to make a required lease payment within 10 days after the payment is due, Mid America Capital generally institutes collection procedures. The lessee may be contacted by telephone on the 10th, but no later than the 30th day of delinquency. A late notice is automatically issued by the system on the 11th day of delinquency and is sent to the lessee. The lease may be referred to legal counsel when the lease is past due beyond four payments and no positive response has been received or when other considerations are present.

Nonperforming assets (i.e., nonaccrual loans and leases, accruing loans and leases delinquent more than 90 days and foreclosed assets) decreased $12.7 million during the nine month period to $24.5 million at March 31, 2012.  This net decrease was primarily the result of loans charged off during fiscal 2012 and by customer ability to obtain alternative financing. The ratio of nonperforming assets to total assets, which is one indicator of credit risk exposure, decreased to 2.05% at March 31, 2012, from 3.12% at June 30, 2011.

Nonaccruing loans and leases decreased to $20.8 million at March 31, 2012, compared to $30.8 million at June 30, 2011. Included in nonaccruing loans and leases at March 31, 2012 were seven loans totaling $826,000 secured by one- to four-family real estate, 11 commercial business loans totaling $685,000, three equipment finance leases totaling $28,000, seven commercial real estate loans totaling $1.8 million, one loan for $32,000 secured by multifamily real estate, 16 agricultural real estate loans totaling $12.5 million, 23 agricultural business loans totaling $4.6 million, and 13 consumer loans totaling $282,000.

Accruing loans and leases delinquent more than 90 days decreased $4.5 million, to $1.1 million at March 31, 2012 compared to $5.6 million at June 30, 2011.  Included in accruing loans and leases delinquent more than 90 days at March 31, 2012 were one loan for $107,000 secured by one- to four-family real estate, three loans totaling $396,000 secured by agricultural real estate, and four loans totaling $633,000 secured by agricultural business assets. For the accruing loans which are greater than 90 days past due, the one- to four-family collateralized loan has a loan to value ratio of 95.2% at March 31, 2012.  This loan remains in accruing status due to the government guarantee on the loan.  Agricultural real estate collateralized loans have a weighted average loan to value ratio of 26.7% and agricultural business collateralized loans have a weighted average loan to value ratio of 58.0%.

The Company’s nonperforming loans and leases, which represent nonaccrual loans and loans past due 90 days and still accruing, have decreased $14.6 million from the levels at June 30, 2011. 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 or leases are deemed impaired. Loans and leases that are not performing do not necessarily result in a loss.

As of March 31, 2012, the Company had $2.6 million of foreclosed assets. The balance of foreclosed assets at March 31, 2012, consisted of $1.1 million in one- to four-family residences, $17,000 in commercial business collateral, $402,000 in commercial real estate collateral, $419,000 in agricultural business collateral, $654,000 in agricultural real estate, and $4,000 in consumer collateral. Approximately $1.0 million of foreclosed real estate was sold at public auction on March 28, 2012, and management expects settlement of proceeds to occur in the fourth fiscal quarter with no additional loss expected.

At March 31, 2012, the Company had designated $48.8 million of its loans and leases as classified, which management has determined need to be closely monitored because of possible credit problems of the borrowers or the cash flows of the secured properties. Included as classified loans and leases are substandard and doubtful categorized loans and leases before applying any specific valuation allowance, and foreclosed real estate and other properties and negative escrow balances on one-to four-family loans. At March 31, 2012, the Company had $7.1 million in multi-family,

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commercial real estate, agriculture, and commercial business participation loans purchased, of which none of the amounts were classified at March 31, 2012. These loans and leases were considered in determining the adequacy of the allowance for loan and lease losses. The allowance for loan and lease losses is established based on management’s evaluation of the risks probable in the loan and lease portfolio and changes in the nature and volume of loan and lease activity. Such evaluation, which includes a review of all loans and leases for which full collectability may not be reasonably assured, considers the estimated fair market value of the underlying collateral, present value of expected principal and interest payments, economic conditions, historical loss experience and other factors that warrant recognition in providing for an adequate loan and lease loss allowance.

Although the Company’s management believes that the March 31, 2012, recorded allowance for loan and lease losses was adequate to provide for probable losses on the related loans and leases, there can be no assurance that the allowance existing at March 31, 2012 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 are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful. Foreclosed assets include assets acquired in settlement of loans.

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

	Nonperforming Assets
	March 31, 2012			June 30, 2011
	(Dollars in Thousands)
Nonaccruing loans and leases:
One- to four-family	$	826		$	1,866
Commercial business	685			687
Equipment finance leases	28			126
Commercial real estate	1,834			784
Multi-family real estate	32			—
Agricultural business	4,613			12,838
Agricultural real estate	12,470			14,002
Consumer direct	21			54
Consumer home equity	260			451
Consumer indirect	1			36
Total	20,770			30,844
Accruing loans and leases delinquent more than 90 days:
One- to four-family	107			113
Commercial business	—			214
Commercial real estate	—			56
Agricultural business	633			3,855
Agricultural real estate	396			1,399
Consumer indirect	—			6
Total	1,136			5,643
Foreclosed assets: (1)
One- to four-family	1,115			667
Commercial business	17			29
Equipment finance leases	—			15
Commercial real estate	402			—
Agricultural business	419			—
Agricultural real estate	654			—
Consumer direct	4			—
Consumer indirect	—			2
Total	2,611			713
Total nonperforming assets (2)	$	24,517		$	37,200
Ratio of nonperforming assets to total assets (3)	2.05		%	3.12		%
Ratio of nonperforming loans and leases to total loans and leases (4)	3.08		%	4.42		%
Accruing troubled debt restructures	$	1,458		$	2,693

(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.

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

	Nine Months Ended March 31,
	2012			2011
	(Dollars in Thousands)
Balance at beginning of period	$	14,315		$	9,575
Charge-offs:
One- to four-family	(100		)	(15		)
Commercial business	(1,011		)	(407		)
Equipment finance leases	(42		)	(169		)
Commercial real estate	(941		)	(64		)
Agricultural business	(2,954		)	(264		)
Agricultural real estate	(1,536		)	(967		)
Consumer direct	(55		)	(98		)
Consumer home equity	(592		)	(430		)
Consumer OD & reserve	(163		)	(351		)
Consumer indirect	(27		)	(53		)
Total charge-offs	(7,421		)	(2,818		)
Recoveries:
One- to four-family	10			1
Commercial business	27			15
Equipment finance leases	58			—
Commercial real estate	32			—
Agricultural business	456			—
Agricultural real estate	53			—
Consumer direct	4			19
Consumer home equity	22			7
Consumer OD & reserve	56			90
Consumer indirect	22			22
Total recoveries	740			154
Net recoveries (charge-offs)	(6,681		)	(2,664		)
Additions charged to operations	2,906			6,584
Balance at end of period	$	10,540		$	13,495
Ratio of allowance for loan and lease losses to total loans and leases at end of period	1.48		%	1.61		%
Ratio of allowance for loan and lease losses to nonperforming loans and leases at end of period (1)	48.11		%	40.05		%
Ratio of net charge offs to average loans and leases for the year-to-date period (2)	1.12		%	0.40		%

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

(2)Percentages for the nine months ended March 31, 2012 and 2011 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 ASC Topic 310, “Accounting by Creditors for Impairment of a Loan” are summarized in the following tables.  The combination of ASC Topic 450, “Accounting for Contingencies” and ASC Topic 310 calculations comprise the Company’s allowance for loan and lease losses.

	General		Specific		General		Specific
	Allowance		Impaired Loan		Allowance		Impaired Loan
	for Loan and		Valuation		for Loan and		Valuation
	Lease Losses		Allowance		Lease Losses		Allowance
Portfolio Segment	March 31, 2012				June 30, 2011
	(Dollars in Thousands)
Residential	$	204	32		$	305	28
Commercial	978		60		1,338		127
Commercial real estate	1,860		59		1,411		272
Agricultural	3,147		2,146		3,088		6,177
Consumer	2,024		30		1,535		34
Total	$	8,213	$	2,327	$	7,677	$	6,638

				Specific					Specific
	Number			Impaired Loan		Number			Impaired Loan
	of Loan	Loan		Valuation		of Loan	Loan		Valuation
	Customers	Balance		Allowance		Customers	Balance		Allowance
Portfolio Segment	March 31, 2012					June 30, 2011
	(Dollars in Thousands)
Residential	2	$	335	$	32	2	$	338	$	28
Commercial	1	110		60		9	659		127
Commercial real estate	1	270		59		3	784		272
Agricultural	8	15,675		2,146		20	28,997		6,177
Consumer	3	121		30		4	178		34
Total	15	$	16,511	$	2,327	38	$	30,956	$	6,638

The allowance for loan and lease losses was $10.5 million at March 31, 2012, as compared to $14.3 million at June 30, 2011. This decrease is primarily attributable to $7.4 million in charge-offs made against the allowance in the first nine months of fiscal 2012, of which $3.9 million had been specifically reserved in the prior fiscal year.  The ratio of the allowance for loan and lease losses to total loans and leases was 1.48% at March 31, 2012, compared to 1.73% at June 30, 2011. The Company’s management has considered nonperforming assets and other assets of concern in establishing the allowance for loan and lease losses. The Company continues to monitor its allowance for possible 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 commercial business, agricultural, construction, multi-family and commercial real estate loans, including purchased loans. A periodic credit review is performed on all types of loans and leases to establish the necessary reserve based on the estimated risk within the portfolio. This assessment of risk takes into account the composition of the loan and lease portfolio, historical loss experience for each loan and lease category, previous loan and lease experience, concentrations of credit, current economic conditions and other factors that in management’s judgment deserve recognition.

Real estate properties acquired through foreclosure are initially recorded at fair value (less a deduction for disposition costs). Valuations are periodically updated by management and a specific provision for losses on such

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properties is established by a charge to operations if the carrying values of the properties exceed their estimated net realizable values.

Although management believes that it uses the best information available to determine the allowances, unforeseen market conditions could result in adjustments and net income 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 and collateral reviews and thus cannot be predicted in advance.

Comparison of the Three Months Ended March 31, 2012 and March 31, 2011

General.  The Company’s net income was $1.2 million, or $0.17 in basic and diluted earnings per common share for the three months ended March 31, 2012, as compared to net income of $459,000, or $0.07 in basic and diluted earnings per common share for the same period in the prior fiscal year.  For the third quarter of fiscal 2012, the return on average equity and the return on average assets was 5.10% and 0.41%, respectively, compared to 1.96% and 0.15%, respectively, for the same period in the prior fiscal year.

Interest, Dividend and Loan Fee Income.  Interest, dividend and loan fee income was $11.0 million for the three months ended March 31, 2012, as compared to $13.2 million for the same period in the prior fiscal year, a decrease of $2.2 million or 16.4%.  This decrease was primarily the result of a decrease in interest income within the loan portfolio, which included an interest reversal of $526,000 on tax increment financing (“TIF”) loans that became impaired during the quarter. Loans and leases receivable had an average yield of 5.32% for the three months ended March 31, 2012, which is 28 basis points less than the average yield of 5.60% for the three months ended March 31, 2011.  Investment securities had a decline in average yield of 76 basis points when comparing the third quarter of fiscal 2012 against the same period of the prior year, due primarily to the increase in the average balance of Federal Reserve demand deposits which yield a lower rate of return.  The average balance for loans and leases receivables for the third quarter of fiscal 2012 decreased $108.6 million, or 12.7% to $744.0 million when compared to the average balance of the third quarter of fiscal 2011.  The average balance of investment securities increased $93.6 million, or 35.6% to $356.4 million for the third quarter of fiscal 2012, when compared to the average balance of the same quarter of the prior fiscal year.  The revenue decrease attributable to the decrease in average interest-earning assets balances was $983,000, while the decrease attributed to the overall declining yield for interest-earning assets was $1.2 million.

Interest Expense.  Interest expense was $3.3 million for the three months ended March 31, 2012, compared to $4.1 million for the same period in the prior fiscal year, a decrease of $859,000 or 20.8%.  The average balance of interest-bearing deposits decreased by $22.6 million, or 2.9%, while the average interest rate paid on deposits decreased by 30 basis points to 0.87% for the third quarter of fiscal 2012.  This was due in part to a decrease in the average balances of the higher paying certificates of deposit by $105.8 million, and the offsetting increase in the average balances of checking and savings deposits of $41.1 million and $42.1 million, respectively.  This shift of deposits to the lower interest-bearing rate accounts resulted in a decrease in interest expense of $238,000 for the three months ended March 31, 2012, as compared to the same quarter of the prior year.  The average balance of FHLB advances and other borrowings decreased by $18.3 million, or 11.0% for the three month period ended March 31, 2012, as compared to the three month period ended March 31, 2011, while the rate decreased to 3.02% from 3.43% for the respective quarter.  The resulting decreases in volume rate accounted for an overall decrease in interest expense of $293,000.  The average rate paid on total interest-bearing liabilities, which include interest-bearing deposits and liabilities, was 1.40% for the three months ended March 31, 2012 as compared to 1.71% for the same period in fiscal 2011.

Net Interest Income. The Company’s net interest income for the three months ended March 31, 2012, decreased $1.3 million or 14.4%, to $7.7 million compared to $9.0 million for the same period in the prior fiscal year.  The net effect of the reduction of rates earned for interest-earning assets in excess of the reduction of rates paid for interest-bearing liabilities resulted in a net decrease in net interest income of $845,000.  In addition, the net decrease in volumes of interest-earning assets in excess of decreased volumes of interest-bearing liabilities resulted in a net decrease in net interest income of $456,000.  The Company’s Net Interest Margin, TE was 2.84% for the three months ended March 31, 2012, as compared to 3.31% for the three months ended March 31, 2011.  Net Interest Margin, TE is a non-GAAP financial measure.  See “Analysis of Net Interest Income” for a calculation of this non-GAAP financial measure and for further discussion as to the reasons we believe this non-GAAP financial measure is useful.

Provision for Losses on Loans and Leases. The allowance for loan and lease losses is maintained at a level which is considered by management to be adequate to absorb probable losses on existing loans and leases that may

46

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.  See “Asset Quality” above for further discussion.

During the three months ended March 31, 2012, the Company recorded a provision for losses on loans and leases of $264,000 compared to $1.9 million for the three months ended March 31, 2011.  The reduction in the provision when compared to the same quarter of the prior year is due to the declining loan balances and the amount of overall charge-offs recorded for the nine month period ended March 31, 2012.  Net charge-offs recorded for the third quarter of fiscal 2012 were $745,000, which brought the nine month fiscal total to $6.7 million.  The effect has reduced the amount of allowance required for specific impaired loans and increased the level of general reserves as a percentage of total reserves.  For this reason, the provision declined from the prior year’s third quarter.

Noninterest Income.  Noninterest income was $3.0 million for the quarter ended March 31, 2012, compared to $2.6 million for the quarter ended March 31, 2011, an increase of $433,000.  No other-than temporary impairment loss on securities was recorded for the third quarter of fiscal 2012, while for the third quarter of fiscal 2011, an other-than temporary impairment loss was recorded for $549,000.  In addition, the net gain on sale of securities increased $407,000 to $539,000 as compared to the same quarter a year ago.  These increases were partially offset by a valuation provision for mortgage servicing rights impairment of $330,000 and loss on the disposal of one closed-branch’s fixed assets of $233,000.

Noninterest Expense.  Noninterest expense was $8.7 million for the three months ended March 31, 2012 as compared to $9.1 million for the three months ended March 31, 2011, a decrease of $393,000, or 4.3%.  The primary factors in the overall decrease were decreases in compensation and employee benefits of $490,000 and the cost of FDIC insurance of $210,000.

Compensation and employee benefits were $4.9 million for the three months ended March 31, 2012, a decrease of $490,000 or 9.1% when compared to the three months ended March 31, 2011.  Employee compensation and performance-based incentive pay were the primary factors in the overall compensation decrease as they decreased by $210,000 and $195,000, respectively, for the third quarter of fiscal 2012 compared to the same quarter of the prior year. This was due to a decrease in FTEs and performance outcomes during the quarter.  Recruiting expense, also a part of compensation and employee benefits, decreased by $117,000, due to additional services received in the prior year’s quarter.

FDIC insurance decreased by $210,000, to $261,000 for the three months ended March 31, 2012 compared to the same quarter in the prior fiscal year.  Effective in the fourth quarter of fiscal 2011, the FDIC insurance assessment approach was modified and effectively reduced the amount of assessments for the Company.

Income Tax Expense.  The Company’s income tax expense for the three months ended March 31, 2012 was $580,000 compared to $123,000 for the same period in the prior fiscal year.  The effective tax rate was 32.4% and 21.1% for the three months ended March 31, 2012 and 2011, respectively.  The amount of permanent tax difference as a net deduction was a higher percentage to income before income taxes in the three month period ended March 31, 2011, which reduced the overall effective tax rate from the Company’s anticipated amount of 34%.

Comparison of the Nine Months Ended March 31, 2012 and March 31, 2011

General.  The Company’s net income was $3.4 million, or $0.48 in basic and diluted earnings per common share for the nine months ended March 31, 2012, as compared to net income of $2.7 million, or $0.39 in basic and diluted earnings per common share for the same period in the prior fiscal year.  For the first three quarters of fiscal 2012, the return on average equity and the return on average assets was 4.72% and 0.37%, respectively, compared to 3.80% and 0.29%, respectively, for the same period in the prior fiscal year.

Interest, Dividend and Loan Fee Income.  Interest, dividend and loan fee income was $36.1 million for the nine months ended March 31, 2012, as compared to $41.4 million for the same period in the prior fiscal year, a decrease of

47

$5.3 million or 12.7%.  This decrease was primarily the result of a decrease in interest income within the loan portfolio.  Loans and leases receivable had an average yield of 5.46% for the nine months ended March 31, 2012, which is 16 basis points less than the average yield of 5.62% for the nine months ended March 31, 2011.  Investment securities had a decline in average yield of 63 basis points when comparing the first nine months of fiscal 2012 against the same period of the prior year, due in part to the increase in the average balance of Federal Reserve demand deposits which yield a lower rate of return.  The average balance for loans and leases receivables for the first three quarters of fiscal 2012 decreased $84.7 million, or 9.7% to $792.6 million when compared to the average balance of the first three quarters of fiscal 2011.  The average balance of investment securities increased $49.9 million, or 19.0% to $313.2 million for the nine months ended March 31, 2012, when compared to the average balance of the same period of the prior fiscal year.  The revenue decrease attributable to the decrease in average interest-earning assets balances was $2.8 million, while the decrease attributed to the overall declining yield for interest-earning assets was $2.4 million.

Interest Expense.  Interest expense was $10.5 million for the nine months ended March 31, 2012, compared to $13.1 million for the same period in the prior fiscal year, a decrease of $2.6 million or 19.5%.  The average balance of interest-bearing deposits decreased by $10.7 million, or 1.4%, while the average rate paid on the deposits decreased by 21.2%.  This was due in part to a decrease in the average balances of the higher paying certificates of deposit of $99.9 million, and primarily offset by an increase in the average balances of checking and savings deposits of $46.2 million and $43.0 million, respectively.  This shift of deposits to the lower interest-bearing rate accounts resulted in a decrease in interest expense of $503,000 for the nine months ended March 31, 2012, as compared to the same period of fiscal 2011.  The average interest rate paid on deposits for the first nine months of fiscal 2012 was 0.98%, compared to 1.24% for the same period in the previous year.  The average balance of FHLB advances and other borrowings decreased by $40.7 million, or 21.6% for the nine month period ended March 31, 2012, as compared to the same period of the prior year, while the rate decreased to 3.05% from 3.09% for the respective periods.  The resulting decreases in volume rate accounted for an overall decrease in interest expense of $2.6 million.  The average rate paid on total interest-bearing liabilities, which include interest-bearing deposits and liabilities, was 1.48% for the nine months ended March 31, 2012 as compared to 1.74% for the same period in fiscal 2011.

Net Interest Income. The Company’s net interest income for the nine months ended March 31, 2012, decreased $2.7 million or 9.6%, to $25.6 million compared to $28.3 million for the same period in the prior fiscal year.  The net effect of the reduction of rates earned for interest-earning assets in excess of the reduction of rates paid for interest-bearing liabilities resulted in a net decrease in net interest income of $2.0 million.  In addition, the net decrease in volumes of interest-earning assets in excess of decreased volumes of interest-bearing liabilities resulted in a net decrease in net interest income of $766,000.  The Company’s Net Interest Margin, TE was 3.09% for the nine months ended March 31, 2012, as compared to 3.32% for the nine months ended March 31, 2011.  Net Interest Margin, TE is a non-GAAP financial measure.  See “Analysis of Net Interest Income” for a calculation of this non-GAAP financial measure and for further discussion as to the reasons we believe this non-GAAP financial measure is useful.

Provision for Losses on Loans and Leases. The allowance for loan and lease losses is maintained at a level which is considered by management to be adequate to absorb probable losses on existing loans and leases that may 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.  See “Asset Quality” above for further discussion.

During the nine months ended March 31, 2012, the Company recorded a provision for losses on loans and leases of $2.9 million compared to $6.6 million for the nine months ended March 31, 2011. The reduction in the provision when compared to the prior year, is due to the declining loan balances and the amount of overall charge-offs recorded for the nine month period ended March 31, 2012.  Net charge-offs recorded for the three quarters of fiscal 2012 were $6.7 million, which is $3.9 million greater than the charge-offs for the same period of the prior year.  The effect of the increased amount of charge-offs reduced the amount of allowance required for specific impaired loans and increased the level of general reserves as a percentage of total reserves.  For this reason, the provision declined from the prior year’s amount through the third quarter.  Although overall loan balances declined from the prior year, the general reserve remained at a similar level of the prior year’s quarter in part due to the effects of historical charge-off activity and management’s assessment of environmental factors.

Noninterest Income.  Noninterest income was $9.8 million for the nine month period ended March 31, 2012, compared to $10.2 million for the same period in the prior year, a decrease of $393,000.  This decrease is due primarily to

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decreases in net loan servicing income, net gain on sale of loans, and loss on disposal of closed-branch fixed assets in the amounts of $352,000, $590,000 and $245,000, respectively.  These decreases were partially offset by net gain on sale of securities of $251,000 and the reduction in other-than temporary losses of $549,000.

Net servicing income decreased $352,000, primarily due to a provision of $330,000 that was recorded in the third quarter of fiscal 2012 related to a valuation adjustment.  Continued low interest rates in the housing sector helped borrowers’ ability to prepay mortgages through refinance and new purchases.  This accelerated rate devalued the portfolio for which management recorded an allowance against the asset balance at March 31, 2012.

Net gain on sale of loans decreased $590,000, primarily due to a decrease in mortgage loan activity and the related loan sales when compared to the same period of the prior year.

The loss on disposal of closed-branch fixed assets was $245,000 for the nine months ended March 31, 2012.  In the second and third quarter, two branches were closed and the net book value remaining on fixed assets that were disposed was recorded.  The Company has announced that four additional branches are scheduled to close in the fourth quarter, which are estimated to include one-time expenses of $550,000 for severance and lease terminations and $230,000 for the disposition of fixed assets.  The closure of the branches, including those that are announced, was due in part to the consolidation of branches which duplicate proximity to other branches and is expected to reduce operating expenses by approximately $1.3 million. No branches were closed in fiscal 2011.

Net gain on sale of investments increased by $251,000, to $874,000 for the nine months ended March 31, 2012 as compared to the first three quarters of fiscal 2011.  Management transacts sales of investment securities as opportunities in the marketplace are presented.

Noninterest Expense.  Noninterest expense was $27.5 million for the nine months ended March 31, 2012 as compared to $28.2 million for the nine months ended March 31, 2011, a decrease of $629,000, or 2.2%.  The primary factors in the overall decrease were decreases in compensation and employee benefits of $947,000 and FDIC insurance of $426,000.  These decreases were offset by the increase in professional fees of $801,000.

Compensation and employee benefits were $15.5 million for the nine months ended March 31, 2012, a decrease of $947,000 or 5.7% when compared to the nine months ended March 31, 2011.  Performance-based incentive pay was the primary factor in the overall compensation decrease as it decreased by $694,000 for the nine months ended March 31, 2012, as compared to the same period in fiscal 2011, due to a decrease in performance outcomes.  Employee compensation decreased $133,000, or 1.2% when compared to the same period of the prior year, but included elevated compensation expenses related to a one-time accruals resulting from two executive separation agreements.  Compensation for existing staff has decreased due to the decreasing FTEs for the first nine months of fiscal 2012 as compared to the prior year, adjusted for annual salary increases for existing staff.  FTEs at March 31, 2012 were 301, compared to 341 at June 30, 2011, or a decline of 11.8% during the first nine months of fiscal 2012.  Net healthcare costs, which are included in the total for compensation and employee benefits, decreased $187,000, or 12.3% to $1.3 million when comparing the nine month period ended March 31, 2012 to the same period in the prior 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.  Director compensation and recruiting costs, also a part of compensation and employee benefits, increased by $64,000 and decreased by $67,000, respectively. The director costs increased primarily due to costs incurred for the increased involvement associated with governance matters, while recruiting costs declined due to the initial focus in fiscal 2011 related to the formal search for a permanent CEO replacement, which has been previously reported.

FDIC insurance decreased by $426,000, to $796,000 for the nine months ended March 31, 2012 compared to the same period in the prior fiscal year.  Effective in the fourth quarter of fiscal 2011, the FDIC insurance assessment was modified and effectively reduced the amount of assessments for the Company from that quarter forward.

Professional fees increased $801,000 to $2.5 million for the first three quarters of fiscal 2012 when compared to the nine month period ended March 31, 2011.  These costs increased due in part to certain employment, regulatory and governance matters incurred primarily during the first half of fiscal 2012.

Income Tax Expense.  The Company’s income tax expense for the nine months ended March 31, 2012 was $1.6 million compared to $1.1 million for the same period in the prior fiscal year.  The effective tax rate was 32.1% and 28.6% for the nine months ended March 31, 2012 and 2011, respectively.  The amount of permanent tax difference as a net

49

deduction was a higher percentage to income before income taxes in the nine month period ended March 31, 2011, which dropped the effective rate below 30%.  For both periods, permanent tax differences reduced the overall effective tax rate from the Company’s anticipated amount of 34%.

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, agency 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, 2012, 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;

·$20.0 million in an uncommitted, unsecured line of federal funds with Zions Bank;

·$53.9 million of available credit from the Federal Reserve Bank; and

·$235.6 million of available credit from FHLB of Des Moines (after deducting outstanding borrowings with FHLB of Des Moines).

The Bank may also seek other sources of contingent liquidity including additional federal funds purchased lines with correspondent banks and lines of credit with the Federal Reserve Bank. There were no funds drawn on the uncommitted, unsecured lines of federal funds with First Tennessee Bank, NA and Zions Bank at March 31, 2012. 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.

The Company has an available line of credit with United Bankers’ Bank for liquidity needs of $4.0 million with no funds advanced at March 31, 2012.  The Company has pledged 100% of Bank stock as collateral for this line of credit.

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, 2012, the Bank had $12.7 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, 2012, the Bank had outstanding commitments to originate and purchase mortgage and commercial loans of $18.2 million and to sell mortgage loans of $14.8 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, 2012, the Bank had an outstanding commitment to purchase $330,000 in investment securities available for sale, but had no outstanding commitments to sell any investment securities available for sale.

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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 FDIC are required 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. Under these capital requirements, at March 31, 2012, the Bank met all current capital requirements.

The OCC has adopted capital requirements for savings institutions comparable to the requirement for national banks. The minimum OCC core capital requirement for well-capitalized institutions is 5% of total adjusted assets. The Bank had Tier 1 (core) capital of 9.50% at March 31, 2012. The minimum OCC risk-based capital requirement for well-capitalized institutions is 10% of risk-weighted assets. The Bank had risk-based capital of 15.16% at March 31, 2012.

The Company has entered into interest rate swap contracts which are classified as cash flow hedge contracts or non-designated derivative contracts. At March 31, 2012, the total notional amount of interest rate swap contracts was $72.8 million with a fair value net loss of $4.5 million. The Company is exposed to losses if the counterparties fail to make their payments under the contract in which the Company is in a receiving status. The Company minimizes its risk by monitoring the credit standing of the counterparties. The Company anticipates the counterparties will be able to fully satisfy their obligations under the remaining agreements. See Note 12 of “Notes to Consolidated Financial Statements” of this Form 10-Q for additional information.

Impact of Inflation and Changing Prices

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

Recent Accounting Pronouncements

In December 2011, FASB issued ASU 2011-12 “Comprehensive Income” (ASC Topic 220).  This update modifies the effective date pertaining to reclassification adjustments out of accumulated other comprehensive income in Accounting Standards Update 2011-05. All other requirements in Update 2011-05 are not affected by this update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements.  The guidance is effective for fiscal years, and the interim periods within those years, beginning December 15, 2011 and early adoption is permitted.  The Company anticipates adopting this update in the first quarter of fiscal 2013 and does not expect the adoption to have a material effect on the Company’s consolidated financial condition, results of operations or cash flow.

In December 2011, FASB issued ASU 2011-11 “Balance Sheet” (ASC Topic 210), disclosures about offsetting assets and liabilities.  This update affects all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50.  The guidance is effective for annual periods beginning January 1, 2013 and the interim periods within those annual periods.  An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. 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 September 2011, FASB issued ASU 2011-08 “Intangibles — Goodwill and Other” (ASC Topic 350).  The objective of this update is to simplify how entities test goodwill for impairment.  This update adds a qualitative analysis to step one of the two-step process, which enables the Company to qualitatively determine if it is more likely than not that goodwill impairment exists, and if not, skip step two in determination of the amount of goodwill impairment.  The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, but early adoption is permitted.  The Company anticipates adopting this update in the fourth quarter

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of fiscal 2012 and does not expect the adoption to have a material effect on the Company’s consolidated financial condition, results of operations or cash flow.

In June 2011, FASB issued ASU 2011-05 “Comprehensive Income” (ASC Topic 220).  This updated requires the presentation of comprehensive income in financial statements.  An entity has the option to present the total comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The guidance is effective for fiscal years, and the interim periods within those years, beginning December 15, 2011 and early adoption is permitted.  The Company anticipates adopting this update in the first quarter of fiscal 2013 and does not expect the adoption to have a material effect on the Company’s consolidated financial condition, results of operations or cash flow.

In May 2011, FASB issued ASU 2011-04 “Fair Value Measurement” (ASC Topic 820).  This update results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. The amendments in this update explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this update are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. The Company has adopted this update at January 1, 2012 and the adoption did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flow.

Since February 6, 2012, the date of our previously filed annual report, the FASB has not issued any additional updates.

Subsequent Event

Subsequent to the third fiscal quarter, assets of a $5.0 million nonperforming agricultural credit were sold at public auction.  The aggregate loans to this borrower represent the largest nonperforming loan relationship at the Bank.  The auction and additional grain and other asset liquidation proceeds are expected to net a sufficient amount to substantially resolve this credit relationship during the fourth fiscal quarter.  The Bank does not expect to realize any further material losses or impairments on these loans.

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, 2012 and 2011, 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 2011 or that the Company’s primary market risk

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exposures and how those exposures were managed during the nine months ended March 31, 2012 changed significantly when compared to June 30, 2011.

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, 2012
			Estimated Increase
Change in	Estimated		(Decrease) in NPV
Interest Rates	NPV Amount		Amount			Percent
Basis Points	(Dollars in Thousands)
+300	$	192,356	$	35,299		22	%
+200	184,428		27,371			17
+100	172,943		15,886			10
—	157,057		—			—
-100	127,986		(29,071		)	(19	)

March 31, 2011
			Estimated Increase
Change in	Estimated		(Decrease) in NPV
Interest Rates	NPV Amount		Amount			Percent
Basis Points	(Dollars in Thousands)
+300	$	151,553	$	11,697		8	%
+200	150,030		10,174			7
+100	145,913		6,057			4
—	139,856		—			—
-100	127,430		(12,426		)	(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, 2012, an evaluation was performed by the Company’s management, including the Company’s President and Chief Executive Officer and the Company’s Senior 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 President and Chief Executive Officer and the Company’s Senior Vice President, Chief Financial Officer and Treasurer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2012.  There were no changes in the Company’s internal control over financial reporting that occurred during the third quarter ended March 31, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

53

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, 2011, 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.  There have been no material changes to the risk factors set forth in the above-referenced filing as of March 31, 2012.

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

None.

Item 3.  Defaults upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.

Item 6.  Exhibits

See “Exhibit Index.”

54

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 4, 2012	By:	/s/ Stephen M. Bianchi
			Stephen M. Bianchi, President and Chief Executive Officer
			(Principal Executive Officer)
Date:	May 4, 2012	By:	/s/ Brent R. Olthoff
			Brent R. Olthoff, Senior Vice President, Chief Financial Officer and Treasurer
			(Principal Financial and Accounting Officer)

55

Exhibit Index

Exhibit Number	Description
10.1	Separation Agreement between the registrant and David A. Brown, dated January 13, 2012 (incorporated herein by reference to the Company’s Current Report on Form 8-K filed January 13, 2012)
31.1	Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Senior Vice President, Chief Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Senior Vice President, Chief Financial Officer and Treasurer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase
101.DEF*	XBRL Taxonomy Extension Definition Linkbase
101.LAB*	XBRL Taxonomy Extension Label Linkbase
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

Index