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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended June 30, 2010ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                     to                   
  .


Commission file number 0-19972



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

Delaware(State or other jurisdiction of
incorporation or organization)

46-0418532(I.R.S. Employer
Identification No.)225 South Main Avenue,
Sioux Falls, SD(Address of principal executive offices)

57104(ZIP Code)


Registrant's
telephone number, including area code:(605) 333-7556

Securities
registered pursuant to Section 12(b) of the Act:None

Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o    No ý

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 ý    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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. 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 ý


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

The aggregate market value of the common stock held by non-affiliates of the registrant, computed by reference to the closing price as of the last
business day of the registrant's most recently completed second fiscal quarter, December 31, 2009, was approximately $67.4 million.

As
of September 3, 2010, there were 6,946,337 shares of the registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Part III of this document is incorporated by reference herein to specific portions of the registrant's definitive proxy
statement to be delivered to stockholders in connection with the 2010 Annual Meeting of Stockholders to be held on November 17, 2010.



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Annual Report on Form 10-K  Table of Contents



Page
NumberPART IItem 1.

Business


2Item 1A.

Risk Factors


42Item 1B.

Unresolved Staff Comments


56Item 2.

Properties


56Item 3.

Legal Proceedings


57Item 4.

[Removed and Reserved]


57PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities


57Item 6.

Selected Financial Data


60Item 7.

Management's Discussion and Analysis of Financial Condition and
Results of Operations


63Item 7A.

Quantitative and Qualitative Disclosures About Market
Risk


88Item 8.

Financial Statements and Supplementary
Data


90Item 9.

Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure


149Item 9A.

Controls and Procedures


149Item 9B.

Other Information


149PART IIIItem 10.

Directors, Executive Officers and Corporate
Governance


149Item 11.

Executive Compensation


150Item 12.

Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters


150Item 13.

Certain Relationships and Related Transactions, and Director
Independence


150Item 14.

Principal Accounting Fees and Services


151PART IVItem 15.

Exhibits and Financial Statement
Schedules


151


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Forward-Looking Statements

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

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



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:



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Forward-looking
statements speak only as of the date they are made. Forward-looking statements are based upon management's then-current beliefs and assumptions, but
management does not give any assurance that such beliefs and assumptions will prove to be correct. We undertake no obligation to publicly update or revise any forward-looking statements included or
incorporated by reference in this Form 10-K 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-K to "we," "our," "us" and other similar references are to the Company, unless otherwise expressly stated or the context requires otherwise.

PART I

Item 1.Business

This section should be read in conjunction with the following parts of this Form 10-K: Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" and
Part II, Item 8, "Financial Statements and Supplementary Data."

The Company

HF Financial Corp., a unitary thrift holding company, 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 acquired all of the outstanding stock of the Bank on April 8, 1992. 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. Unless otherwise indicated, all matters discussed in this
Form 10-K relate to the Company and its direct and indirect subsidiaries, including, without limitation, the Bank. See "Subsidiary Activities" below for further information
regarding the subsidiary operations of the Company and the Bank.

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The
executive offices of the Company and its direct and indirect subsidiaries are located at 225 South Main Avenue, Sioux Falls, South Dakota, 57104. The Company's telephone
number is (605) 333-7556.

Website and Available Information

The website for the Company and the Bank is located atwww.homefederal.com.Information
on this website does not constitute part of this Form 10-K.

The
Company makes available, free of charge, its Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K
and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as reasonably practicable
after such forms are filed with or furnished to the SEC. Copies of these documents are available to stockholders upon request addressed to the Secretary of the Company at 225 South Main Avenue, Sioux
Falls, South Dakota, 57104.

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.

Through
its trust department, the Bank acts as trustee, personal representative, administrator, guardian, custodian, agent, advisor and manager for various accounts. As of
June 30, 2010, the trust department of the Bank maintained approximately $84.5 million in assets under management. Wealth management has become a strategic focus of the Bank, and the
Bank has added expertise in portfolio management and business development to enhance this business line to drive future growth in assets under management and fee income.

The
Bank also purchases residential mortgage-backed securities and invests in U.S. Government and agency obligations and other permissible investments. The Bank receives loan servicing
income on loans serviced for others and commission income from credit life insurance on consumer loans. The Bank, through its wholly-owned subsidiaries, offers annuities, mutual funds, life insurance
and other financial products and services, as well as equipment leasing services.

The
Bank's deposits are insured up to applicable limits by the Deposit Insurance Fund ("DIF"), which is administered by the Federal Deposit Insurance Corporation ("FDIC"), and the Bank
is subject to primary regulation and examination by the Office of Thrift Supervision ("OTS").

Segments

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated
regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company's reportable segments are "banking" (including leasing activities) and
"other." The "banking" segment is conducted through the Bank and Mid America Capital Services, Inc. ("Mid America Capital") and the "other" segment is composed of smaller
non-reportable segments, the Company and inter-segment eliminations. For financial information by segment see Note 1 of "Notes to Consolidated
Financial Statements," which is included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

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Subsidiary Activities

In addition to the Bank, the Company had six other wholly-owned subsidiaries as of June 30, 2010: HF Financial
Group, Inc. ("HF Group"), HF Financial Capital Trust III ("Trust III"), HF Financial Capital Trust IV ("Trust IV"), HF Financial Capital Trust V ("Trust V"), HF Financial Capital
Trust VI ("Trust VI") and HomeFirst Mortgage Corp. (the "Mortgage Corp.").

In
August 2002, the Company formed HF Group, a South Dakota corporation. HF Group previously marketed software to facilitate employee benefits administration, payroll processing and
management and governmental reporting. HF Group no longer actively markets this software and had immaterial operations in 2010. Intercompany interest income is eliminated in the preparation of
consolidated financial statements.

In
December 2002, the Company formed Trust III, a Delaware corporation, for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures
of the Company. These subordinated debentures constitute the sole asset of Trust III.

In
September 2003, the Company formed Trust IV, a Delaware corporation, for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures
of the Company. These subordinated debentures constitute the sole asset of Trust IV.

In
December 2006, the Company formed Trust V, a Delaware corporation, for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of
the Company. These subordinated debentures constitute the sole asset of Trust V.

In
July 2007, the Company formed Trust VI, a Delaware corporation, for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the
Company. These subordinated debentures constitute the sole asset of Trust VI.

The
Mortgage Corp., a South Dakota corporation formed in September 1994, was previously engaged in the business of originating one- to four-family residential
mortgage loans, which were sold into the secondary market. The Mortgage Corp. had no activity during fiscal 2009 and fiscal 2010.

As
a federally chartered thrift institution, the Bank is permitted by OTS regulations to invest up to 2% of its assets in the stock of, or loans to, service corporation subsidiaries. The
Bank may invest an additional 1% of its assets in service corporations where such additional funds are used for inner-city or community development purposes. The Bank currently has less
than 1% of its assets in investments in its subsidiary service corporations as defined by the OTS. In addition to investments in service corporations, the Bank is permitted to invest an unlimited
amount in operating subsidiaries engaged solely in activities in which the Bank may engage directly.

The
Bank has four wholly-owned subsidiaries, Hometown Investment Services, Inc. ("Hometown"), Mid America Capital Services, Inc. ("Mid America Capital"),
Mid-America Service Corporation ("Mid-America") and PMD, Inc. ("PMD"). Home Federal Securitization Corp. ("HFSC") was a wholly-owned subsidiary, but was dissolved during
fiscal year 2010.

Hometown,
a South Dakota corporation formed in February 1951, provides financial and insurance products to customers of the Bank and members of the general public in the Bank's market
area. Insurance products offered by Hometown primarily include annuities and life insurance products. Hometown obtains its funding via a line of credit from the Bank. Banking regulations do not limit
the amount of funding provided to an operating subsidiary. In June 2010, the Bank advanced $100,000 for the purchase of common stock of the subsidiary. As of June 30, 2010, there were no
advances on an approved line of credit of $75,000. Intercompany interest income and interest expense are eliminated in the preparation of consolidated financial statements.

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Mid
America Capital, a South Dakota corporation formed in October 1990, specializes in equipment finance leasing. Mid America Capital obtains its funding through a line of credit from
the Bank. Banking regulations do not limit the amount of funding provided to an operating subsidiary. As of June 30, 2010, Mid America Capital had advanced $8.4 million on an approved
line of credit of $35.0 million with the Bank. Intercompany interest income and interest expense are eliminated in the preparation of consolidated financial statements.

Mid-America,
a South Dakota corporation formed in August 1971, in the past provided residential appraisal services to the Bank and other lenders in the Bank's market.
Mid-America had no activity during fiscal 2009 and fiscal 2010.

PMD,
a South Dakota corporation formed in January 1992, in the past was engaged in the business of buying, selling and managing repossessed real estate properties. PMD had no activity
during fiscal 2009 and fiscal 2010.

HFSC,
a Delaware corporation formed in January 2003, existed for the sole purpose of buying motor vehicle installment loans from the Bank to be securitized. HFSC had no activity during
fiscal 2009 and fiscal 2010 and was dissolved effective March 24, 2010.

Market Area

Based on total assets at June 30, 2010, the Bank is the largest savings association headquartered in South Dakota. The Bank has
a total of 33 banking centers in its market area and one Internet branch located atwww.homefederal.com.The Bank's primary market area includes
communities located in eastern and central South Dakota, including the Sioux Falls metropolitan statistical area (MSA), and the cities of Pierre, Mitchell, Aberdeen, Brookings, Dakota Dunes,
Watertown, and Yankton. The Bank also has a banking center in Marshall, Minnesota, which serves customers located in southwestern Minnesota. The banking center located in Dakota Dunes also serves
customers located in northwestern Iowa. The Bank's primary market area features a variety of agribusiness, financial services, health care and light manufacturing firms. The Internet branch allows
access to customers beyond traditional geographical areas.

Mid
America Capital provides services to customers primarily in a five-state area in the upper Midwest, but originations can and have expanded nationwide based on
relationships developed with existing Bank customers and other vendor relationships.

Business Strategy

The Company's business strategy is to remain a community-focused financial institution and to grow and improve its profitability
by:



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Lending Activities

The Bank originates a variety of loans including one- to four-family residential loans, commercial business
loans, agriculture loans, consumer loans, multi-family and commercial real estate loans, and construction loans. Consumer loans include loans for automobile purchases, home equity and home improvement
loans and student loans.

Business Banking

Commercial Business Lending.In order to serve the needs of the local business community and improve the interest rate sensitivity and
yield of its
assets, the Bank originates adjustable- and fixed-rate commercial loans. Interest rates on commercial business loans generally adjust or float with a designated national index plus a
specified margin. The Bank's commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance accounts receivable, inventory and equipment and
business expansion within the Bank's market area. The Bank originates commercial business loans directly and through programs sponsored by the Small Business Administration ("SBA") of which a portion
of such loans are also guaranteed in part by the SBA. The Bank generally originates commercial business loans for its portfolio and retains the servicing with respect to such loans. The Bank
anticipates continued expansion and emphasis of its commercial business lending, subject to market conditions and the Home Owners' Loan Act ("HOLA") restrictions. See
"RegulationLoan and Investment Powers" below for HOLA restrictions.

Commercial
business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of
funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, may be dependent upon the general economic environment). The
Bank's commercial business loans are typically secured by the assets of the business, such as accounts receivable, equipment and inventory. However, the collateral securing the loans may depreciate
over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Whenever possible, the Bank's commercial business loans include personal guarantees of the
borrowers. In addition, the loan officer may perform on-site visits, obtain financial statements and perform a financial review of the loan.

Multi-Family and Commercial Real Estate Lending.The Bank engages in multi-family and commercial real estate lending primarily in South
Dakota and
the adjoining Midwestern states. These lending activities may include existing property or new construction development or purchased loans, including loans to builders and developers for the
construction of one- to four-family residences and condominiums and the development of one- to four-family lots.

Loans
secured by multi-family and commercial real estate properties are generally larger and involve a greater degree of credit risk than one- to four-family
residential mortgage loans. Because

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payments
on loans secured by multi-family and commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject
to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower's ability to repay the
loan may be impaired. In addition, loans secured by property outside of the Bank's primary market area may contain a higher degree of risk due to the fact that the Bank may not be as familiar with
market conditions where such property is located. The Bank does not have a material concentration of multi-family or commercial real estate loans outside of South Dakota and the adjoining Midwestern
states.

The
Bank presently originates adjustable-rate, short-term balloon payment, fixed-rate multi-family and commercial real estate loans. The Bank's
multi-family and commercial real estate loan portfolio is secured primarily by apartment buildings and owner occupied and non-owner occupied commercial real estate. The terms of such loans
are negotiated on a case-by-case basis. Commercial real estate loans generally have terms that do not exceed 25 years. The Bank has a variety of rate adjustment
features, call provisions and other terms in its multi-family and commercial real estate loan portfolio. Generally, the loans are made in amounts up to 80% of the appraised value of the collateral
property and with debt service coverage ratios of 115% or higher. The debt service coverage is the ratio of net cash from operations divided by payments of debt obligations. However, these percentages
may vary depending on the type of security and the guarantor. Such loans provide for a negotiated margin over a designated national index. The Bank analyzes the borrower's financial condition, credit
history, prior record for producing sufficient income from similar loans, and references as well as the reliability and predictability of the net income generated by the property securing the loan.
The Bank generally requires personal guarantees of borrowers.

Depending
on the circumstances of the security of the loan or the relationship with the borrower, the Bank may decide to sell participations in the loan. The sale of participation
interests in a loan are necessitated by the amount of the loan or the limitation of loans-to-one borrower. See
"RegulationLoans-to-One Borrower" for a discussion of the loans-to-one borrower
regulations. In return for
servicing these loans for the participants, the Bank generally receives a fee of 0.25% to 0.38%. Also, income is received at loan closing from loan fees and discount points. Appraisals on properties
securing multi-family and commercial real estate loans originated by the Bank are performed by appraisers approved pursuant to the Bank's appraisal policy.

The
Bank also makes loans to developers for the purpose of developing one- to four-family lots. These loans typically have terms of one year and carry floating
interest rates based on a national designated index. Loan commitment and partial release fees are charged. These loans generally provide for the payment of interest and loan fees from loan proceeds.
The principal balance of these loans is typically paid down as lots are sold. Builder construction and development loans are obtained principally through continued business from developers and
builders who have previously borrowed from the Bank, as well as broker referrals and direct solicitations of developers and builders. The application process includes a submission to the Bank of
plans, specifications and costs of the project to be constructed or developed. These items are used as a basis to determine the appraised value of the subject property. Loans are based on the lesser
of current appraised value and/or the cost of construction (land plus building), and land development loans are generally originated with a maximum loan-to-value ratio of 65%
based upon an independent appraisal.

The
HOLA includes a provision that limits the Bank's non-residential real estate lending to no more than four times its total capital. This maximum limitation, which at
June 30, 2010 was $442.3 million, has not materially limited the Bank's lending practices.

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Under HOLA, the maximum amount which the Bank may lend to any one borrower is 15% of the Bank's unimpaired capital and surplus, or $17.4 million at
June 30, 2010. Loans in an amount equal to an additional 10% of unimpaired capital and surplus may be made to the same borrower if such loans are fully secured by readily marketable collateral.
The Bank may request a waiver from the OTS to exceed the 15% loans-to-one borrower limitation on a case-by-case basis. See
"RegulationLoans-to-One Borrower" for more information and a discussion of the loans-to-one
borrower regulations.

Construction Lending.The Bank makes construction loans to individuals for the construction of their residences, as well as loans to
builders and
developers for the construction of single family and multi-family residential properties, in the Bank's primary market area.

Construction
loans to individuals for their residences are structured to be converted to mortgage loans at the end of the construction phase, which typically runs six to twelve months.
Residential construction loans are generally underwritten pursuant to the same guidelines used for originating residential mortgage loans.

The
Bank makes loans for the construction of multi-family residential properties. Such loans are generally made at adjustable- rates, which adjust periodically based on the appropriate
index.

Construction
loans are generally originated with a maximum loan-to-value ratio of 80%, and up to 90% on loans to individuals for construction of their residence,
based upon an independent appraisal. Because of the uncertainties inherent in estimating development and construction costs and the market for the project upon completion, it is relatively difficult
to evaluate accurately the total loan funds required to complete a project, the related loan-to-value ratios and the likelihood of ultimate success of the project. Construction
and development loans to borrowers other than owner occupants also involve many of the same risks discussed above regarding multi-family and commercial real estate loans and tend to be more sensitive
to general economic conditions than many other types of loans.

Prior
to making a commitment to fund a construction loan, the Bank requires an appraisal of the property, or, for larger projects, both an appraisal and a study of the feasibility of the
proposed project. The Bank's construction loan policy provides for the inspection of properties by independent in-house and outside inspectors at the commencement of construction and prior
to disbursement of funds during the term of the construction loan.

Agricultural Loans.In order to serve the needs of the local agricultural community and improve the interest rate sensitivity and yield
of its
assets, the Bank originates agricultural loans through its agricultural division. The agricultural division offers loans to its customers such as: (i) operating loans that are used to fund the
borrower's operating expenses, which typically have a one year term and are indexed to the national prime rate; (ii) term loans on machinery, equipment and breeding stock that may have a term
up to seven years and require annual payments; (iii) agricultural farmland term loans that are used to finance (or refinance) land purchases; (iv) specialized loans to fund facilities
and equipment for livestock confinement enterprises; and (v) loans to fund ethanol plant development. Agriculture real estate loans typically will have personal guarantees of the borrowers, a
first lien on the real estate, interest rates adjustable to the national prime rate or Treasury Note rates, and annual, quarterly or monthly payments. Operating and term loans are secured by farm
chattels (crops, livestock, machinery, etc.), which are the operating assets of the borrower. The Bank also originates agricultural loans directly and through programs sponsored by the Farmers Service
Agency ("FSA") of which a portion of such loans are also guaranteed in part by the FSA. The bank also provides financing for part-time farmers and their primary residences. These loans are
for customers who derive the majority of their income from non-farming related sources but do derive a portion of their income from the property they are financing. These loans are
typically sold to Farmer Mac with the Bank providing the ongoing servicing. For these services the Bank is paid an annual servicing fee from Farmer Mac.

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Loan
customers are required to supply current financial statements, tax returns and cash flow projections which are updated on an annual basis. In addition, on major loans, the loan
officer will perform an annual farm visit, obtain financial statements and perform a financial review of the loan.

Mortgage Lending

One- to Four-Family Residential Mortgage Lending.One- to four-family residential mortgage loan
originations are primarily generated by the Bank's marketing efforts, its present customers, walk-in customers and referrals from real estate agents and builders. The Bank has focused its
lending efforts primarily on the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences.

The
Bank currently makes 15-, 20- and 30-year fixed- and adjustable-rate ("ARM") one- to four-family residential
mortgage loans at loan-to-value ratios consistent with Federal National Mortgage Assoc.("FNMA")/Federal Home Loan Mortgage Corp.("FHLMC") guidelines.
Loan-to-values exceeding 80% are required to include private mortgage insurance in an amount sufficient to reduce the Bank's exposure at or below the 80% level. The Bank
generally offers an ARM loan with a fixed rate for the initial three to five years, which then converts to a one-year annual rate reset ARM for the remainder of the life of the loan. These
loans provide for an annual cap and a lifetime cap at a set percent over the fully-indexed rate.

The
Bank also offers a portfolio loan product that is a seven-year balloon loan that is fully payable at the end of the balloon term.

The
Bank also offers fixed-rate 15- to 30-year mortgage loans that conform to secondary market standards. Interest rates charged on these
fixed-rate loans are competitively priced on a daily basis according to market conditions. Residential loans generally do not include prepayment penalties.

The
Bank also originates fixed-rate one- to four-family residential mortgage loans through the South Dakota Housing Development Authority ("SDHDA")
program. These loans generally have terms not to exceed 30 years and are insured by the Federal
Housing Administration ("FHA"), Veterans Administration ("VA"), Rural Development or private mortgage insurance. The Bank receives an origination fee of 1% of the loan amount from the borrower and a
servicing fee of generally 0.38% from the SDHDA for these services. The servicing fee rate may subsequently decline to a minimum of 0.25% based on delinquency characteristics. The Bank is the largest
servicer of loans for the SDHDA. At June 30, 2010, the Bank serviced $965.8 million of mortgage loans for the SDHDA. See Note 4 of "Notes to Consolidated Financial Statements,"
which is included in Part II, Item 8, "Financial Statements and Supplementary Data" in this Form 10-K, for information on loan servicing.

In
underwriting one- to four-family residential mortgage loans, the Bank evaluates both the borrower's ability to make monthly payments and the value of the
property securing the loan. The property that secures the real estate loans made by the Bank is appraised by an appraiser approved under the Bank's appraisal policy. The Bank requires borrowers to
obtain title, fire and casualty insurance in an amount not less than the amount of the loan. Real estate loans originated by the Bank contain a "due-on-sale" clause allowing
the Bank to declare the unpaid principal balance due and payable upon the sale of the collateral property.

The
Bank offers online mortgage capabilities through QuickClick Online Mortgage Solutions, a service that allows customers to check rates, research loan options and complete
mortgage applications via the Bank's website. This service is currently available to branch locations in South Dakota and Minnesota.

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Consumer Lending

Other Consumer Lending.The Bank's management considers its consumer loan products to be an important component of its lending
strategy.
Specifically, consumer loans generally have shorter terms to maturity and carry higher rates of interest than one- to four-family residential mortgage loans. In addition, the
Bank's management believes that the offering of consumer loan products helps to expand and create stronger ties to its existing customer base by increasing the number of customer relationships and
providing cross-marketing opportunities. The Bank ceased originations of consumer indirect automobile loans in the first quarter of fiscal year 2008 in order to pursue other lending opportunities and
a re-allocation of the use of capital. The Bank
also participates in Federal student loan programs, whereby loans are serviced by a third party until sold to the secondary loan market.

The
Bank's consumer direct loan portfolio includes, among other types, automobile loans, home equity loans, loans secured by deposit accounts and student loans. Consumer loan terms vary
according to the type of collateral, length of contract and creditworthiness of the borrower. The Bank offers both open- and closed-end credit. Overdraft lending is extended
through lines of credit that are tied to a checking account. The credit lines generally bear interest at 18% and are generally limited to no more than $2,000. Loans secured by deposit accounts at the
Bank are currently originated for up to 90% of the account balance (although historically the Bank has loaned up to 100% of the account balance), with a hold placed on the account restricting the
withdrawal of the account balance. The interest rate on such loans is typically equal to 2% above the contract rate.

Loans
secured by second mortgages, together with loans secured by all prior liens, are generally limited to a maximum of 95% of the appraised or assessed value of the property securing
the loan and generally have maximum terms that do not exceed 10 years.

The
underwriting standards employed by the Bank for consumer loans include an application, a determination of the applicant's payment history on other debts, and an assessment of the
ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed loan amount.

Consumer
loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable
assets, such as automobiles or boats. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans.

Leasing Activities

General.Through its wholly owned subsidiary, Mid America Capital, the Bank originates commercial
and municipal leases. These products have a fixed interest rate for the duration of the lease with terms typically ranging from 24 to 60 months. The leases generally are 100% financed with
either the first or first and last months' payments due at lease inception. As a result of the 100% financing and fixed interest rate, the yield on leases is higher than similar type lending products.

Leases
are originated generally in the Bank's trade area in the upper Midwest. All leases are secured by the equipment leased, with personal guarantees of the borrowers normally obtained
on commercial leases.

Commercial Leases.In order to support the Bank and its customers and to improve the yield of its assets, Mid America Capital originates
commercial
leases to customers primarily in the Bank's trade

10

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Table of Contents

area.
Mid America Capital basically offers two types of commercial leases: capital and tax leases. Leases encompass a wide variety of equipment for a variety of commercial uses. The customer base
tends to be small- to medium-sized businesses that view leasing as another financing option that augments their overall operation. Repayment terms tend to be monthly in nature. As with commercial
loans, commercial leases typically are made on the basis of the borrower's ability to make repayment from the cash flow of their business. As a result, the availability of funds for the repayment of
commercial leases may be substantially dependent on the success of the business itself. The collateral securing the leases will generally depreciate over time, may be difficult to appraise and may
fluctuate in value based on the success of the business.

Municipal Leases.The Bank and Mid America Capital also originate leases to municipal entities such as cities, counties, and public
schools. The
lessee must be a political subdivision of the state in order to qualify as a municipal lease. Because the interest income earned on this type of lease is exempt from federal income taxes, the rate
offered to the municipality is usually substantially lower than a comparable commercial lease. Repayment terms generally are on a monthly, semi-annual or annual basis. Residual values are
$1.00 for municipal leases.

Repayment
is based on the municipality's ability to levy and collect taxes. Assuming the municipality has a bond rating, that bond rating, together with audited financial statements, are
the basis for the lease. On larger leases, bond ratings and financial statements will be reviewed annually.

Loan and Lease Portfolio Composition.Over the past several years, the Company has transformed its
loan and lease portfolio from predominantly one-to four-family residential and consumer loans to a more diverse portfolio including commercial and agriculture loans. As part of
the Company's business strategy to build its commercial and agriculture loan portfolio, the Bank has hired several bankers with significant commercial and agriculture lending experience, which has led
to successful growth results across these business lines. The Company's commercial and agricultural loan portfolio has increased to 67.29% of the Company's total loan and lease portfolio at
June 30, 2010 from 65.04% at June 30, 2009, while its one- to- four family residential and consumer loan portfolio has decreased to 23.32% of its total loan and
lease portfolio from 26.20% over that period. At the same time, the Company continues to prioritize and invest in mortgage lending as it believes this to be a core component of its personal banking
strategy.

11

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Table of Contents

The following table sets forth information concerning the composition of the Company's loan and lease portfolio from continuing operations in dollar amounts and
in percentages (before deductions for the undisbursed portion of loans in process, deferred fees and discounts and allowance for losses) as of the dates indicated.

At June 30,2010

2009

2008

2007

2006Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total(Dollars in Thousands)One- to four-family(1)

$
93,247


10.04
%
$
94,237


10.59
%
$
108,546


13.36
%
$
125,525


15.97
%
$
108,342


14.57
%Multi-family


50,538


5.44


49,054


5.51


46,118


5.68


34,126


4.34


34,161


4.59Commercial business and real estate(2)(3)


332,450


35.78


337,477


37.90


310,378


38.20


281,357


35.79


248,060


33.35Agricultural real estate


118,956


12.80


102,676


11.53


78,043


9.60


48,030


6.11


31,484


4.23Construction


32,743


3.52


12,827


1.44


8,286


1.02


18,674


2.38


33,596


4.52Equipment finance leases(2)


10,549


1.13


15,880


1.78


19,250


2.37


22,267


2.83


29,343


3.95Agricultural business


154,860


16.67


134,331


15.09


91,934


11.31


69,608


8.86


57,985


7.80Consumer Loans:Automobile


23,420


2.52


36,359


4.08


58,807


7.24


98,238


12.50


106,900


14.37Deposit account


1,438


0.15


1,645


0.19


1,580


0.19


1,772


0.23


1,553


0.21Student(4)


4,893


0.53


5,993


0.67


614


0.08


263


0.03


420


0.06Junior liens on mortgages


97,031


10.44


91,570


10.28


81,250


10.00


79,113


10.06


84,898


11.42Other


9,066


0.98


8,367


0.94


7,727


0.95


7,079


0.90


6,932


0.93Total consumer loans


135,848


14.62


143,934


16.16


149,978


18.46


186,465


23.72


200,703


26.99Total gross loans and leases


929,191


100.00
%

890,416


100.00
%

812,533


100.00
%

786,052


100.00
%

743,674


100.00
%Less:Undisbursed portion of loans in process


(30,973
)




(23,791
)




(19,834
)




(10,387
)




(9,674
)Deferred fees and discounts


(652
)




(462
)




(193
)




582





883Allowance for losses


(9,575
)




(8,470
)




(5,933
)




(5,872
)




(5,657
)Total loans and leases receivable, net

$
887,991




$
857,693




$
786,573




$
770,375




$
729,226


(1)Includes
one- to four-family loans held for sale.(2)Includes
tax-exempt loans and leases.(3)Includes
commercial loans held for sale.(4)Includes
student loans held for sale.


12

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Table of Contents

The following table sets forth the composition of the Company's loan and lease portfolio from continuing operations by fixed- and adjustable-rate in
dollar amounts and in percentages (before deductions for the undisbursed portion of loans in process, deferred fees and discounts and allowance for losses) as of the dates indicated.
Adjustable-rate loans are tied to various indices including prime rate and the treasury yield curve and have reset dates ranging from daily to several years.

At June 30,2010

2009

2008

2007

2006Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total(Dollars in Thousands)Fixed-Rate Loans and Leases:One- to four-family(1)

$
71,340


7.68
%
$
68,547


7.70
%
$
76,392


9.40
%
$
89,086


11.33
%
$
70,341


9.46
%Multi-family, commercial & construction(2)(3)


95,572


10.29


85,951


9.65


107,511


13.23


121,046


15.40


115,939


15.59Agricultural real estate


25,508


2.74


23,552


2.64


23,841


2.93


13,591


1.73


9,495


1.28Consumer(4)


78,264


8.42


93,546


10.51


110,702


13.63


146,686


18.66


151,354


20.35Agricultural business


32,199


3.46


24,988


2.81


17,020


2.09


14,007


1.78


6,673


0.90Equipment finance leases(2)


10,549


1.13


15,880


1.78


19,250


2.37


22,267


2.83


29,343


3.95Total fixed-rate loans and leases


313,432


33.72


312,464


35.09


354,716


43.65


406,683


51.73


383,145


51.53Adjustable-Rate Loans:One- to four-family(1)


21,907


2.36


25,690


2.88


32,154


3.96


36,439


4.64


38,001


5.11Multi-family, commercial & construction


320,159


34.46


313,407


35.20


257,271


31.67


213,111


27.12


199,878


26.87Agricultural real estate


93,448


10.06


79,124


8.89


54,202


6.67


34,439


4.38


47,770


6.42Consumer(4)


57,584


6.20


50,388


5.66


39,276


4.83


39,779


5.06


49,349


6.64Agricultural business


122,661


13.20


109,343


12.28


74,914


9.22


55,601


7.07


25,531


3.43Total adjustable-rate loans


615,759


66.28


577,952


64.91


457,817


56.35


379,369


48.27


360,529


48.47Total loans and leases


929,191


100.00
%

890,416


100.00
%

812,533


100.00
%

786,052


100.00
%

743,674


100.00
%Less:Undisbursed portion of loans in process


(30,973
)




(23,791
)




(19,834
)




(10,387
)




(9,674
)Deferred fees and discounts


(652
)




(462
)




(193
)




582





883Allowance for loan and lease losses


(9,575
)




(8,470
)




(5,933
)




(5,872
)




(5,657
)Total loans and leases receivable, net

$
887,991




$
857,693




$
786,573




$
770,375




$
729,226


(1)Includes
one- to four-family loans held for sale.(2)Includes
tax-exempt loans and leases.(3)Includes
commercial loans held for sale.(4)Includes
student loans held for sale.


13

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Table of Contents

The following schedule illustrates the scheduled principal contractual repayments of the Company's loan and lease portfolio at June 30, 2010. The schedule
does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.

Real Estate

Non-Real EstateOne- to Four-
Family(1)

Multi-
Family

Commerical

Agricultural

Construction

Consumer(2)

Commercial
Business(3)

Agricultural

Total(Dollars in Thousands)Due in less than 1 year

$
4,406

$
3,493

$
47,758

$
16,137

$
9,519

$
25,110

$
57,917

$
123,249

$
287,589Due in 1 to 5 years


15,672


17,102


62,137


35,115


5,942


93,013


41,439


26,267


296,687Due 5 years or greater


73,169


29,943


117,979


67,704


17,282


17,725


15,769


5,344


344,915Total

$
93,247

$
50,538

$
227,874

$
118,956

$
32,743

$
135,848

$
115,125

$
154,860

$
929,191


(1)Includes
one- to four-family loans held for sale.(2)Includes
demand loans, loans having no stated maturity, student loans held for sale and overdraft loans.(3)Includes
equipment finance leases and tax-exempt leases.


Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less
than their average contractual terms because of prepayments. In addition, due-on-sale clauses on loans generally give the Bank the right to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to
increase when current mortgage loan rates are substantially higher than rates on existing mortgage loans and decrease when rates on existing mortgages are substantially higher than current mortgage
loan rates.

The
following table sets forth the composition of the Company's deferred fees and discounts on loans as of the dates indicated.

At June 30,2010

2009

2008

2007

2006(Dollars in Thousands)One-to four-family

$
(460
)
$
(500
)
$
(599
)
$
(691
)
$
(616
)Multi-family, commercial real estate & construction


(291
)

(252
)

(232
)

(276
)

(348
)Consumer


4


16


44


103


113Agricultural


(78
)

(99
)

(70
)

(44
)

(32
)Equipment finance leases


93


131


39


40


63Commercial business


21


28


21


14


5Dealer reserve


59


214


604


1,436


1,698Total deferred fees and discounts

$
(652
)
$
(462
)
$
(193
)
$
582

$
883


Deferred
fees and discounts on loans and leases have trended to a net deferred cost position. In fiscal year 2010, the net deferred fees and discounts on loans and leases decreased by
$190,000. This decrease was primarily due to a $155,000 reduction in dealer reserve, as a result of lower indirect automobile loan balances as the Company ceased consumer indirect loan originations in
the first quarter of fiscal year 2008.

Potential Problem Loans

Nonperforming Assets.See "Asset Quality" under Part II, Item 7 "Management's Discussion and Analysis of Financial Condition
and
Results of Operations" of this Form 10-K for discussion.

14

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Table of Contents

Classified Assets.Federal regulations provide for the classification of loans, leases and other assets, such as debt and equity
securities
considered by the OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity
of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the Company will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of
such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the Company to sufficient risk to warrant
classification in one of the aforementioned categories, but possess weaknesses, are required to be designated "criticized" or "special mention" by management.

When
the Company classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to
charge-off such amount. The Company's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Bank's Regional Director
at the regional OTS office, who may order the establishment of additional general or specific loss allowances.

In
connection with the filing of its periodic reports with the OTS and in accordance with its classification of assets policy, the Company regularly reviews problem loans and leases in
its portfolio to determine whether any loans or leases require classification, as well as investment securities, in accordance with applicable regulations. On the basis of management's monthly review
of its assets, at June 30, 2010, the Company had designated $50.7 million of its assets as special mention and $38.9 million of its assets as classified. Other potential problem
loans are included in criticized and classified assets. See "Asset Quality" under Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations"
of this Form 10-K for further discussion.

Allowance for Loan and Lease Losses.See "Application of Critical Accounting Policies" and "Asset
Quality" under Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K for discussion.

Investment Activities

The Bank is required under OTS regulation to maintain a sufficient amount of liquid assets. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments in relation to the return on loans.

Federally
chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper, investment grade corporate debt securities and mutual funds whose assets conform to the investments that a federally
chartered savings institution is otherwise authorized to make directly.

Generally,
the investment policy of the Bank is to invest funds among various categories of investments and maturities based upon the Bank's asset/liability management policies,
investment quality and marketability, liquidity needs and performance objectives. At June 30, 2010, approximately 89.6% of our investment portfolio was in AAA-rated, liquid
residential mortgage-backed securities.

At
June 30, 2010, the Company's investments in residential mortgage-backed securities totaled $241.5 million, or 19.3% of its total assets, and does not consist of any
private-label securities. As of

15

---



Table of Contents

such
date, the Bank also had a $10.3 million investment in the stock of the Federal Home Loan Bank of Des Moines ("FHLB" or "FHLB of Des Moines") in order to satisfy the FHLB of Des Moines'
requirement for membership.

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

At June 30, 2010Less Than 1 Year

1 to 5 Years

5 to 10 Years

Over 10 Years

Total Investment
SecuritiesAmortized
Cost

Weighted
Average
Yield

Amortized
Cost

Weighted
Average
Yield

Amortized
Cost

Weighted
Average
Yield

Amortized
Cost

Weighted
Average
Yield

Amortized
Cost

Fair Value(Dollars in Thousands)U.S. government agencies & corporations

$




%
$
4,551


1.58
%
$




%
$




%
$
4,551

$
4,576Municipal bonds


480


0.98


5,484


3.44


5,204


3.89


2,652


4.01


13,820


14,224Trust preferred securities




















9,257


2.46


9,257


3,902Residential mortgage-backed securities








1,886


5.30


9,373


5.18


226,254


2.96


237,513


241,481Total investment securities

$
480




$
11,921




$
14,577




$
238,163




$
265,141

$
264,183


The effective maturities for the Bank's residential mortgage-backed securities are much shorter due to the combination of prepayments and the
variable-rate nature of $224.6 million of residential mortgage-backed securities. The variable or hybrid (fixed for a period of time and then variable thereafter) structure gives
the Bank flexibility in risk management of the balance sheet.

Management
has implemented a process to identify securities that could potentially have a credit impairment that is other-than-temporary. This process involves
evaluation of the length of time and extent to which the fair value has been less than the amortized cost basis,
review of available information regarding the financial position of the issuer, monitoring the rating of the security, cash flow projections, and the Company's intent to sell a security or whether it
is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity. To the extent we determine that a security is
deemed to be other-than-temporarily impaired, an impairment loss is recognized. In fiscal year 2010, the other than temporary impairment losses taken against the pooled trust
preferred securities was $2.2 million. In addition, $460,000 was recognized on the balance sheet in other comprehensive income resulting in $2.7 million of credit loss recognized through
earnings.

In
fiscal year 2009, the total other-than-temporary impairment losses taken against the pooled trust preferred securities was $3.9 million, of which
$3.5 million was recognized on the balance sheet in other comprehensive income with $397,000 of credit loss recognized through earnings. Additionally, the Company recorded a net impairment loss
of $8,000 attributed to Fannie Mae common stock held in the investment securities portfolio. No other-than-temporary impairments were recorded against earnings during fiscal
years 2008 or 2007. See Note 1, "Summary of Significant Accounting Policies," and Note 2, "Investment Securities," of "Notes to Consolidated Financial Statements," which is included in
Part II, Item 8 of this Form 10-K for additional information.

The
Bank's investment securities portfolio is managed in accordance with a written investment policy adopted by the Bank's Board of Directors. Investments may be made by the Bank's
officers within specified limits and approved in advance by the Bank's chief executive officer or president for transactions over these limits. At the present time, the Bank does not have any
investments that are held for trading purposes. At June 30, 2010, the Company had $264.4 million of securities available for sale, including residential mortgage-backed securities of
$241.5 million. See Note 2 of "Notes to

16

---



Table of Contents

Consolidated
Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Form 10-K for further information on the
Company's investment portfolio.

Sources of Funds

General.The Company's primary sources of funds are earnings, in-market deposits, FHLB advances and other borrowings, amortization and
repayments of loan principal, residential mortgage-backed securities and callable agency securities. Secondary sources include sales of mortgage
loans, sales and/or maturities of securities, out-of-market deposits and short-term investments.

Borrowings
of the Bank are primarily from the FHLB of Des Moines, and may be used on a short-term basis to compensate for seasonal reductions in deposits or deposit inflows
at less than projected levels, and may be used on a longer-term basis to support expanded lending activities. The Bank has established collateral at the Federal Reserve Bank ("FRB") as a
contingent source of funding. See Note 7 of the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of
this Form 10-K for further detail of the Company's borrowings.

Deposits.The Bank offers a variety of deposit accounts having a wide range of interest rates and terms. The Bank's deposits consist of
statement
savings accounts, checking accounts, money market and certificate of deposit accounts ranging in terms from 30 days to five years. The Bank primarily solicits deposits from its market area,
with a strategic focus of multiple-service household growth. The Bank relies primarily on customer service, competitive pricing policies and advertising to attract and retain these deposits. Based on
liquidity needs, the Bank may, from time to time, acquire out-of-market deposits in those circumstances where wholesale funding offers either a maturity or cost efficiency not
available with retail deposits. At June 30, 2010, out-of-market deposits accounted for less than 3% of total deposits.

The
flow of deposits is influenced by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit accounts offered by the
Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. In recent years, the Bank has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate conscious. The Bank manages the pricing of its deposits in keeping with its asset/liability management and profitability
objectives. Based on its experience, the Bank believes that its savings, money market, and checking accounts are stable sources of deposits. However, the ability of the Bank to attract and maintain
certificates of deposit, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions.

17

---



Table of Contents

The
following table sets forth the dollar amount of deposits in the various types of deposit accounts offered by the Bank as of the dates indicated.

At June 30,2010

2009

2008Amount

Percent of
Total

Amount

Percent of
Total

Amount

Percent of
Total(Dollars in Thousands)Transaction Accounts:Noninterest bearing accounts

$
117,139


12.81
%
$
94,067


11.23
%
$
90,598


11.55
%Interest bearing accounts weighted average rates of 0.10%, 0.15% and 0.64% at June 30, 2010, 2009 and 2008


100,231


10.96


94,846


11.32


90,125


11.49Savings accounts weighted average rates of 0.33%, 0.35% and 1.46% at June 30, 2010, 2009 and 2008


83,136


9.09


81,417


9.72


78,575


10.02Money market accounts weighted average rates of 0.73%, 0.64% and 1.53% at June 30, 2010, 2009 and 2008


189,821


20.76


145,214


17.33


171,689


21.89Total transaction accounts


490,327


53.62


415,544


49.60


430,987


54.95In-Market Certificates of Deposit:0.00 - 1.99%


182,585


19.97


91,971


10.98


1,069


0.142.00 - 2.99%


142,922


15.64


87,130


10.40


64,598


8.233.00 - 3.99%


53,265


5.83


109,339


13.05


58,781


7.504.00 - 4.99%


13,909


1.52


81,817


9.76


106,627


13.605.00 - 5.99%


8,233


0.90


30,922


3.69


94,727


12.086.00 - 6.99%


119


0.01


112


0.01


193


0.02Total in-market certificates of deposit


401,033


43.87


401,291


47.89


325,995


41.57Out-of-market certificates of deposit weighted average rate of 1.10%, 1.32% and 2.98% at June 30, 2010, 2009 and 2008


22,904


2.51


21,033


2.51


27,255


3.48Total certificates of deposit


423,937


46.38


422,324


50.40


353,250


45.05Total deposits

$
914,264


100.00
%
$
837,868


100.00
%
$
784,237


100.00
%


18

---



Table of Contents

The following table sets forth the amount of the Company's certificates of deposit and other deposits by time remaining until maturity as of June 30, 2010.

MaturityLess Than
3 Months

3 to 6
Months

6 to 12
Months

Over
12 Months

Total(Dollars in Thousands)Certificates of deposit less than $100,000(1)

$
39,917

$
39,143

$
45,390

$
85,477

$
209,927Certificates of deposit of $100,000 or more


15,768


13,108


22,811


87,881


139,568Out-of-market certificates of deposit(2)


9,744


8,041


2,477


2,642


22,904Public funds(3)(4)


9,843


5,229


16,301


20,165


51,538Total certificates of deposit

$
75,272

$
65,521

$
86,979

$
196,165

$
423,937


(1)Includes
funds from the Certificate of Deposit Account Registry Service ("CDARS") certificate of deposit program of $33.2 million.(2)Includes
certificates of deposit of $100,000 or greater of $22.3 million.(3)Includes
certificates of deposit from governmental and other public entities, excluding out-of-market certificates of deposit.(4)Includes
certificates of deposit of $100,000 or greater of $50.4 million.


The
Bank solicits certificates of deposit of $100,000 or greater from various state, county and local government units which carry rates which are negotiated at the time of deposit. See
Note 6 of "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and
Supplementary Data" of this Form 10-K. Deposits at June 30, 2010, and 2009 included $89.4 million and $78.1 million, respectively, of deposits from one local
governmental entity, the majority of which are savings account balances.

Borrowings.Although deposits are the Bank's primary source of funds, the Bank's policy has been to utilize borrowings when they are a
less costly
source of funds or can be invested at a positive rate of return.

The
Bank's borrowings consist primarily of advances from the FHLB of Des Moines upon the security of its capital stock of the FHLB of Des Moines and certain pledgeable loans, including
but not limited to, its mortgage related loans, residential mortgage-backed securities and U.S. Government and other agency securities. Such advances can be made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. At June 30, 2010, the Bank's FHLB advances totaled $190.5 million, representing 16.4% of total liabilities.

The
Company has a line of credit for $6.0 million with United Bankers' Bank for liquidity needs, but did not have any outstanding advances at June 30, 2010. The Company
pledged 100% of the stock of the Bank as collateral on the line of credit. The Company had a line of credit for $6.0 million with First Tennessee Bank, NA at June 30, 2009, and had
outstanding advances of $5.5 million at June 30, 2009. The line of credit matured on September 30, 2009. See Note 7 of "Notes to Consolidated Financial Statements," which
is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Form 10-K for further detail of the Company's borrowings.

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The
following table sets forth the maximum month-end balances and average balances of FHLB and FRB advances and other borrowings of the Company at the dates indicated.

Years Ended June 30,2010

2009

2008(Dollars in Thousands)Maximum Month-End Balance:FHLB and FRB advances

$
258,390

$
307,562

$
244,040Other borrowings


241


5719


180Average Balance:FHLB and FRB advances

$
206,818

$
231,587

$
152,140Other borrowings


2,261


619


149


The
following table sets forth certain information as to the Bank's FHLB and FRB advances and other borrowings of the Company at the dates indicated.

June 30,2010

2009

2008(Dollars in Thousands)Overnight federal funds purchased

$
21,405

$
26,495

$
29,920Fixed-rate FHLB advances


169,100


180,655


168,355Other borrowings


214


5,719


179Total borrowings

$
190,719

$
212,869

$
198,454Weighted average interest rate of borrowings


3.03
%

3.63
%

3.88
%


Competition

The banking business is highly competitive and the Bank experiences competition in each of its markets from many other financial
institutions, many of which are larger and may have significantly greater financial and other resources. Specifically, the Bank competes with
commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual
funds, as well as super-regional, national and international financial institutions, that operate offices in the Company's primary market areas and elsewhere. Many of these competitors are also
well-established financial institutions.

Competitors
that are not depository institutions are generally not subject to the extensive regulations that apply to the Bank. The Bank competes with these institutions both in
attracting deposits and in making loans. The Bank competes for deposits by offering a variety of deposit accounts at competitive rates, convenient business hours and convenient branch locations with
inter-branch deposit and withdrawal privileges at each. The Bank competes for loans on the basis of quality of service, interest rates, loan fees and loan type. In addition, the Bank must attract its
customer base from other existing financial institutions and from new residents. In new markets that the Bank may enter, the Bank will also compete against well-established community banks
that have developed relationships within the community.

Employees

At June 30, 2010, the Bank had a total of 308 full-time employees and 49 part-time employees. The
full-time employees include 7 employees of the Bank's subsidiary corporations. The Bank's employees are not represented by any collective bargaining group. Management considers its
relations with its employees to be good.

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Regulation

General

The Bank is a federally chartered thrift institution, the deposits of which are federally insured by the FDIC under the DIF.
Accordingly, the Bank is subject to broad federal regulation and oversight extending to all of its operations by its primary federal regulator, the OTS, and by its deposit insurer, the FDIC. Such
regulation covers all aspects of the banking business, including lending practices, safeguarding deposits, capital structure, transactions with affiliates and conduct and qualifications of personnel.
The Bank is a member of the Federal Home Loan Bank of Des Moines ("FHLB" or "FHLB of Des Moines") and is subject to certain limited regulation by the Federal Reserve Board ("FRB"). As the unitary
thrift holding company of the Bank, we are also subject to federal regulation and oversight by the OTS.

The
purpose of the regulation of us, like other depository institution holding companies, is to protect subsidiary institutions where deposits are federally insured and their depositors.
As discussed below, under recently enacted financial reform legislation known as The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the OTS
will be abolished 90 days after the formal transfer of its supervisory and rulemaking functions to various federal agencies in July 2011 (or else by January 2012 if a six-month
extension is required). Accordingly, both the Company and Bank will be transitioning to the jurisdiction of new primary federal regulators. The primary regulator of the Company will be the FRB and the
primary regulator of the Bank will be the Comptroller of the Currency.

Certain
of these regulatory requirements and restrictions are discussed below or elsewhere in this Form 10-K. The following discussion is intended to be a summary of
the material statutes, regulations and policies applicable to savings associations and their holding companies, and is not intended to be a complete discussion of all such statutes, regulations and
policies.

Regulation of Federal Savings Associations

The OTS has extensive authority over the operations of federal savings associations, such as the Bank. This regulation and supervision
establishes a comprehensive framework for activities in which a federal savings association can engage and is intended primarily for the protection of the DIF and depositors. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such laws and regulations or interpretations thereof, whether by the OTS, the FDIC
or through legislation, could have a material adverse impact on the Bank and its operations and on us and our stockholders.

The
Bank is required to file periodic reports with the OTS and is subject to periodic examinations primarily by the OTS and to a lesser extent by the FDIC.

Business Activities

The activities of federal savings associations are generally governed by federal laws and regulations. These laws and regulations
delineate the nature and extent of the activities in which federal savings associations may engage. In particular, many types of lending authority for federal savings associations are limited to a
specified percentage of the institution's capital or assets.

However,
as discussed below, the Dodd-Frank Act will significantly impact the availability of federal preemption of state consumer laws to federal savings associations and
their subsidiaries.

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Table of Contents

Loan and Investment Powers

The Bank derives its lending and investment powers from the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities and certain other assets. The Bank
may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage
activities. These investment powers are subject to various limitations, including (i) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four
highest rating categories; (ii) a limit of 400% of an association's capital on the aggregate amount of loans secured by non-residential real estate property; (iii) a limit of
20% of an association's assets on the aggregate amount of commercial and agricultural loans and leases with the amount of commercial loans in excess of 10% of assets being limited to small business
loans; (iv) a limit of 35% of an association's assets on the aggregate amount of secured consumer loans and acquisitions of certain debt securities, with amounts in excess of 30% of assets
being limited to loans made directly to the original obligor and where no third-party finder or referral fees were paid; (v) a limit of 5% of assets on non-conforming loans (loans
in
excess of the specific limitations of the HOLA); and (vi) a limit of the greater of 5% of assets or an association's capital on certain construction loans made for the purpose of financing what
is or is expected to become residential property. In addition, the HOLA and the OTS regulations provide that a federal savings association may invest up to 10% of its assets in tangible personal
property for leasing purposes. At June 30, 2010, the Bank met the 10% leasing limitation with 0.83% of total Bank assets. Such general leases, however, do not have to be aggregated with the
institution's loans for purposes of the HOLA's investment and lending limitations. At June 30, 2010, the Bank met the 20% limitation on commercial and agricultural loans and leases with such
loans and leases equal to 15.17% of total Bank assets.

Loans-To-One Borrower

Under the HOLA, the Bank is generally subject to the same limits on loans-to-one borrower as are imposed on
national banks. With specified exceptions, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus.
Additional amounts may be loaned, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily-marketable collateral. At June 30,
2010, the Bank's lending limit under this restriction was $17.4 million.

Assessments

The OTS has established a schedule for the assessment of fees upon all savings associations to fund the operations of the OTS. The
general assessment, paid on a semiannual basis, is computed by totaling three components: the Bank's total assets, supervisory condition and complexity of operations. The Bank's OTS assessment
(standard assessment) for the fiscal year ended June 30, 2010, was approximately $265,000.

Enforcement

The OTS has primary enforcement responsibility over federal savings associations, including the Bank. In general, these enforcement
actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices and can result in, among other things, assessments of civil money penalties, issuance of
cease and desist orders and removal of directors and officers. Under the Federal Deposit Insurance Act, the FDIC has the authority to recommend to the Director of the OTS that an enforcement action be
taken with respect to a
particular savings association. If action is not taken by the OTS, the FDIC may take action under certain circumstances.

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Table of Contents

Safety and Soundness Standards

Under federal law, the OTS has adopted a set of guidelines prescribing safety and soundness standards. The guidelines establish general
standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and
compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.
The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services
performed by an executive officer, employee, director or principal stockholder.

In
addition, the OTS adopted regulations that authorize the OTS to order a bank that has been given notice by the OTS that it is not satisfying applicable safety and soundness standards
to submit a compliance plan. If, after being so ordered, a bank fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must
issue an order directing action to correct the deficiency and may issue an order directing corrective actions and other actions of the types to which an undercapitalized association is subject under
the "prompt corrective action" provisions of federal law. If a bank fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money
penalties.

Prompt Corrective Action Regulations

Under the OTS prompt corrective action regulations, the OTS is required to take certain, and is authorized to take other, supervisory
actions against undercapitalized banks. For this purpose, a bank is placed in one of the following five categories based on the association's capital:



The
severity of the action authorized or required to be taken under the prompt corrective action regulations increases as a bank's capital decreases within the three undercapitalized
categories. All banks are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person if, following such distribution, the bank would be
undercapitalized. The OTS is required to monitor closely the condition of an undercapitalized bank and to restrict the growth of its assets.

An
undercapitalized bank is required to file a capital restoration plan within 45 days of the date the bank receives notice that it is within any of the three
undercapitalized categories, and the plan must be
guaranteed by any parent holding company. The aggregate liability of a parent holding company is limited to the lesser of:



If
a bank fails to submit an acceptable plan, it is treated as if it were "significantly undercapitalized." Banks that are "significantly" or "critically undercapitalized" are subject to
a wider

23

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Table of Contents

range
of regulatory requirements and restrictions. Under the OTS regulations, a federal savings association is generally treated as "well-capitalized" if its total risk-based
capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, its leverage ratio is 5% or greater, and it is not subject to any order or directive by the
OTS to meet a specific capital level.

At
June 30, 2010, the Bank met the criteria for being considered "well-capitalized."

Federal Deposit Insurance of Accounts and Regulation by the FDIC

The Bank is a member of, and pays deposit insurance assessments to, the DIF, which is administered by the FDIC. Effective
April 1, 2006, through the Federal Deposit Insurance Reform Act of 2005, the maximum insurance coverage for self-directed retirement plan deposits increased from $100,000 to
$250,000 permanently. Under the Dodd-Frank Act, all other deposits of the Bank are permanently insured up to $250,000 per depositor for each account ownership category (prior to the
legislation, the increased insurance coverage from $100,000 to $250,000 was temporary until December 31, 2013). FDIC insurance of deposits is backed by the full faith and credit of the U.S.
government. As the insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may
prohibit any FDIC-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious risk to the DIF. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the
OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or
unsound condition.

The
DIF was formed on March 31, 2006, following the merger of the Bank Insurance Fund and the Savings Association Insurance Fund in accordance with the Federal Deposit Insurance
Reform Act of 2005 (the "Deposit Insurance Fund Act"). In addition to merging the insurance funds, the Deposit Insurance Fund Act established a statutory minimum and maximum designated reserve ratio
for the DIF and granted the FDIC greater flexibility in establishing the required reserve ratio. The Dodd-Frank Act provides for an increase in the minimum designated reserve ratio for the
DIF from 1.15% to 1.35% of insured deposits, which much be reached by September 30, 2020, and provides that in setting the assessments necessary to meet the new requirement, the FDIC shall
offset the effect of this provision on insured depository institutions with total consolidated assets of less than $10 billion, so that more of the cost of raising the reserve ratio will be
borne by the institutions with more than $10 billion.

In
order to maintain the DIF, member institutions are assessed an insurance premium. The amount of each institution's premium is generally based on the balance of insured deposits and
the degree of risk the institution poses to the DIF. Under the assessment system, the FDIC assigns an institution to one of four risk categories, with the first category having two
sub-categories based on the institution's most recent supervisory and capital evaluations, designed to measure risk. In October 2008, the FDIC proposed raising assessment rates to
implement a Restoration Plan for the DIF, which had fallen significantly below the then-applicable minimum target level of 1.15% as a result of recent bank failures. On February 27,
2009, the FDIC approved an amended Restoration Plan, under which the FDIC implemented an assessment rate schedule to raise the DIF reserve ratio to 1.15% within seven years. Pursuant to the Plan, the
FDIC implemented a final rule that set assessment rates and made adjustments based on risk. Under the final rule, banks in the lowest risk category were required to pay initial base rates ranging from
12 basis points to 16 basis points of assessable deposits on an annual basis, beginning on April 1, 2009 (applicable to assessments for the second quarter of 2009 and thereafter), subject to
further adjustment for banks holding unsecured debt, certain secured liabilities and brokered deposits beyond a certain amount. Banks in the highest risk category were required to pay an initial base
rate of 45 basis points of assessable deposits, which may also be adjusted to between 40 basis points and 77.5 basis points of assessable deposits for excess amounts of unsecured debt,

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Table of Contents

certain
secured liabilities and brokered deposits. The FDIC also reserved the right to adjust the assessment rate schedule from quarter to quarter. On May 22, 2009, the Board of Directors of
the FDIC adopted a final rule establishing a special assessment of five basis points on each FDIC-insured depository institution's assets, minus its Tier 1 capital, as of
June 30, 2009. The special assessment of $538,000 was collected on September 30, 2009. The FDIC is authorized to raise the assessment rates as necessary to maintain the DIF and has
authority to declare additional special assessments. In addition, on November 12, 2009, the FDIC Board approved a rule requiring prepayment of the quarterly assessments for the fourth quarter
of calendar 2009, and the entire calendar years of 2010, 2011, and 2012. On December 30, 2009, the Company paid $4.9 million which
was recorded as a prepaid asset and will be proportionally expensed over future periods. At June 30, 2010, the remaining balance recorded as a prepaid asset was $3.7 million. The FDIC
may impose additional special assessments which would be recorded as they are incurred.

The
Deposit Insurance Fund Act allows "eligible insured depository institutions" to share a one-time assessment credit pool of approximately $4.7 billion. To be
eligible, an institution must have been in existence on December 31, 1996 and have paid a deposit insurance assessment prior to that date, or be a "successor" to such an institution. The Bank's
remaining assessment credit of $114,000 at June 30, 2008, was applied to reduce deposit insurance assessments during the first and second quarters of fiscal year 2009.

In
addition, all FDIC-insured institutions are required to pay assessments to the FDIC at an annual rate of approximately 0.0124% of insured deposits to fund interest
payments on bonds issued by the Financing Corporation ("FICO"), an agency of the federal government established in 1987 to recapitalize the predecessor to the DIF. These assessments, which are
adjusted quarterly, will continue until the FICO bonds mature in 2017 through 2019.

The
Bank's assessment rate for the fiscal year ending June 30, 2010, was 0.1404% and the premium paid for Fiscal 2010 was $1.3 million. The FDIC has authority to increase
insurance assessments. A significant increase in DIF insurance premiums would have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what the
insurance assessment rate will be in the future.

Under
federal law, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance.

Regulatory Capital Requirements

OTS regulations require the Bank to meet three minimum capital standards:



In
assessing an institution's capital adequacy, the OTS takes into consideration not only these numeric factors but also qualitative factors and has the authority to establish higher
capital requirements for individual institutions where necessary. The Bank, as a matter of prudent management, targets as its goal the maintenance of capital ratios which exceed these minimum
requirements and that are consistent with the Bank's risk profile.

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At
June 30, 2010, the Bank exceeded each of its capital requirements as shown in the following table:

Amount(1)

Percent of
Applicable
Assets(2)(Dollars in Thousands)GAAP Capital

$
110,572


8.82
%Tier 1 (core) capital

$
108,428


8.69
%Required


49,907


4.00Excess over requirement

$
58,521


4.69
%Total risk-based capital

$
117,406


11.68
%Required


80,402


8.00Excess over requirement

$
37,004


3.68
%


(1)The
Bank's investment in its subsidiaries is included for purposes of calculating regulatory capital.(2)Tier I
(core) capital figures are determined as a percentage of total adjusted assets; risk based capital figures are determined as a percentage of
risk-weighted assets.


The
Federal Deposit Insurance Corporation Improvement Act ("FDICIA") required that the OTS and other federal banking agencies revise their risk-based capital standards to
ensure that they take into account interest rate risk, concentration of risk and the risks of non-traditional activities. The OTS monitors the interest rate risk of individual institutions
through (i) the OTS requirements for interest rate risk management, (ii) the ability of the OTS to impose individual minimum capital requirements on institutions that exhibit a
high degree of interest rate risk, and (iii) regulatory requirements that provide guidance on the management of interest rate risk and outline the responsibility of boards of directors in that
area.

The
OTS monitors the interest rate risk of individual institutions through analysis of the change in net portfolio value, or NPV. NPV is defined as the net present value of an
institution's existing assets, liabilities, and off-balance sheet contracts and, therefore, hypothetically represents the value of an institution's net worth. The OTS has also used this
NPV analysis as part of its evaluation of certain applications or notices submitted by savings associations. The OTS, through its general oversight of the safety and soundness of savings associations,
retains the right to impose minimum capital requirements on individual institutions to the extent the institution is not in compliance with certain written guidelines established by the OTS regarding
NPV analysis. The OTS has not imposed any such requirements on the Bank.

Limitations on Dividends and Other Capital Distributions

The OTS imposes various restrictions or requirements on the Bank's ability to make capital distributions, including cash dividends. A
savings institution that is the subsidiary of a savings and loan holding company must file a notice with the OTS at least 30 days before making a capital distribution.

The
OTS may disapprove of a notice or application if:



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During
the fiscal year ended June 30, 2010, the Bank paid cash dividends to the Company totaling $2.5 million.

Liquidity

All savings associations, including the Bank, are required to maintain a sufficient amount of liquid assets to ensure its safe and
sound operation. For a discussion of what the Bank includes in liquid assets, see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations"
of this Form 10-K.

Branching

Subject to certain limitations, the HOLA and the OTS regulations permit federally chartered savings associations to establish branches
in any state of the United States. The authority to establish such branches is available (i) if the law of the state in which the branch is located, or is to be located, would permit
establishment of the branch if the savings association were a state savings association chartered by such state or (ii) if the association qualifies as a "domestic building and loan
association" under the Internal Revenue Code of 1986, as amended, which imposes qualification requirements similar to those for a "qualified thrift lender" under the HOLA. See the section below
entitled "Qualified Thrift Lender Test." The branching authority under the HOLA and the OTS regulations preempts any state law purporting
to regulate branching by federal savings associations.

Community Reinvestment

Under the Community Reinvestment Act("CRA") as implemented by OTS regulations, the Bank has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular
community. The CRA requires the OTS, in connection with its examination of a savings association, to assess the Bank's record of meeting the credit needs of its community and to take such record into
account in its evaluation of certain regulatory applications by the Bank. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received an "Outstanding" CRA
rating in the OTS evaluation, which was last completed on May 29, 2008.

The
CRA regulations rate an institution based on its actual performance in meeting community needs. In particular, the rating system focuses on three tests: (i) a lending test, to
evaluate the institution's record of making loans in its assessment areas; (ii) an investment test, to evaluate the institution's record of investing in community development projects,
affordable housing, and programs benefiting low or moderate income individuals and businesses; and (iii) a service test, to evaluate the institution's delivery of services through its branches,
automated teller machines ("ATMs") and other offices.

Qualified Thrift Lender Test

Under the HOLA, the Bank must comply with the qualified thrift lender test("QTL test"). Under the QTL test, the Bank is required to
maintain at least 65% of its "portfolio assets" (total assets less (i) specified liquid assets up to 20% of total assets, (ii) intangibles, including goodwill, and (iii) the value
of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed securities, credit card

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Table of Contents

loans,
student loans and small business loans) in at least nine months of the most recent 12-month period. The Bank may also satisfy the QTL test by qualifying as a "domestic building and
loan association" as defined in the Internal Revenue Code of 1986, as amended.

At
June 30, 2010, the Bank held 72.23% of its portfolio assets in qualified thrift investments and had more than 65% of its portfolio assets in qualified thrift investments in 12
of the 12 months during the fiscal year ended June 30, 2010, and thus qualified under the QTL test. The Bank has met the QTL test since its inception.

A
savings association that fails the QTL test and is unable to demonstrate a reasonable likelihood of meeting it in the future may be required to convert to a bank charter and will
generally be prohibited from: (i) engaging in any new activity not permissible for a national bank, (ii) paying dividends not permissible under national bank regulations, and
(iii) establishing any new branch office in a location not permissible for a national bank. In addition, if the institution does not re-qualify under the QTL test within three years
after failing the test, the institution would be prohibited from engaging in any activity not permissible for a national bank and may have to repay any outstanding advances from the Federal Home Loan
Bank as promptly as possible.

Transactions with Affiliates and Insiders

The Bank's authority to engage in transactions with its "affiliates" is limited by the OTS regulations, Sections 23A and 23B of
the Federal Reserve Act("FRA") Regulation W issued by the FRB and Section 11 of the HOLA as well as any additional limitations adopted by the OTS. OTS regulations regarding transactions
with affiliates generally conform to Regulation W. These provisions, among other things, prohibit or limit a savings association from extending credit to, or entering into certain transactions
with, its affiliates.

Under
the restrictions on transactions with affiliates, the aggregate amount of covered transactions with any individual affiliate is limited to 10% of the unimpaired capital and surplus
of the savings association. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings association's unimpaired capital and surplus. Loans and other specified
transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low-quality assets from affiliates is permitted
only under certain circumstances. Transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliates.

In
addition, the OTS regulations include additional restrictions on savings associations under Section 11 of the HOLA, including provisions prohibiting a savings association from
making a loan to an affiliate that is engaged in activities that are not permitted for bank holding companies under the Bank Holding Company Act and provisions prohibiting a savings association from
purchasing or investing in securities issued by an affiliate that is not a subsidiary. OTS regulations also include certain specific exemptions from these prohibitions. The FRB and the OTS require
each depository institution that is subject to Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W and the OTS regulations regarding
transactions with affiliates.

The
Bank's authority to extend credit to its directors, executive officers and principal shareholders, as well as to entities controlled by such persons, is currently governed by the
requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the FRB, as made applicable to federal savings associations by the HOLA and the OTS regulations. Among other
things, these provisions require that extensions of credit to insiders:



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In
addition, extensions for credit in excess of certain limits must be approved by the Bank's board of directors.

Section 402
of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, prohibits the extension of personal loans to directors and executive officers of issuers (as defined in
the Sarbanes-Oxley Act). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as the Bank, that are subject to restrictions on transactions with
insiders under Section 22(h) of the FRA.

Real Estate Lending Standards

The OTS and the other federal banking agencies adopted regulations to prescribe standards for extensions of credit that (i) are
secured by real estate or (ii) are made for the purpose of financing the construction of improvements on real estate. The OTS regulations require the Bank to establish and maintain written
internal real estate lending standards that are consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its real estate lending
activities. The standards also must be consistent with accompanying OTS guidelines, which include loan-to-value ratios for the different types of real estate loans. The Bank is
also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions are reviewed and justified
appropriately. The guidelines also list a number of lending situations in which exceptions to the loan-to-value standards are justified. The Bank has established and
implemented these required policies regarding real estate lending activities.

Nontraditional Mortgage Products

The federal banking agencies have published final guidance for institutions that originate or service nontraditional or alternative
mortgage products, defined to include all residential mortgage loan products that allow borrowers to defer repayment on principal or interest, such as interest-only mortgages and payment
option adjustable-rate mortgages.

Recognizing
that alternative mortgage products expose institutions to increased risks as compared to traditional loans where payments amortize or reduce the principal amount, the
guidance required increased scrutiny for alternative mortgage products. Institutions that originate or service alternative mortgages should have (i) strong risk management practices that
include maintenance of capital levels and allowance for loan losses commensurate with the risk; (ii) prudent lending policies and underwriting
standards that address a borrower's repayment capacity; and (iii) programs and practices designed to ensure that consumers receive clear and balanced information to assist in making informed
decisions about mortgage products. The guidance also recommends heightened controls and safeguards when an institution combines an alternative mortgage product with features that compound risk, such
as a simultaneous second-lien or the use of reduced documentation to evaluate a loan application.

The
Bank is required to comply with the guidance as it is interpreted and applied by the OTS.

Privacy Regulations

Under the OTS regulations adopted pursuant to the Gramm-Leach-Bliley Act of 1999, the Bank is required to adopt procedures to protect
customers' "nonpublic personal information." The regulations generally require that the Bank disclose its privacy policy, including identifying with whom it shares a customer's "nonpublic personal
information," to customers at the time of establishing the customer

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relationship
and annually thereafter. In addition, the Bank is required to provide its customers with the ability to "opt-out" of having it share their personal information with
unaffiliated third parties and not to disclose account numbers or access codes to nonaffiliated third parties for marketing purposes. The Bank currently has a privacy protection policy in place, which
has been reviewed, for compliance with the regulations.

Protection of Customer Information

In addition to certain state laws governing protection of customer information, the Bank is subject to federal regulatory guidelines
establishing standards for safeguarding customer information. These regulations implement certain provisions of the Gramm-Leach-Bliley Act. The guidelines describe the federal banking agencies'
expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and
complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and
information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could
result in substantial harm or inconvenience to any customer. Federal
guidelines also impose certain customer disclosures and other actions in the event of unauthorized access to customer information.

Consumer Protection and Compliance Provisions

The Bank is subject to various laws and regulations dealing generally with consumer protection matters. The Bank may be subject to
potential liability under these laws and regulations for material violations. The Bank's loan operations are also subject to federal laws applicable to credit transactions, such as
the:



The
Bank's deposit operations are also subject to federal laws applicable to deposit transactions, such as the:



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Identity Theft Prevention

The federal banking agencies, including the OTS, issued a joint rule implementing Section 315 of the Fair and Accurate Credit
Transactions Act, requiring each financial institution or creditor to develop and implement a written identity theft prevention program to detect, prevent, and mitigate identity theft in connection
with the opening of certain accounts or certain existing accounts.

Among
the requirements under the rule, the Bank is required to adopt "reasonable policies and procedures" to:



Prohibitions Against Tying Arrangements

Federal savings associations are subject to statutory prohibitions on certain tying arrangements. A depository institution is
prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that
the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Trust Activities Regulation

The Bank derives its trust powers from Section 5(n) of the HOLA and the regulations and policies of the OTS. Under these laws,
regulations and policies, the trust activities of federal savings associations are governed by both federal and state laws. Generally, the scope of trust activities that the Bank can provide will be
governed by the laws of the states in which the Bank is "located" (as such term is defined under the regulations of the OTS), while other aspects of the trust operations of the Bank are governed by
federal laws and regulations. If the trust activities of a federal savings association are located in more than one state, however, then the scope of fiduciary services that the federal savings
association can provide will vary depending on the laws of each state.

The
Bank, through its trust department, acts as trustee, personal representative, administrator, guardian, custodian, record keeper, agent, registrar, advisor and manager for various
accounts. As of June 30, 2010, the trust department of the Bank maintained approximately $84.5 million in assets under management.

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Federal Reserve System

Under FRB regulations, the Bank is required to maintain noninterest-earning reserves against its transaction accounts. FRB regulations
generally require that (i) reserves of 3% must be maintained against aggregate transaction account balances of $55.2 million or less, subject to adjustment by the FRB, and (ii) a
reserve of 10% must be maintained against that portion of total transaction accounts in excess of $55.2 million. The first $10.7 million of otherwise reservable balances are exempted
from the reserve requirements. The Bank was in compliance with these reserve requirements at June 30, 2010. Because required reserves must be maintained in the form of either vault cash, a
noninterest bearing account at a Federal Reserve bank, or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the Bank's interest-earning
assets to the extent that the requirement exceeds vault cash.

The
FRB has, and is likely to continue to have, an important impact on the operating results of financial institutions through its power to implement national monetary policy, among
other things, in order to curb inflation or combat a recession. The FRB affects the levels of bank loans, investments and deposits through its control over the issuance of United States government
securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject.

Federal Home Loan Bank System

The Bank is a member of the FHLB of Des Moines, which is one of 12 regional FHLBs that administer the home financing credit function of
savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLB system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. These policies and procedures are
subject to the regulation and oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. 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.

At
June 30, 2010, the Bank had $10.3 million in FHLB stock, which was in compliance with this requirement. The Bank receives dividends on its FHLB stock, subject to
approval by the FHLB. For the fiscal year ended June 30, 2010, dividends paid by the FHLB of Des Moines to the Bank totaled approximately $240,000, which constitutes a $29,000 decrease in the
amount of dividends received in fiscal 2009.

Anti-Money Laundering / Combating Terrorist Financing Provisions

The Bank is subject to the OTS and Financial Crimes Enforcement Network regulations implementing the Bank Secrecy Act, as amended by
the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, commonly known as the USA PATRIOT Act, which gives the federal government
expanded powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering
requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement
bodies. Other provisions of the USA PATRIOT Act impose affirmative obligations on a broad range of financial institutions,

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including
banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

Among
other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions:



Holding Company Regulation

We are a unitary savings and loan holding company within the meaning of the HOLA. As such, we are required to register with and be
subject to OTS examination and supervision as well as certain reporting requirements. In addition, the OTS has enforcement authority over us and any of our non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a
subsidiary savings association.

As
discussed below, under the Dodd-Frank Act all savings and loan holding companies, including the Company, will be transitioning to a new primary regulator, the FRB, upon
the formal transfer of the OTS's rulemaking and supervisory powers in July 2011 (or else by January 2012 if a six-month extension is required). Additionally, all savings and loan holding
companies for the first time will become subject to the same capital and activity requirements as those applicable to bank holding companies. All savings and loan holding companies will generally have
a five year phase-in period to comply with the new capital requirements.

The
Dodd-Frank Act requires the Comptroller General, head of the Government Accountability Office ("GAO"), to conduct various studies addressing aspects of the financial
system in the United States. Among the mandated studies involving savings associations and their holding companies, the GAO is tasked with determining the adequacy of the federal bank regulatory
framework applicable to such institutions, including any restrictions such as limitations on affiliate transactions or cross-marketing between an association and its holding company or affiliate. The
GAO study will also

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evaluate
the potential consequences of subjecting savings associations and their holding companies to the requirements of the Bank Holding Company Act, by considering the availability and allocation
of credit, the stability of the financial system and the economy, the safe and sound operation of savings associations, and the impact on the types of activities in which savings associations and
their holding companies engage. The results of the GAO study and other studies mandated by the Dodd-Frank Act may impact the regulation of savings and loan holding companies and their
savings association subsidiaries.

"Grandfathered" Savings and Loan Holding Company Status

Because we acquired the Bank prior to May 4, 1999, we are a "grandfathered" unitary savings and loan holding company under the
Gramm-Leach-Bliley Act. As such, we are exempt from the limitations on certain unrelated business activities that apply to other savings and loan holding companies and their subsidiaries that are not
savings associations, provided the Bank continues to be a "qualified thrift lender." If, however, we are acquired by a non-financial company, if we acquire another savings association
subsidiary (and we become a multiple savings and loan holding company) or, as a result of proposed legislative changes, we will terminate our "grandfathered" unitary savings and loan holding company
status, and become subject to certain additional limitations on the types of business activities in which we could engage. All "non-grandfathered" unitary savings and loan holding
companies are limited to financially related activities permissible for bank holding companies, as defined under the Gramm-Leach-Bliley Act.

Restrictions Applicable to All Savings and Loan Holding Companies

Federal law prohibits a savings and loan holding company, including us, directly or indirectly, from
acquiring:



A
savings and loan holding company may not acquire as a separate subsidiary an insured institution that has a principal office outside of the state where the principal office of its
subsidiary institution is located, except:



In
addition, if the Bank fails the QTL test (discussed above), we must register with the FRB as a bank holding company under the Bank Holding Company Act within one year of the Bank's
failure to so qualify.

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The
HOLA also prohibits a savings and loan holding company (directly or indirectly, or through one or more subsidiaries) from acquiring or retaining, with certain exceptions, more than
5% of a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the
HOLA. In evaluating applications by holding companies to acquire savings associations, the OTS must consider the financial and managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the DIF, the convenience and needs of the community and competitive factors.

Change of Control

Federal law requires, with few exceptions, OTS approval (or, in some cases, notice and effective clearance) prior to any acquisition of
control of the Company. Among other criteria, under the HOLA, Change in Bank Control Act and OTS regulations, "control" is conclusively presumed to exist if a person or company acquires, directly or
indirectly, more than 25% of any class of voting stock of a savings association or holding company. Under OTS regulations, control is also presumed to exist, subject to rebuttal, if an acquiror
acquires more than 10% of any class of voting stock of a savings association or its holding company (or more than 25% of any class of stock) and is subject to any of several "control factors,"
including but not limited to, the relative ownership position of a person, the existence of control agreements and board composition.

Developments in Regulation of the Financial Sector

In response to deteriorating conditions in the U.S. financial system, the Obama Administration, Congress and federal banking agencies
have taken various actions as part of a comprehensive strategy to stabilize the financial system and housing markets, and to strengthen the regulation of U.S. financial institutions. The numerous
programs established under the various initiatives are currently in different stages of implementation as well as being phased out.

Emergency Economic Stabilization Act of 2008

The Emergency Economic Stabilization Act, enacted on October 3, 2008, provided the Secretary of the Treasury with authority to,
among other things, establish the Troubled Asset Relief Program ("TARP") to purchase from financial institutions up to $700 billion of troubled assets.

On
October 14, 2008, the Treasury announced the Capital Purchase Program ("CPP") under the Emergency Economic Stabilization Act, pursuant to which the Treasury would purchase up
to $250 billion of senior preferred shares from qualifying financial institutions on standardized terms. The program was voluntary and required an institution to comply with a number of
restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. On November 21, 2008, we entered into a purchase agreement with the
Treasury under the CPP, pursuant to which we agreed to issue and sell (i) 25,000 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share (the
"Preferred Stock") and (ii) a warrant to purchase up to 302,419 shares of our common stock, par value $0.01 per share, at an initial exercise
price of $12.40 per share (the "Warrant"), for an aggregate purchase price of $25.0 million in cash. On June 3, 2009, we entered into a Repurchase Letter Agreement with the Treasury
pursuant to which we completed the repurchase of the Preferred Stock from the Treasury. The repurchase price of the Preferred Stock was $25.0 million, plus a final accrued dividend of $62,500.
On June 30, 2009, we entered into a Warrant Repurchase Letter Agreement with the Treasury pursuant to which we repurchased the Warrant from the Treasury for a purchase price of $650,000.

On
February 25, 2009, the Treasury announced the Capital Assistance Program ("CAP"), a new capital program under the Treasury's Financial Stability Plan. The purpose of the CAP
was to restore confidence throughout the financial system by ensuring that the nation's largest banking institutions

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have
a sufficient capital cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers. The CAP did
not replace the CPP and was open to qualifying institutions regardless of whether they participated in the CPP. The deadline to apply for the CAP was November 9, 2009 and the Company did not
apply for this program.

American Recovery and Reinvestment Act of 2009

On February 17, 2009, the President signed the American Recovery and Reinvestment Act of 2009 into law as a $787 billion
dollar economic stimulus. The stimulus included discretionary spending for among other things, infrastructure projects, increased unemployment benefits and food stamps, as well as tax relief for
individuals and businesses. This act also implemented new executive compensation and corporate governance requirements applicable to CPP participants.

Temporary Liquidity Guarantee Program

The FDIC established a Temporary Liquidity Guarantee Program ("TLGP") on October 14, 2008 (i) guaranteeing certain debt
issued by FDIC-insured institutions and certain holding companies on or after October 14, 2008 through June 30, 2009, which was extended to October 31, 2009, and
(ii) providing unlimited insurance coverage for noninterest-bearing transaction accounts, a program which was extended through December 31, 2010.

The
Debt Guarantee Program ("DGP") component of the TLG program aimed to provide liquidity to the inter-bank lending market and promote stability in the unsecured funding
market. Under the DGP, the FDIC temporarily guaranteed all newly issued senior unsecured debt up to prescribed limits. In general, the maximum amount of outstanding debt that was guaranteed under the
DGP for each participating entity at any time was limited to 125 percent of the par value of the participating entity's senior unsecured debt. The DGP ensured that such debt would be fully
protected in the event the issuing institution subsequently fails or its holding company files for bankruptcy. The DGP concluded on October 31, 2009, with the FDIC's guarantee expiring no later
than December 31, 2012. On October 20, 2009, the FDIC established a limited, six-month emergency guarantee facility upon expiration of the DGP. Under the emergency guarantee
facility, certain participating entities were able to apply to the FDIC for permission to issue FDIC-guaranteed debt during the period starting October 31, 2009 through
April 30, 2010. The fee for issuing debt under the emergency facility was at least 300 basis points, which the FDIC reserved the right to increase on a case-by-case
basis, depending upon the risks presented by the issuing entity.

Under
the Transaction Account Guarantee Program ("TAGP") component of the TLG program, noninterest-bearing transaction accounts are fully insured through December 31, 2010. The
unlimited guarantee under the TAGP is in addition to, and separate from, the general deposit insurance coverage of $250,000 provided for under the DIF. On August 26, 2009, the FDIC adopted a
final rule originally extending the TAGP for six months, through June 30, 2010, but subsequently extended the program to December 31, 2010, with the possibility of a further extension
through December 31, 2011. For institutions choosing to remain in the program for the extended period, the annual assessment rate applicable to the extension period is either 15 basis points,
20 basis points or 25 basis points, depending on the risk category assigned to the institution under the FDIC's risk-based premium system. The Bank is a participant in the program and, as
such, is bound by the requirements of the program, including the quarterly payment of an annualized assessment on any deposit amounts exceeding the existing deposit insurance limit of $250,000. This
assessment is in addition to our usual risk-based assessment, as discussed above under "Federal Deposit Insurance of Accounts and Regulation by the
FDIC."

Under
the Dodd-Frank Act, the FDIC is required to provide, after December 31, 2010 and until December 31, 2012, unlimited insurance coverage for
noninterest-bearing transaction accounts. Unlike

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the
current TAGP, the legislation provides a modified definition of "noninterest-bearing transaction account" for purposes of maintaining eligibility for the unlimited guarantee, and the guarantee
applies to all insured depository institutions rather than only those that have opted to participate in the program.

Term Asset-Backed Securities Loan Facility

Under the Term Asset-Backed Securities Loan Facility ("TALF"), the Federal Reserve Bank of New York had the authority to lend up to
$200 billion to eligible owners of certain AAA-rated asset backed securities backed by newly and recently originated auto loans, credit card loans, student loans, and
SBA-guaranteed small business loans. The facility ceased making loans collateralized by newly issued commercial mortgage-backed securities ("CMBS") on June 30, 2010, and loans
collateralized by all other types of TALF-eligible newly issued and legacy asset backed securities on March 31, 2010. The FRB did not extend the facility past the June 30,
2010 deadline.

The Credit Card Accountability Responsibility and Disclosure Act of 2009

On May 22, 2009, President Obama signed into law the Credit Card Accountability Responsibility and Disclosure Act of
2009("Credit CARD Act"). The Credit CARD Act amends various acts, including the Fair Credit Reporting Act, the Electronic Fund Transfer Act and the Truth-in-Lending
Act("TILA"). The Credit CARD Act makes numerous changes to the TILA, affecting the marketing, underwriting, pricing, billing and other aspects of the consumer credit card business. The Credit CARD Act
superseded joint final rules issued by federal banking agencies under Section 5 of the Federal Trade Commission Act to provide clarification to the body of law surrounding unfair or deceptive
acts or practices. The Credit CARD Act targets the elimination of unfair or deceptive practices associated with credit card accounts and, among other things, prohibits arbitrary interest rate
increases and universal default on existing balances; requires a credit card issuer who increases a cardholder's interest rate to periodically review and decrease the rate if indicated by the review;
prohibits credit card issuers from increasing rates on a cardholder in the first year after a credit card account is opened; requires promotional rates to last at least six months; prohibits
exorbitant and unnecessary fees; requires fairness in application and timing of card payments; and requires enhanced disclosures of card terms and conditions. The FRB has adopted final rules amending
Regulation Z that implement provisions of the Credit CARD Act.

Amendments to Truth in Savings Act Regulations

The FRB has adopted a final rule amending its regulations that implement the Truth in Savings Act. The final rule, published in the
Federal Register on January 29, 2009 and later amended, addresses depository institutions' disclosure practices related to overdrafts. The final rule extends to all institutions the requirement
to disclose on periodic statements the total amounts charged for overdraft fees and returned items fees, for both the statement period as well as the year-to-date. The final
rule also requires institutions that provide
account balance information through an automated system to provide a balance that excludes additional funds that may be made available to cover overdrafts. The effective date for the initial final
rule published in January 2009 was January 1, 2010. The amended final rule generally became effective July 6, 2010, except for a section requiring institutions to disclose on each
periodic statement, as applicable, the total dollar amount of all fees or charges imposed on the account for paying checks or other items when there are insufficient or unavailable funds and the
account becomes overdrawn for the month and calendar year-to-date, which becomes effective on October 1, 2010.

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Amendments to Electronic Fund Transfer Act Regulations

In November 2009, the FRB published a final rule amending Regulation E, which implements the Electronic Fund Transfer Act, and
the official staff commentary to the regulation. The Regulation E final rule limits the ability of financial institutions to assess overdraft fees for paying ATM and one-time debit
card transactions that overdraw a consumer's account, unless the consumer affirmatively consents, or opts in, to the institution's payment of overdrafts for those transactions. The rule became
effective on July 1, 2010.

The Dodd-Frank Act

On July 21, 2010, the President signed the Dodd-Frank Act into law. Among other things, the Dodd-Frank
Act dramatically impacts the rules governing the provision of consumer financial products and services, and implementation of the Dodd-Frank Act will require new mandatory and
discretionary rulemakings by numerous federal regulatory agencies over the next several years. The new law significantly affects the operations of federal thrifts and their holding companies as, among
other things, the Dodd-Frank Act: (1) abolishes the OTS, effective 90 days after the transfer of the OTS's supervisory and other functions to the FRB, FDIC, and the Office of
the Comptroller of the Currency ("OCC"); (2) creates the Bureau of Consumer Financial Protection ("BCFP"), a new independent consumer watchdog agency housed within the FRB that will have
primary rulemaking authority with respect to all federal consumer financial laws and is authorized to prescribe rules applicable to any covered person or service provider identifying and prohibiting
acts or practices that are "unfair, deceptive, or abusive" in connection with any transaction with a consumer involving a consumer financial product or service; (3) requires that formal capital
requirements be imposed on savings and loan holding companies generally commencing July 2015; (4) codifies the "source of strength" doctrine for all depository
institution holding companies; (5) grants to the U.S. Department of the Treasury, FDIC and the FRB broad new powers to seize, close and wind down "too big to fail" financial (including
non-bank) institutions in an orderly fashion; (6) establishes a new Financial Stability Oversight Council that is charged with identifying and responding to emerging risks
throughout the financial system, composed primarily of federal financial services regulators and chaired by the Secretary of the Treasury Department; (7) adopts new standards and rules for the
mortgage industry; (8) adopts new bank, thrift and holding company regulation; (9) permanently increases the standard maximum deposit insurance amount to $250,000 per depositor, per
institution for each account ownership category; (10) temporarily provides for unlimited deposit insurance coverage for "noninterest-bearing transaction accounts;" (11) repeals the
long-standing statutory prohibition on the payment of interest on demand deposits; (12) adopts new federal regulation of the derivatives market; (13) adopts the
so-called Volcker Rule, substantially restricting proprietary trading by depository institutions and their holding companies; (14) imposes requirements for "funeral plans" by large,
complex financial companies; (15) establishes new regulation of the asset securitization market through "skin in the game" and enhanced disclosure requirements; (16) establishes new
regulation of interchange fees; (17) establishes new and enhanced compensation and corporate governance oversight for the financial services industry; (18) provides enhanced oversight of
municipal securities; (19) provides a specific framework for payment, clearing and settlement regulation; (20) tasks the federal banking agencies with adopting new and enhanced capital
standards for all depository institutions; (21) significantly narrows the scope of federal preemption for national banks and federal savings associations; (22) revises the affiliate
transaction and insider lending rules; and (23) revises the requirements applicable to QTLs.

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Under the Dodd-Frank Act, the ability of the Bank to rely on federal preemption of state consumer financial laws will be based on the same preemption
standards applicable to national banks. A "state consumer financial law" is defined as "a state law that does not directly or indirectly discriminate against national banks and that directly and
specifically regulates the manner, content, or terms and conditions of any financial transaction (as may be authorized for national banks to engage in), or any account related thereto, with respect to
a consumer." Under the new preemption standards established under the Dodd-Frank Act, generally effective within one year from the date of enactment, preemption of a state consumer
financial law is permissible only if: (1) application of the state law would have a discriminatory effect on national banks or federal thrifts as compared to state banks; (2) the state
law is preempted under a judicial standard that requires a state consumer financial law to prevent or significantly interfere with the exercise of the national bank's or federal thrift's powers before
it can be preempted, with such preemption determination being made by the OCC (by regulation or order) or by a court, in either case on a "case-by-case" basis; or
(3) the state law is preempted by another provision of federal law other than the Act. Additionally, the Dodd-Frank Act specifies that such preemption standards only apply to
national banks and federal thrifts themselves, and not their non-depository institution subsidiaries or affiliates. Specifically, operating subsidiaries of national banks and federal
thrifts that are not themselves chartered as a national bank or federal thrift may no longer benefit from federal preemption of state consumer financial laws, which shall apply to such subsidiaries
(or affiliates) to the same extent that they apply to any person, corporation or entity subject to such state laws.

We
are currently evaluating the potential impact of the Dodd-Frank Act on our business, financial condition, results of operations and prospects. It is difficult to predict
at this time what specific impact the Dodd-Frank Act and the
yet-to-be-written implementing rules and regulations may have on us. However, given that the legislation is likely to materially change the regulatory environment
for the financial services industry in which we operate, we expect at a minimum that our compliance costs will increase. For further discussion on the potential impact of the Dodd-Frank
Act on the Company and Bank, see "Risk Factors" below.

The Sarbanes-Oxley Act

As a public company, we are subject to the Sarbanes-Oxley Act, which implements a broad range of disclosure, corporate governance and
accounting measures for public companies designed to promote honesty and transparency and to protect investors from corporate wrongdoing. Furthermore, the NASDAQ Global Market enacted corporate
governance rules that implement some of the mandates of the Sarbanes-Oxley Act. The NASDAQ rules include, among other things, requirements ensuring that a majority of the Board of Directors are
independent of management, establishing and publishing a code of conduct for directors, officers and employees, and calling for stockholder approval of all new stock option plans and all material
modifications. These rules affect us because our common stock is listed on The NASDAQ Global Market.

The
Dodd-Frank Act provides an exemption from the independent auditor attestation requirement under Section 404(b) of the Sarbanes-Oxley Act for small issuers that are
neither a large accelerated filer nor an accelerated filer. The Company qualifies for this exemption.

Federal Securities Law

Our common stock is registered with the SEC under the Exchange Act. We are subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the SEC under the Exchange Act.

Our
stock held by persons who are affiliates (generally officers, directors and principal stockholders) of us may not be resold without registration or unless sold in accordance with
certain

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resale
restrictions. If we meet specified current public information requirements, each of our affiliates is able to sell in the public market, without registration, a limited number of shares in any
three-month period.

Delaware General Corporation Law

We are incorporated under the laws of the State of Delaware. Thus, the rights of our stockholders are governed by the Delaware General
Corporation Law.

Federal and State Taxation

The Company and its direct and indirect subsidiaries file a consolidated federal income tax return on a fiscal year basis. In
addition, each of Trust III, Trust IV, Trust V and Trust VI are required to file individual trust returns on a calendar year basis.

In
addition to the regular income tax, corporations, including savings associations such as the Bank, generally are subject to a minimum tax. An alternative minimum tax is imposed at a
minimum tax rate of 20% on alternative minimum taxable income, which is the sum of a corporation's regular taxable income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax and net operating losses can offset no more than 90% of alternative minimum taxable
income.

To
the extent earnings appropriated to a savings association's bad debt reserves for "qualifying real property loans" and deducted for federal income tax purposes exceed the allowable
amount of such reserves computed under the experience method and to the extent of the association's supplemental reserves for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other distributions to a shareholder (including distributions on redemption, dissolution or liquidation) or for any other purpose (except
to absorb bad debt losses). As of June 30, 2010, the Bank's Excess for tax purposes totaled approximately $8.5 million.

South Dakota Taxation.The Bank is subject to the South Dakota franchise tax to the extent that such corporations are engaged in
business in the
state of South Dakota. South Dakota does not have a corporate income tax. The franchise tax will be imposed at a rate of 6% on franchise taxable income which is computed in the same manner as federal
taxable income with some minor variations to comply with South Dakota law, other than the carryover of net operating losses which is not permitted under South Dakota law. A South Dakota return of
franchise tax must be filed annually.

Minnesota Taxation.The Bank is subject to the Minnesota corporate income tax to the extent that such corporations are engaged in
business in the
state of Minnesota. The corporate income tax is imposed at a rate of 9.8% on corporate taxable income, which is computed in the same manner as federal taxable income with some minor variations to
comply with Minnesota law. A Minnesota return of corporate income tax must be filed annually.

Delaware Taxation.As a Delaware holding company, the Company is exempted from Delaware corporate income tax but is required to file an
annual report
with and pay an annual fee to the State of Delaware. The Company is also subject to an annual franchise tax imposed by the State of Delaware, which is made in quarterly payments.

Taxation in Other States.Mid America Capital is required to file state income tax returns in those states which lessees have
operations. The total
taxes paid in the year ended June 30, 2010 were not material to the operation of the Company.

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Executive Officers

Information regarding the executive officers of the Company is contained in Part I, Item 1 "Business" of this
Form 10-K pursuant to Instruction 3 to Item 401(b) of Regulation S-K, and is incorporated by reference herein.

The
following table lists the executive officers of the Company and the Bank as of September 3, 2010.

Name

Position with the CompanyCurtis L. Hage

Chairman, President and Chief Executive Officer of the CompanyDarrel L. Posegate

Executive Vice President, Chief Financial Officer and Treasurer of the CompanyDavid A. Brown

Senior Vice President/Community Banking of the BankStephen M. Bianchi

Senior Vice President/PresidentTwin Cities MarketJon M. Gadberry

Senior Vice President/Wealth Management of the BankMary F. Hitzemann

Senior Vice President/Human Resources of the BankBrent R. Olthoff

Senior Vice President, Chief Financial Officer and Treasurer of the BankNatalie A. Sundvold

Senior Vice President/Service & Support of the BankMichael Westberg

Senior Vice President/Corporate Strategy of the BankBruce E. Hanson

Vice President, Controller of the Bank


Business Experience of each Executive Officer

CURTIS L. HAGE, age 64, is Chairman, President and Chief Executive Officer of the
Company. He was elected to the position of Chairman of the Board of Directors of the Company in September 1996 and has held the positions of President and Chief Executive Officer since February 1991.
Prior to such time, Mr. Hage served as Executive Vice President of the Bank since 1986. Since joining the Bank in 1968, he served in various capacities prior to being elected Executive Vice
President. Mr. Hage received his M.B.A. from the University of South Dakota and attended the Graduate School of Savings Institution Management at the University of Texas.

DARREL L. POSEGATE, age 52, has served as Executive Vice President, Chief Financial Officer and Treasurer of the Company since January
2002. He has served as President of the Bank since October 2006 and as Executive Vice President, Chief Financial Officer and Treasurer of the Bank from January 2002 until October 2006. Prior to such
time, he was employed in senior leadership roles in the banking industry since 1983. Mr. Posegate received his B.A. degree from Luther College, Decorah, Iowa.

DAVID A. BROWN, age 48, has served as the Senior Vice President/Community Banking of the Bank since May 2008. Prior to May 2008, he served
as the Senior Vice President/Business Banking of the Bank since November 1999. Prior to joining the Bank, Mr. Brown served as Vice President/Manager Commercial Banking of Firstar Bank, Sioux
City, Iowa, a national banking institution. Mr. Brown received his M.B.A. and a B.S. in Business Administration from the University of South Dakota.

STEPHEN M. BIANCHI,age 46, has served as the President of the Twin Cities market for the Bank since April 2010. Prior to joining the
Bank, he was Senior Vice President at Associated Bank, where he served as Minnesota Regional President and Minnesota Regional Commercial Banking Manager from July 2006 to April 2010. Before that, he
was Twin Cities Business Banking Manager for Wells Fargo Bank, where he held several other management positions over 14 years. Mr. Bianchi received his B.S. degree in Finance and M.B.A.
from Providence College.

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JON M. GADBERRY, age 48, has served as Senior Vice President/Wealth Management of the Bank since December 2007. Prior to joining the Bank,
Mr. Gadberry was employed by Bank of the West as Vice President/Trust Manager from April 2003 to December 2007. Mr. Gadberry received his B.S. in Business Administration from Concordia
College in Moorhead, Minnesota.

MARY F. HITZEMANN, age 58, has served as the Senior Vice President/Human Resources of the Bank since October 1993. Ms. Hitzemann
joined the Bank in January 1993. Prior to that time, she was employed as Vice President of Human Resources for Rapid City Regional Hospital from May 1989 to May 1992. Ms. Hitzemann received her
B.A. degree from Augustana College.

BRENT R. OLTHOFF, age 39, has served as Senior Vice President, Chief Financial Officer and Treasurer of the Bank since April 2007.
Mr. Olthoff first joined the Bank in July 2001, and was promoted to Vice President/Finance in July 2004. From February 2006 to April 2007, Mr. Olthoff was employed by FTN Financial, a
capital markets firm in Memphis, Tennessee, where he was Vice President/Asset Strategies. Mr. Olthoff received his B.B.A degree in Finance from Iowa State University.

NATALIE A. SUNDVOLD, age 47, has served as the Senior Vice President/Service & Support of the Bank since October 2002. She joined
the Bank in February 1994 as manager of the phone banking center and was promoted to Vice President/In-Touch Banking in October 1995. Prior to joining the Bank, she was employed by the
Bank of New York from October 1989 to October 1993. Ms. Sundvold received her B.S. from Northern State University.

MICHAEL WESTBERG, age 43, has served as the Senior Vice President/Corporate Strategy of the Bank since May 2008. Prior to May 2008, he
served as the Senior Vice President/Retail Banking of the Bank since July 2006. Mr. Westberg joined the Bank in February 1996 as a branch manager. Prior to joining the Bank, he was employed
with First Savings Bank, Beresford, South Dakota, from 1992 to 1996; and The Associates, Dallas, Texas, from 1989 to 1992. Mr. Westberg attended Illinois State University majoring in business
and is a graduate of the American Bankers Association National School of Banking.

BRUCE E. HANSON, age 47, has served as Vice President, Controller of the Bank since October 2008. Prior to joining the Bank, he was
employed as Vice President, Controller at South Dakota State Medical Holding Co., dba Dakotacare, from 1996 to September 2008. Mr. Hanson received his B.A. degree in Accounting from the
University of South Dakota.

There
are no family relationships involving any of the above executive officers, directors and director nominees.

Mr. Hage
notified the Board of Directors on July 21, 2010 that he will retire effective December 31, 2011 from his positions as an officer of the Company and the
Bank. The Board has formed a search committee to identify the next generation of leadership for the Company and the Bank.

Item 1A.Risk Factors

The following are certain material risks that our management believes are specific to us and our business. You should understand that
it is not possible to predict or identify all such potential risks and, as such, this list of risk factors should not be viewed as all-inclusive or in any particular order. An investment
in our common stock involves certain risks. Before making an investment decision, you should read carefully and consider the risk factors below in conjunction with the other information in this
Form 10-K and information incorporated by reference into this Form 10-K, including our consolidated financial statements and related notes which are set forth in
Part II, Item 8 "Financial Statements and Supplementary Data" of this Form 10-K. Additional risks and uncertainties not presently known to us at this time or that we
currently deem immaterial may also materially and

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adversely
affect our business and operations. The value or market price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. The risks
discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements.

Risks Related to Our Industry and Business

Difficult economic and market conditions have adversely affected our industry.

Dramatic declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively
impacted the credit performance of mortgage and construction loans and resulted in significant write-downs of assets by many financial institutions across the United States. General downward economic
trends, reduced availability of commercial credit and increasing unemployment have negatively impacted the credit performance of commercial and consumer credit, resulting in additional write-downs.
Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other. This market turmoil and
tightening of credit has led to increased commercial and consumer deficiencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity.
Financial institutions have experienced decreased access to deposits and borrowings. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets may
adversely affect our business, financial condition, results of operations and stock price. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market
conditions on us and others in the financial institutions industry. In particular, we may face the following risks in connection with these events:



The full impact of the recently enacted Dodd-Frank Act is currently unknown given that much of the details and substance of the new laws will be determined
through agency rulemaking.

The compliance burden and impact on our operations and profitability with respect to the Dodd-Frank Act are currently
unknown, as the Dodd-Frank Act delegates to various federal agencies the task of implementing its many provisions through regulation. Hundreds of new federal regulations, studies and
reports addressing all of the major areas of the new law, including the regulation of federal savings associations and their holding companies, will be required, ensuring that federal rules and
policies in this area will be further developing for months and years to come. Based on the provisions of the Dodd-Frank Act and anticipated implementing regulations, it is highly likely
that banks and

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thrifts
as well as their holding companies will be subject to significantly increased regulation and compliance obligations that expose us to noncompliance risk and consequences.

The elimination of the OTS and transfer of the OTS's supervisory and rulemaking functions to various federal banking agencies will change the way that we are regulated.

As the OTS is due to be abolished 90 days after transferring its supervisory and rulemaking functions to various federal
agencies, both the Bank and Company will be transitioning to the jurisdiction of new primary federal regulators, which will change the way that we are regulated. Specifically, the OTS's supervisory
and rulemaking functions (except for consumer protection) relating to all federal savings associations will be transferred to the OCC, while the OTS's supervisory and rulemaking functions relating to
savings and loan holding companies and their non-depository institution subsidiaries will be transferred to the FRB. While the OCC and FRB are directed to implement existing OTS
regulations, orders, resolutions, determinations and agreements for thrifts and their holding companies under the HOLA, the transition of supervisory functions from the OTS to these agencies could
alter the operations of the Bank and Company so as to be more closely aligned with the OCC's and FRB's respective supervision of national banks and bank holding companies. While the functions of the
OTS will formally be transferred to the OCC and FRB in July 2011 (or else by January 2012 if a six-month extension is required), we may see changes in the way we are supervised and
examined sooner, and may experience operational challenges in the course of transition to our new regulators.

The new BCFP may reshape the consumer financial laws through rulemaking and enforcement of unfair, deceptive or abusive practices, which may directly impact the business
operations of depository institutions offering consumer financial products or services including the Bank.

The BCFP has broad rulemaking authority to administer and carry out the purposes and objectives of the "Federal consumer financial
laws, and to prevent evasions thereof," with respect to all financial institutions that offer financial products and services to consumers. The BCFP is also authorized to prescribe rules, applicable
to any covered person or service provider, identifying and prohibiting acts or practices that are "unfair, deceptive, or abusive" in connection with any transaction with a consumer for a consumer
financial product or service, or the offering of a consumer financial product or service ("UDAP authority"). The full reach and impact of the BCFP's broad new rulemaking powers and UDAP authority on
the operations of financial institutions offering consumer financial products or services is currently unknown. Notwithstanding, insured depository institutions with assets of $10 billion or
less will continue to be supervised and examined by their primary federal regulators, rather than the BCFP, with respect to compliance with the federal consumer protection laws.

Legislative and regulatory initiatives taken to date may not achieve their intended objectives; proposed and future initiatives may substantially increase compliance burdens
and further impact our financial condition or results of operations.

Legislative and regulatory initiatives taken to date by Congress and the federal banking regulators to address financial regulatory
reform may not achieve their intended objectives, thereby requiring additional legislation or regulation of the financial services industry. Furthermore, the Basel Committee on Banking Supervision and
other international bodies comprised of banking regulators have committed to raise capital standards and liquidity buffers within the banking system by imposing new requirements, for example a
requirement that all regulatory capital instruments issued by depository institutions must include contractual terms that allow regulators to write them off or convert them to common shares in the
event of the institution's failure. Such proposals may impose more stringent standards than currently applicable or anticipated with respect to capital and liquidity requirements for depository
institutions. We cannot predict whether such proposals will ultimately be adopted, or the

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impact
that such proposals, if adopted, would have upon our financial condition or results of operations.

We recorded other-than-temporary impairment ("OTTI") charges in our trust preferred securities ("TRUPS") portfolio in the each of the last six
consecutive quarters, and we could record additional losses in the future.

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

We
held six TRUPS pools with an adjusted cost basis of $9.3 million and a fair value of $3.9 million at June 30, 2010. Rating downgrades on these investments
occurred during fiscal years 2009 and 2010, placing each in a below investment grade rating. Due to an inactive market for these securities, management utilized a "Level 3" fair value input
according to ASC Topic 820, utilizing discounted cash flow methodologies to determine fair value and OTTI.

During
fiscal 2009 and 2010, we determined that four debt securities exhibited OTTI. The aggregate OTTI losses recorded for the four securities were $6.1 million, of which
$3.0 million was recognized on the balance sheet in other comprehensive income, with the balance being $3.1 million of credit loss recognized through earnings. The remaining difference
between amortized cost basis and fair value of $2.4 million recognized in other comprehensive income is primarily attributable to the four TRUPS for which OTTI was not recognized at
June 30, 2010.

The
valuation of our TRUPS will continue to be influenced by external market and other factors, including implementation of Securities and Exchange Commission and Financial Accounting
Standards Board guidance on fair value accounting, the financial condition of specific issuers within our pooled securities (including any credit deterioration thereof), deferral and default rates of
specific issuer financial institutions, rating agency actions, and the prices at which observable market transactions occur. If we are required to record additional OTTI charges on our TRUPS
portfolio, we could experience potentially significant earnings losses as well as an adverse impact to our capital position.

Under
the recently enacted Dodd-Frank Act, trust preferred securities issued on or after May 19, 2010 are no longer eligible for inclusion in Tier 1 capital.
For trust preferred securities issued before May 19, 2010, regulatory capital deductions will generally be required during a phase in period from January 1, 2013 to January 1,
2016, however depository institution holding companies with assets of less than $15 billion as of year-end 2009 enjoy a permanent grandfather right with respect to such securities
for purposes of calculating regulatory capital.

As a result of current economic conditions, the Bank's allowance for loan losses may prove to be insufficient to absorb losses in its loan portfolios, which could adversely
affect its operating results.

While the Bank maintains an allowance for loan and lease losses to provide for loan defaults and non-performance, losses
may exceed the value of the collateral securing the loans and the allowance may not fully cover any excess loss. At June 30, 2010, the Bank's nonperforming loans (which consist of
non-accrual loans and loans still accruing but past due greater than 90 days) totaled $8.2 million, or 0.92% of its loan portfolio. At June 30, 2010, the Bank's
nonperforming assets (which include foreclosed real estate) were $9.2 million, or 0.73% of assets. In addition, the Bank had $15.9 million in accruing loans that were 30 to
89 days delinquent at June 30, 2010. At June 30, 2010, the Bank held $9.6 million of loan and lease loss reserves, or 1.07% of total loans, and 116.31% of
non-performing loans.

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Until
economic and market conditions improve, the Bank may continue to incur additional losses relating to an increase in nonperforming loans. The Bank does not record interest income on
non-accrual loans or other real estate owned, thereby adversely affecting its income, and increasing its loan administration costs. When the Bank takes collateral in foreclosures and
similar proceedings, it is required to mark the related loan to the then fair market value of the collateral, which may result in a loss. These loans and other real estate owned also increase its risk
profile and the capital its regulators believe is appropriate in light of such risks. As a result of current economic conditions, additional provisions for loan losses may be necessary.

The
Bank makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and
other assets serving as collateral for the repayment of loans. The Bank's allowance for loan and lease losses is based on these judgments, as well as historical loss experience and an evaluation of
the other risks associated with the loan portfolio, including but not limited to, the size and composition of the loan portfolio, current economic condition and geographic concentrations within the
portfolio. The Bank's allowance is also periodically reviewed by its regulators. If the Bank's assumptions or judgments used to determine the allowance proves to be incorrect, if the value of the
collateral securing the loans decreases substantially or if the Bank's regulators disagree with the Bank's judgments, the Bank may need to increase the allowance in amounts that exceed its
expectations. Material additions to the allowance would adversely affect our results of operations and financial condition.

Determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires significant estimates, and actual losses may vary
from current estimates.

The Bank maintains an allowance for loan losses to provide for loans in its portfolio that may not be repaid in their entirety. The
determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires us and the Bank to make significant estimates of current credit risks and
future trends, all of which may undergo material changes.

In
evaluating the adequacy of the Bank's allowance for loan losses, we consider numerous quantitative factors, including our historical charge-off experience, growth of our
loan portfolio, changes in the composition of our loan portfolio and the volume of delinquent and classified loans. In addition, we use information about specific borrower situations, including their
financial position and estimated collateral values, to estimate the risk and amount of loss for those borrowers. Finally, we consider many qualitative factors, including general and economic business
conditions, duration of the current business cycle, current general market collateral valuations, trends apparent in any of the factors we take into account and other matters, which are by nature
subjective and fluid. Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding the Bank's borrowers' abilities to successfully
execute their business models through changing economic environments, competitive challenges and other factors. In considering information about specific borrower situations, our analysis is subject
to the risk that we are provided inaccurate or incomplete information. Because of the degree of uncertainty and susceptibility of these factors to change, the Bank's actual losses may vary from our
current estimates.

Additionally,
bank regulators periodically review the Bank's allowance for loan losses and may require an increase in the provision for loan losses or recognize loan
charge-offs based upon their judgments, which may be different from ours. Any increase in the Bank's allowance for loan losses or loan charge-offs required by these regulatory
authorities may adversely affect our operating results.

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We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our
performance.

We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our
business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve,
delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and,
therefore, our operating results may be materially adversely affected.

Our financial success is dependant on the prevailing economic, political and business conditions as well as the population growth in South Dakota.

Our success and growth is dependant on the income levels, deposits and population growth in our primary market area, which are
communities located in eastern and central South Dakota, including the Sioux Falls metropolitan statistical area (MSA), and the cities of Pierre,
Mitchell, Aberdeen, Brookings, Dakota Dunes, Watertown and Yankton. If the communities in which we operate do not grow or if prevailing economic conditions locally are unfavorable, our business will
be negatively affected.

Additionally,
there are inherent risks associated with our lending activities, including credit risk, which is the risk that borrowers may not repay outstanding loans or the value of the
collateral securing loans decreases. Our business operations and activities are concentrated in the state of South Dakota and most of our credit exposure is in that state, so we are specifically at
risk from adverse economic, political and business conditions that affect South Dakota. Accordingly, economic and business conditions in South Dakota, such as increases in unemployment, commercial and
consumer delinquencies and real estate foreclosures, as well as decreases in real gross domestic product, home and land prices or home sales, will each adversely impact our credit risk.

For
example, credit card issuers, a significant employer in the Sioux Falls MSA, are subject to recently enacted legislation that may result in their interest income and loan fee income
being significantly reduced, which could cause these companies to scale back their operations and reduce personnel. A reduction in such operations and personnel could negatively affect the economic
conditions in South Dakota, which in return could negatively impact our credit risk and business.

Our financial success is dependent on our ability to compete effectively in highly competitive markets.

We operate in the highly competitive markets of South Dakota. Our future growth and success will depend on our ability to compete
effectively in these markets. Through the Bank, we compete for loans, deposits and other financial services in geographic markets with other local, regional and national commercial banks, credit
unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as
super-regional, national and international financial institutions. Many of our competitors offer products and services different from us, and have substantially greater resources, name recognition and
market presence than we do, which benefits them in attracting business. Larger competitors may be able to price loans and deposits more aggressively than we can and have broader customer and
geographic bases to draw upon.

Competitors
that are not depository institutions are generally not subject to the extensive regulations that apply to us. Through the Bank, we compete with these institutions both in
attracting deposits and in making loans. In addition, we must attract our customer base from other existing financial institutions and from new residents. There is a risk that we will not be able to
compete successfully with these other financial institutions in our markets, and that we may have to pay higher interest rates to attract deposits or charge lower interest rates to obtain loan volume,
resulting in

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reduced
profitability. In new markets that we may enter, we will also compete against well-established community banks that have developed relationships within the community.

We are subject to extensive regulations that may limit or restrict our activities, and the cost of compliance is high.

We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various
regulatory agencies, currently including the OTS and the FDIC, and to a limited extent, the FRB. Banking regulations are primarily intended to protect the DIF and depositors, not stockholders. Our
compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest
rates paid on deposits and locations of offices. We are also subject to regulatory capital requirements, which require us to maintain adequate capital to support our growth. If we fail to meet these
capital and other regulatory requirements, our ability to grow, our cost of funds and FDIC insurance, our ability to pay dividends on our common stock, and our ability to make acquisitions could be
materially and adversely affected.

As
previously highlighted, the recently enacted Dodd-Frank Act dramatically impacts the regulation and activities of federal thrifts and their holding companies by, among
other things, abolishing our primary regulator, the OTS, and providing for new rules that govern the provision of consumer financial products and services. Implementation of the Dodd-Frank
Act will require new mandatory and discretionary rulemakings by numerous federal regulatory agencies over the next several years which are likely to have a significant impact on the operations of all
depository institutions and their holding companies.

Liquidity risks could affect operations and jeopardize our financial condition.

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

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

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

The
Bank currently has a $15.0 million unsecured line of federal funds with First Tennessee Bank, NA, which did not have activity or an outstanding balance at June 30, 2010
and 2009.

The
Bank currently has a $10.0 million unsecured line of federal funds with Zions Bank, which did not have activity or an outstanding balance at June 30, 2010.

On
September 30, 2009, we entered into a Loan Agreement (the "Loan Agreement") with United Bankers' Bank (the "Lender") in order to refinance our outstanding borrowings of
$5.966 million under our line of credit with First Tennessee Bank, NA (the "FTB Line of Credit"). Our borrowings

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under
the FTB Line of Credit were scheduled to mature on September 30, 2009. Under the Loan Agreement, the Lender committed to lend to us an aggregate principal amount not to exceed
$6 million. On November 25, 2009, the Company repaid its outstanding borrowings of $6.044 million (principal plus accrued interest) under the Loan Agreement. As of June 30,
2010, there was no outstanding balance.

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

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

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

FDIC insurance premiums have increased substantially within the last year and we expect to continue to pay significantly higher FDIC
premiums in the future. Market developments have significantly depleted the DIF and reduced the ratio of reserves to insured deposits.

During
the calendar year 2009, the FDIC imposed additional assessments and changes for the purpose of replenishing its reserves. The FDIC adopted a revised risk-based deposit
insurance assessment schedule on February 27, 2009, which raised deposit insurance premiums. On May 22, 2009, the FDIC implemented a five basis point special assessment of each insured
depository institution's assets minus Tier 1 capital as of June 30, 2009, that was collected on September 30, 2009. On November 12, 2009, the FDIC adopted a rule that
required insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009,
along with each institution's risk-based deposit insurance assessment for the third quarter of 2009. Under the rule, an institution accounts for the prepayment by recording the entire
amount of its prepaid assessment as a prepaid expense (an asset) as of December 30, 2009, and subsequently records an expense (charge to earnings) for its regular quarterly assessment until the
asset is exhausted. Once the asset is exhausted, the institution would resume paying and accounting for quarterly deposit insurance assessments as it did previous to the ruling. It also stated that
this requirement for prepaid assessments does not preclude the FDIC from changing assessment rates or from further revising the risk-based assessment system during 2009, 2010, 2011, 2012,
or thereafter, pursuant to notice-and-comment rulemaking procedures provided by statute. Accordingly, continued actions by the FDIC could significantly increase the Bank's
noninterest expense in fiscal 2011 and for the foreseeable future. Any future special assessments or increases could have a further material impact on our results of operations.

Under
the recently enacted Dodd-Frank Act, the FDIC is required to provide, after December 31, 2010 and until December 31, 2012, unlimited insurance coverage
for noninterest-bearing transaction accounts. Unlike the current transaction account guarantee portion of the TLGP, the Dodd-Frank Act provides a modified definition of
"noninterest-bearing transaction account" for purposes of maintaining eligibility for the unlimited guarantee, and the guarantee applies to all insured depository institutions rather than only those
that have opted to participate in the program. Continued actions by the FDIC with respect to special assessments for the unlimited guarantee could significantly increase the Bank's noninterest expense
in fiscal 2011 and for the foreseeable future.

Our profitability may be affected by changes in market interest rates.

Through our banking subsidiary, the Bank, our profitability depends in large part on our net interest income, which is the difference
between interest earned from interest-earning assets, such as loans and mortgage-backed securities, and interest paid on interest-bearing liabilities, such as deposits

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and
borrowings. Our net interest income will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increase faster than the interest earned on
loans and investments.

Our
results of operations will be affected by domestic economic conditions and the monetary and fiscal policies of the U.S. government and its agencies. The FRB has, and is likely to
continue to have, an important impact on the operating results of lending institutions through its power to implement national monetary policy, among other things, in order to curb inflation or combat
a recession. The Federal Reserve affects the levels of bank loans, investments and deposits through its control over the issuance of U.S. government securities, its regulation of the discount rate
applicable to member banks and its influence over reserve requirements to which member banks are subject. If short-term interest rates rise, and if rates on our deposits and borrowings
re-price upwards faster than the rates on our long-term loans and investments, we may experience compression of our net interest margin, which will have a negative effect on
our results of operations. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

While
we intend to manage the effects of changes in interest rates by adjusting the terms, maturities and pricing of our assets and liabilities, our efforts may not be effective in a
changing rate environment and our financial condition and results of operations may suffer.

A significant portion of our loan portfolio is secured by real estate; therefore, we have a high degree of risk from a downturn in our real estate markets and the local
economy and face risks that are unique to holding foreclosed real estate.

A further downturn in the real estate market and local economy in South Dakota could hurt our business because a significant portion of
our loans are secured by real estate located in South Dakota. Real estate values and real estate markets are generally affected by, among other things, changes in regional or local economic
conditions, fluctuations in interest rates, and the availability of loans to potential purchasers. If real estate values decline in South Dakota, the value of real estate collateral securing our loans
could be significantly reduced. Our ability to recover on
defaulted loans by foreclosing and selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans.

Additionally,
the Bank faces certain risks that are unique to holding foreclosed real estate, such as the risk that hazardous or toxic substances are found on the foreclosed property,
which may require the Bank to incur substantial expenses to remediate or materially reduce the property's value. Although the Bank has policies and procedures in place to ensure that an environmental
review is performed before initiating any foreclosure action on real property, these reviews may turn out to be insufficient to detect all potential environmental hazards. The remediation costs and
any other financial liabilities associated with an environmental hazard in connection with foreclosed real estate could have a material adverse effect on our financial condition and results of
operations.

Our loan concentration presents a business risk if the agriculture industry suffers a downturn.

Agricultural loans comprised 31.0% of our total loan and lease portfolio at June 30, 2010. A number of these loans have
relatively large balances. The deterioration of one or a few of these loans may cause a significant increase in nonperforming loans. Furthermore, any extended period of low commodity prices,
significantly reduced yields on crops, reduced levels of government assistance to the agricultural industry and/or reduced farmland values could result in a significant increase in our nonperforming
loans. An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, and/or an increase in loan charge-offs, which
would have an adverse impact on our results of operations and financial condition.

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The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other
financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions
about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or
by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral
held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure. There is no assurance that any such losses would not
materially and adversely affect our results of operations.

Negative developments in the financial industry and the credit markets may subject us to additional regulation.

As a result of ongoing challenges facing the U.S. economy, the potential exists for new laws and regulations regarding lending and
funding practices and liquidity standards to be promulgated, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, including the
expected issuance of many formal enforcement orders. Negative developments in the financial industry and credit markets, and the impact of new legislation in response to those developments, may
negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and may adversely impact our financial performance.

Future acquisitions and expansion activities may disrupt our business, dilute existing stockholders and adversely affect our operating results.

We intend to continue to evaluate potential acquisitions and expansion opportunities in the normal course of our business. To the
extent that we grow through acquisitions, we may not be able to adequately or profitably manage this growth. Acquiring other banks, thrifts, or financial service companies, as well as other geographic
and product expansion activities, involve various risks including:



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Attractive acquisition opportunities may not be available to us in the future.

We expect that other banking and financial service companies, many of which have significantly greater resources than us, will compete
with us in acquiring other banks, thrifts, and financial service companies. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are
subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests. Among
other things, our regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. Any
acquisition could be dilutive to our earnings and stockholders' equity per share of our common stock.

Our ability to complete acquisitions and expansion activities, if any, may require us to raise additional capital that may not be available when it is needed or may not be
available on terms acceptable to us.

We are required by regulatory agencies to maintain adequate levels of capital to support our operations and such levels may be
increased by legislative and regulatory developments. To complete any future acquisitions and expansion activities, we may need to raise additional capital. Our ability to raise additional capital, if
needed, will depend in part on conditions in the capital markets at that time, which are outside our control. Accordingly, we may not be able to raise additional capital, if needed, on terms
acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through organic or external growth could be materially impaired.

In
the event that we are able to raise capital through the issuance of additional shares of common stock or other securities, the ownership interests of current investors would be
diluted and the per share book value of our common stock may be diluted. New investors may also have rights, preferences and privileges senior to the holders of our common stock, which may adversely
affect the holders of our common stock.

We are subject to security and operational risks relating to our use of technology that could damage our reputation and our business.

Security breaches in our Internet banking activities or other communication and information systems could damage our reputation, result
in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on
our financial condition and
results of operations. We rely on standard Internet and other security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not
protect our systems from compromises or breaches of our security measures.

The loss of one or more of our key personnel, or our failure to attract, assimilate and retain other highly qualified personnel in the future, could harm our business.

As a community bank, we expect our future growth to be driven in large part by the relationships that our key personnel, including
Curtis L. Hage, our Chairman, President and Chief Executive Officer, and Darrel L. Posegate, our Executive Vice President, Chief Financial Officer and Treasurer, maintain with our customers. We do not
have long-term employment agreements with any of our officers or key employees. Mr. Posegate's employment agreement has a term of one year, which automatically renews on
July 1 for an additional year unless, no later than March 31 of the previous year, either the Bank or Mr. Posegate gives notice that the employment agreement shall not be
extended. Mr. Hage has notified us that he will retire effective December 31, 2011 from his positions as an officer of the Company and the Bank. Search efforts are underway to identify
the next generation of leadership for the Company and the Bank.

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We
believe that our continued growth and future success will depend in large part upon the skills of our management team. The competition for qualified personnel in the financial
services industry can be intense, and the loss of key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect our business. The unexpected loss of
any of our key employees could have a material adverse effect on our business and possibly result in reduced revenues and earnings.

Changes in or interpretations of accounting standards may materially impact our financial statements.

Accounting principles generally accepted in the United States and accompanying accounting pronouncements, implementation guidelines,
interpretations and practices for many aspects of our business are complex and involve subjective judgments, including, but not limited to, accounting for the allowance for loan and lease losses and
pending and incurred but not reported health claims. Changes in these estimates or changes in other accounting rules and principles, or their interpretation, could significantly change our reported
earnings and operating results, and could add significant volatility to those measures, without a comparable underlying change in cash flow from operations.

The holders of our junior subordinated debentures have rights that are senior to those of our stockholders.

We have supported our continued growth through the issuance of trust preferred securities from special purpose trusts and accompanying
sales of junior subordinated debentures to these trusts. The accompanying junior subordinated debentures have an aggregate liquidation amount totaling $27.8 million as of June 30, 2010.
Payments of the principal and interest on the trust preferred securities of these trusts are conditionally guaranteed by us. Further, the accompanying junior subordinated debentures that we issued to
the trusts are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of
our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock.

Risks Relating to Our Common Stock

The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell shares of our common stock at times or at prices you find
attractive.

The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility, which has
reached unprecedented levels in past months. In some cases, the markets have produced downward pressure on stock prices for certain issuers without regard to those issuers' underlying financial
strength. As a result, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur. This may make it difficult for you to resell shares of our
common stock at times or at prices you find attractive.

The
trading price of the shares of our common stock will depend on many factors that may change from time to time and may be beyond our control. Among the factors that could affect our
stock price are those identified in the section entitled "Special Cautionary Note Regarding Forward-Looking Statements" and as follows:



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A
significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation.

Our ability to pay dividends depends primarily on dividends from our banking subsidiary, the Bank, which is subject to regulatory limits.

We are a unitary thrift holding company and our operations are conducted primarily by our banking subsidiary, the Bank. Since we
receive substantially all of our revenue from dividends from the Bank, our ability to pay dividends on our common stock depends on our receipt of dividends from the Bank.

Dividend
payments from the Bank are subject to legal and regulatory limitations, generally based on net income and retained earnings. The ability of the Bank to pay dividends to us is
also subject to its profitability, financial condition, capital expenditures and other cash flow requirements. The Bank may not be able to generate adequate cash flow to pay us dividends in the
future. The inability to receive dividends from the Bank could have an adverse effect on our business and financial condition.

Furthermore,
holders of our common stock are only entitled to receive the dividends as our Board of Directors may declare out of funds legally available for such payments. Although we
have historically paid cash dividends on our common stock, we are not required to do so and our Board of Directors could reduce or eliminate our common stock dividend in the future. This could
adversely affect the market price of our common stock.

Additionally,
we may elect in the future to defer interest payments on our junior subordinated debentures discussed above. The debenture agreements prohibit dividend payments on our
common stock following the deferral of interest payments on the subordinated debentures underlying the trust preferred securities.

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The trading volume in our common stock has been low, and the sale of a substantial number of shares of our common stock in the public market could depress the price of our
common stock and make it difficult for you to sell your shares.

Our common stock is listed to trade on The Nasdaq Global Market but is thinly traded. As a result, you may not be able to sell your
shares of common stock on short notice. Additionally, thinly traded stock can be more volatile than stock trading in an active public market. The sale of a substantial number of shares of our common
stock at one time could depress the market price of our common stock, making it difficult for you to sell your shares and impairing our ability to raise capital.

We may raise additional capital, which could have a dilutive effect on the existing holders of our common stock and adversely affect the market price of our common stock.

We are not restricted from issuing additional shares of common stock or securities that are convertible into or exchangeable for, or
that represent the right to receive, common stock. We may evaluate opportunities to access the capital markets taking into account our regulatory capital ratios, financial condition and other relevant
considerations, and subject to market conditions,
we may take further capital actions in addition to issuance of the shares offered by this prospectus. Such actions could include, among other things, the issuance of additional shares of common stock
in public or private transactions in order to further increase our capital levels above the requirements for a well-capitalized institution established by the federal bank regulatory
agencies as well as other regulatory targets.

We
face significant regulatory and other governmental risks as a financial institution, and it is possible that capital requirements and directives could in the future require us to
change the amount or composition of our current capital, including common equity.

The
issuance of any additional shares of common stock or securities convertible into or exchangeable for common stock or that represent the right to receive common stock, or the exercise
of such securities, could be substantially dilutive to holders of our common stock, including purchasers of common stock in this offering. Holders of our shares of common stock have no preemptive
rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to our
stockholders. The market price of our common stock could decline as a result of sales of shares of our common stock made after this offering or the perception that such sales could occur.

Certain provisions of our Certificate of Incorporation and Bylaws, as well as Delaware and federal law, may discourage, delay or prevent an acquisition of control of us.

Certain provisions included in our Certificate of Incorporation and Bylaws, as well as certain provisions of the Delaware General
Corporation Law and federal law, may discourage, delay or prevent potential acquisitions of control of us, particularly when attempted in a transaction that is not negotiated directly with, and
approved by, our Board of Directors, despite possible benefits to our stockholders.

Specifically,
our Certificate of Incorporation and Bylaws, as the case may be, include certain provisions that:



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Furthermore,
federal law requires OTS approval prior to any direct or indirect acquisition of "control" (as defined in OTS regulations) of the Bank, including any acquisition of control
of us. Under OTS regulations, an acquiror is deemed, subject to rebuttal, to have acquired control of a savings association if the acquiror, directly or indirectly, or through one or more subsidiaries
or transactions or acting in concert with one or more persons or companies, acquires more than 10 percent of any class of voting stock of a savings association and is subject to any of the
enumerated control factors under the regulation.

Item 1B.Unresolved Staff Comments

None.

Item 2.Properties

The Company and its direct and indirect subsidiaries conduct their business at the main office located at 225 South Main Avenue, Sioux
Falls, South Dakota, 57104. Currently, the Bank has a total of 33 banking centers in its market area and one Internet branch located at www.homefederal.com.Of such 33 total banking centers, the Company
owns 15, including the main office, and leases 18 others. For a description of the
Bank's market area, see Item 1, "BusinessMarket Area" of this Form 10-K.

The
total net book value of the Company's premises and equipment (including land, building, leasehold improvements and furniture, fixtures and equipment) at June 30, 2010 was
$15.0 million. The Company's previously announced new facility in Watertown, South Dakota completed construction in fiscal 2010 and subsequently on February 1, 2010 was sold as a leased
back facility to an unrelated group. This facility replaces an existing branch office in that community. Management believes there is

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a
continuing need to keep facilities and equipment up-to-date and continued investment will be necessary in the future.

Item 3.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, that 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 4.    [Removed and Reserved]

PART II

Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Stock Listing

The Company's common stock is traded under the symbol "HFFC" on the NASDAQ Global Market.

The
following table sets forth the range of high and low sale prices for the Company's common stock for each quarter of the two most recent fiscal years ended June 30, 2010 and
2009. Quotations for such periods are as reported by the NASDAQ Global Market.

FISCAL 2010

HIGH

LOW1st Quarter

$
13.00

$
10.602nd Quarter

$
11.39

$
8.053rd Quarter

$
10.45

$
9.254th Quarter

$
11.73

$
9.46




FISCAL 2009

HIGH

LOW1st Quarter

$
16.30

$
12.152nd Quarter

$
14.06

$
9.003rd Quarter

$
13.50

$
10.024th Quarter

$
13.36

$
10.75


As
of September 3, 2010, the Company had 461 holders of record of its common stock.

The
transfer agent for the Company's common stock is BNY Mellon Shareowner Services, P.O. Box 358015, Pittsburgh, PA 15252.

Dividends

The Company paid cash dividends on a quarterly basis of $0.1125, $0.1125, $0.1125 and $0.1125 per share throughout fiscal 2010. The
Company paid cash dividends on a quarterly basis of $0.1125, $0.1125, $0.1125 and $0.1125 per share in fiscal 2009. On July 26, 2010, the Board of Directors announced the approval of a cash
dividend of $0.1125 per share and the Company paid the respective cash dividends on August 13, 2010 to stockholders of record on August 6, 2010.

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The Company's ability to pay dividends on its common stock is dependent on the dividend payments it receives from the Bank, since the Company receives
substantially all of its revenue in the form of dividends from the Bank. Future dividends are not guaranteed and will depend on the Company's ability to pay them.

The
Company and the Bank are subject to the oversight of the OTS and the Bank is also subject to the oversight of the FDIC. The OTS imposes various restrictions on the Bank's ability to
make capital distributions, including cash dividends. The Bank must file a notice with the OTS at least 30 days before making a capital distribution. The Bank must also file an
application for prior approval to make a dividend if the total amount of its capital distributions, including the proposed distribution, for the applicable calendar year would exceed an amount equal
to the Bank's net income for that year plus retained net income for the previous two years.

The
OTS may disapprove of a notice or application if:



The
Company's ability to pay dividends is also subject to the terms of its outstanding trust preferred securities and the accompanying junior subordinated debentures. Under the terms of
these debentures, the Company may defer interest payments on the debentures for up to five years. If the Company defers such interest payments, the Company may not declare or pay any cash dividends on
any shares of its common stock during the deferral period.

In
addition, the Company has a line of credit for $6.0 million with United Bankers' Bank with no outstanding balance at June 30, 2010. The line of credit matures on
October 1, 2010. In case of default on the line of credit, the Company's ability to pay cash dividends may be restricted.

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Stockholder Return Performance

The following line graph compares the cumulative total stockholder return on the Company's common stock to the comparable cumulative
total return of the NASDAQ Market Index and the NASDAQ Bank Index for the last five years.

The
performance graph assumes that on July 1, 2005, $100 was invested in the Company's common stock (at the closing price of the previous trading day) and in each of the indexes.
The comparison assumes the reinvestment of all dividends. Cumulative total stockholder returns for the Company's common stock, the NASDAQ Market Index and the NASDAQ Bank Index are based on the
Company's fiscal year ending June 30. The performance graph represents past performance and should not be considered to be an indication of future performance.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL STOCKHOLDER RETURN        AMONG HF FINANCIAL CORP.,        NASDAQ MARKET INDEX AND NASDAQ BANK INDEX

GRAPHIC

ASSUMES $100 INVESTED ON JULY 01, 2005
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING JUNE 30, 2010

Equity Compensation Plan Information

The following table sets forth certain information about the common stock that may be issued upon exercise of options, warrants and
rights under all of the Company's existing equity compensation plans as of June 30, 2010, including the 2002 Stock Option and Incentive Plan, the 1996 Director Restricted Stock Plan, and the
1991 Stock Option and Incentive Plan (collectively, the "Incentive Plans"). The 1996 Director Restricted Stock Plan expired on January 1, 2007, and the 1991 Stock Option and Incentive Plan
expired on October 27, 2002. Although the column below entitled "Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights" includes common stock to be issued
upon unexpired options issued under the 1991 Stock Option and Incentive Plan, no common stock remains available for future awards under the 1991 Stock Option and Incentive

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Plan.
Additionally, no common stock remains available for future awards under the 1996 Director Restricted Stock Plan.

Plan Category

Number of Shares to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights

Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights

Number of Shares
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Shares Reflected
in the First Column)(1)Equity plan compensation plans approved by stockholders


331,376

$
13.48


349,084Equity plan compensation plans not approved by stockholders


N/A


N/A


N/ATotal


331,376

$
13.48


349,084


(1)All
349,084 shares may be issued under the 2002 Stock Option and Incentive Plan in the form of nonvested stock.


Sales of Unregistered Stock

None.

Issuer Purchases of Equity Securities

None.

Item 6.Selected Financial Data

The following table sets forth selected consolidated financial statement and operations data with respect to the Company for the
periods indicated. This information should be read in conjunction with the Financial Statements and related notes appearing in Part II, Item 8 "Financial Statements and Supplementary
Data" of this Form 10-K and with Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this
Form 10-K. The Company's selected financial statement and operations data for each of the fiscal years 2006 through 2010 have been derived from audited consolidated financial
statements, which have been audited by Eide Bailly, LLP, independent public accountants.

At June 30,2010

2009

2008

2007

2006(Dollars in Thousands)Selected Statement of Financial Condition Data:Total assets

$
1,253,015

$
1,176,796

$
1,103,494

$
1,001,454

$
961,294Securities available for sale


264,442


222,910


225,004


142,223


145,518FHLB stock


10,334


12,476


11,245


5,058


5,647Loans and leases receivable


862,704


842,812


777,777


761,599


721,603Loans held for sale


25,287


14,881


8,796


8,776


7,623Deposits


914,264


837,868


784,237


815,864


769,002Advances from FHLB and other borrowings


190,719


212,869


198,454


68,600


91,620Subordinated debentures payable to trusts


27,837


27,837


27,837


27,837


27,837Stockholders' equity


94,435


68,675


64,203


62,270


56,058


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Years Ended June 30,2010

2009

2008

2007

2006(Dollars in Thousands, Except Per Share Data)Selected Statement of Income Data:Interest and dividend income

$
57,354

$
60,688

$
63,174

$
61,874

$
53,411Interest expense


20,681


25,359


33,298


36,240


27,762Net interest income


36,673


35,329


29,876


25,634


25,649Provision for losses on loans and leases


2,950


1,679


1,994


1,198


5,279Net interest income after provision for losses on loans and leases


33,723


33,650


27,882


24,436


20,370Loan servicing income


2,042


2,301


2,211


1,803


1,123Gain on sale of land, net














3,557Gain on sale of branches, net











2,763


Gain on sale of loans, net


1,841


1,906


1,197


923


969Gain on sale of securities, net


1,853


904


3





3Net impairment losses recognized in earnings


(2,683
)

(405
)







Goodwill impairment losses recognized in earnings


(585
)










Other noninterest income


7,961


7,896


7,922


7,707


7,199Noninterest expense


(35,451
)

(34,566
)

(30,606
)

(29,605
)

(26,499
)Income before income taxes


8,701


11,686


8,609


8,027


6,722Income tax expense


2,956


3,870


2,766


2,644


2,214Net income


5,745


7,816


5,843


5,383


4,508Preferred stock dividends and accretion





1,316








Net income available to common stockholders

$
5,745

$
6,500

$
5,843

$
5,383

$
4,508


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Years Ended June 30,2010

2009

2008

2007

2006(Dollars in Thousands, Except Per Share Data)Basic earnings per common share:(1)Net income

$
1.00

$
1.62

$
1.47

$
1.35

$
1.15Diluted earnings per common share:(1)Net income


1.00


1.61


1.45


1.33


1.13Dividends declared per share(1)


0.45


0.45


0.43


0.42


0.41Dividend payout ratio(2)


45.00
%

27.78
%

29.25
%

30.93
%

35.20
%Interest rate spread (average during period)


3.04


2.95


2.70


2.36


2.60Net interest margin(3)


3.29


3.26


3.11


2.80


2.98Net interest margin, TE(4)


3.34


3.32


3.16


2.85


3.01Average interest-earning assets to average interest-bearing liabilities


1.14


1.13


1.12


1.11


1.12Equity to total assets (end of period)


7.54


5.84


5.82


6.22


5.83Equity-to-assets ratio (ratio of average equity to average total assets)


7.07


6.98


6.21


6.06


5.94Nonperforming assets to total assets (end of period)


0.73


1.07


0.34


0.40


0.40Allowance for loan and lease losses to nonperforming loans and leases (end of period)(5)


116.31


73.83


191.08


167.87


168.11Allowance for loan and lease losses to total loans and leases (end of period)


1.07


0.98


0.75


0.76


0.77Nonperforming loans and leases to total loans and leases (end of period)(5)


0.92


1.32


0.39


0.45


0.46Noninterest expense to average total assets


3.02


3.00


2.97


3.00


2.87Net interest income after provision for losses for loans and leases to noninterest expense (end of period)


93.58


97.35


91.10


82.54


76.87Return on assets (ratio of net income to average total assets)


0.48


0.68


0.57


0.55


0.49Return on equity (ratio of net income to average equity)


6.82


9.73


9.12


9.01


8.23Operating Efficiency Ratio(6)


73.71


69.83


70.75


76.56


71.41Efficiency Ratio(7)


75.57


72.12


74.27


76.24


68.83Number of full-service offices


33


33


33


33


35


(1)All
per share data has been retroactively adjusted for the 10% stock dividend paid on April 24, 2006.(2)Dividends
declared per share divided by net income per share.(3)Net
interest income divided by average interest-earning assets.(4)Net
interest margin expressed on a fully taxable equivalent basis.(5)Nonperforming
loans and leases include nonaccruing loans and leases and accruing loans delinquent more than 90 days.(6)Total
noninterest expense divided by the sum of net interest income plus total noninterest income excluding net interest expense on trust preferred
securities and gain on sale of branches and gain on sale of land.(7)Total
noninterest expense divided by the sum of net interest income plus total noninterest income.


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Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations

This section should be read in conjunction with the following parts of this Form 10-K: Forward-Looking Statements,
Part II, Item 8 "Financial Statements and Supplementary Data," Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," and Part I,
Item 1 "Business."

Executive Summary

The Company's net income available to common stockholders for fiscal 2010 was $5.7 million, or $1.00 per diluted share, compared
to $6.5 million, or $1.61 per diluted share
for fiscal 2009. Return on average equity was 6.82% at June 30, 2010, compared to 9.73% at June 30, 2009.

During
the second quarter of fiscal 2010, the Company issued 2.9 million shares of its common stock at a public offering price of $8.00 per share, for gross proceeds of
$23.0 million. The net proceeds of the offering after deducting underwriting discounts and commissions and estimated offering expenses totaled approximately $20.7 million. The proceeds
were used to pay off an existing line of credit with United Bankers' Bank of $6.0 million and increase liquidity. As a result of the stock offering, average equity increased by 4.9% in fiscal
2010 compared to fiscal 2009, primarily due to the capital raised. Per share earnings calculations were based on a diluted weighted average shares outstanding of 5.8 million shares versus
4.0 million shares in fiscal 2009.

Net
interest income for fiscal 2010 was $36.7 million, an increase of $1.3 million or 3.8% over the same period a year ago. The net interest margin was 3.29%, compared to
3.26% for the same period a year ago, an increase of 3 basis points. On a fully taxable equivalent basis, the net interest margin for fiscal 2010 was 3.34%, compared to 3.32% in fiscal 2009. Net
Interest Margin, TE is a non-GAAP financial measure. See "Analysis of Net Interest Income" for a calculation of this non-GAAP financial measure and for further discussion as to
the reasons we believe this non-GAAP financial measure is useful. The cost of funds rate on interest-bearing liabilities decreased from 2.65% in fiscal 2009 to 2.11% in fiscal 2010, a
change of 54 basis points. For the same period, yields on earning assets decreased from 5.60% to 5.15%, a decrease of 45 basis points. Increases in volume from fiscal 2009 to fiscal 2010 of average
earning assets and interest-bearing liabilities were 2.9% and 2.7% respectively.

Variability
of the net interest margin ratio may be affected by many aspects, including Federal Reserve policies for short-term interest rates, competitive and global
economic factors and customer preferences for various products and services. As of June 30, 2010, management believes that it has positioned the institution for earning asset sensitivity,
whereas an asset sensitive institution will generally realize an increase in income if interest rates rise due to the fact that more assets will be reinvested at higher market rates than liabilities.
However, within a twelve month time horizon there may be a slight lag effect where liabilities may initially reprice faster than assets for a portion of the time period.

Agricultural
loans accounted for the majority of the loan growth between fiscal 2010 and 2009. Agricultural real estate loans were $118.4 million at the end of 2010, up
$16.2 million or 15.9% since fiscal year 2009, and comprised 13.6% of total loans outstanding, up from 11.8% at the end of 2009. Agricultural business loans were $152.2 million at the
end of 2010, up $23.1 million or 17.9% since fiscal year 2009, and comprised 17.4% of total loans outstanding, up from 14.9% at the end of 2009. Loans of this type are in a diverse range of
agricultural enterprises, including grain production, dairy and livestock operations. The credit risk related to agricultural loans is largely influenced by general economic conditions and the
resulting impact on a borrower's operations or on the value of underlying collateral, if any. Credit risk is managed by employing sound underwriting guidelines, lending primarily to borrowers in local
markets, periodically evaluating the underlying collateral, and formally reviewing the borrower's financial soundness and relationship on an ongoing basis.

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The
allowance for loan and lease losses increased $1.1 million to $9.6 million at June 30, 2010, an increase of 13.0%. The ratio of allowance for loan and lease
losses to total loans and leases was 1.07% as of June 30, 2010 compared to 0.98% at June 30, 2009. Total nonperforming assets at June 30, 2010 were $9.2 million as compared
to $12.6 million at June 30, 2009. The ratio of nonperforming assets to total assets was 0.73% for June 30, 2010, compared to 1.07% at June 30, 2009. The allowance for loan
and lease losses is calculated based on loan and lease levels, loan and lease loss history over 12, 36, and 60 month time periods, credit quality of the loan and lease portfolio, and
environmental factors such as economic health of the region and management experience. This risk rating analysis is designed to give the Company a consistent and systematic methodology to determine
proper levels for the allowance at a given time. Management intends to continue its disciplined credit administration and loan underwriting processes and to remain focused on the creditworthiness of
new loan originations.

The
Company held $9.3 million in trust preferred securities at June 30, 2010 that are currently impaired under applicable accounting rules. These are comprised of pooled
securities issued primarily by banks throughout the United States, and were downgraded which places each in a below investment grade rating. The Company performed analysis to determine if any of the
securities had a credit loss by estimating if any of the cash flows are not expected to be received as contracted. During fiscal 2010 and 2009, we determined that four debt securities exhibited
other-than-temporary impairment. The aggregate OTTI losses recorded for the four securities were $6.1 million, of which $3.0 million was recognized on the balance
sheet in other comprehensive income, and $3.1 million of credit loss recognized through earnings.

Total
deposits at June 30, 2010, were $914.3 million, an increase of $76.4 million, or 9.1%, from June 30, 2009. Due to the continued low interest rate
environment, the Company experienced a preference by customers of deposititng in non-maturity deposits. Money market accounts increased $44.6 million, or 30.7%, from June 30,
2009, noninterest bearing checking accounts increased $23.1 million, or 24.5%, and interest bearing checking accounts increased $5.4 million, or 5.7%, over the same period a year ago.
Public fund account balances increased $32.4 million, or 17.8%, from June 30, 2009, which was primarily in the money market and checking account categories. Interest expense on deposits
was $12.3 million for fiscal 2010, a decrease of $3.4 million, or 21.5%, over fiscal 2009.

The
total risk-based capital ratio was 11.68% at June 30, 2010, compared to 11.05% at June 30, 2009. This continues to place the Bank in the
"well-capitalized" category within OTS regulation at June 30, 2010, and is consistent within the "well-capitalized" OTS category in which the Company plans to operate.
The Company historically has been able to manage the size of its assets through secondary market loan sales of single-family mortgages, student loans and a loan securitization.

Noninterest
income for fiscal 2010 was $11.0 million, compared to $12.6 million for the same period a year ago, a decrease of $1.6 million or 12.6%. Net impairment
losses recognized in earnings increased $2.3 million from fiscal 2009 to fiscal 2010. Loan servicing income, fees on deposits, and net gain on sale of loans decreased $259,000, $137,000, and
$65,000, respectively, over the previous year. The decline in loan servicing income was a largely a result of changes in the portfolio's performance attributes. Net gain on sale of securities and
trust income increased $949,000 and $144,000, respectively, which combined to partially offset the previously mentioned decreases from fiscal 2009 to fiscal 2010.

Noninterest
expense for fiscal 2010 was $36.0 million, compared to $34.6 million for fiscal 2009, an increase of $1.5 million or 4.3%. Occupancy and equipment,
marketing and community development, and check and data processing increased $498,000, $332,000, and $173,000, respectively. During the company's annual goodwill impairment testing, it was determined
that the goodwill associated with the acquisition of the leasing division was impaired. Accordingly, the Company wrote-off the entire amount of goodwill associated with this acquisition,
resulting in an additional $585,000 of expense for fiscal

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2010.
Employee compensation and benefits decreased $232,000, or 1.1%, as compared to fiscal 2009, which was attributed primarily to performance-based incentive pay and healthcare cost decreases.

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. The operating efficiency ratio (i.e., noninterest expense divided by total revenue adjusted for
interest expense of trust preferred debt securities) for fiscal 2010 was 73.71%, compared to 69.83% for the same period a year ago, an increase of 388 basis points. The operating efficiency ratio
excludes the impact of net interest expense on the variable priced trust preferred securities. The Company has issued trust preferred securities primarily to provide funding for stock repurchases and
to repay other borrowings. Net interest expense on the $27.8 million of trust preferred securities outstanding was $1.8 million for fiscal 2010 and 2009, with an average rate paid of
6.61% and 6.57% paid in fiscal 2010 and fiscal 2009, respectively. The total efficiency ratio (i.e., non-interest expense divided by total revenue) was 75.57% for the year ended
June 30, 2010, compared to 72.12% for the prior year, an increase of 345 basis points. Contributing to this change in the efficiency ratio was the goodwill impairment expense of $585,000 and
the $2.3 million increase in other-than-temporary impairment. Management believes that improvement to the operating efficiency ratio can be accomplished through steady
growth of the balance sheet and the containment of incremental operating expenses.

The
Bank is a member of the Deposit Insurance Fund (the "DIF"), which is administered by the Federal Deposit Insurance Corporation ("FDIC"). Deposits are insured up to the applicable
limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. Recent bank failures have decreased the DIF to levels below its required reserve ratio. In order to replenish the
DIF, the FDIC has increased deposit insurance premiums to a level designed to restore the DIF to required levels
within seven years, and the Company paid a one-time special assessment of $535,000 on September 30, 2009, based upon deposits at June 30, 2009. This assessment was accrued in
the fourth quarter of fiscal 2009. In addition, on November 12, 2009, the FDIC Board approved a rule requiring prepayment of the quarterly assessments for the fourth quarter of calendar 2009,
and the entire calendar years of 2010, 2011, and 2012. On December 30, 2009, the Company paid $4.9 million which was recorded as a prepaid asset and will be proportionally expensed over
future periods. At June 30, 2010, the remaining balance recorded as a prepaid asset was $3.7 million. The FDIC may impose additional special assessments which would be recorded as they
are incurred. The FDIC also instituted the Transaction Account Guarantee Program ("TAGP"). The TAGP extended the FDIC's insurance to full coverage of non-interest bearing transaction
accounts for participating institutions through December 31, 2010 and provided for the possibility of a further extension through December 31, 2011. The Bank is assessed an annualized
rate of 15 basis points on deposit balances in excess of the $250,000 insurance limit. The Bank is a participant in the TAGP, but does not expect this program to have a material impact on the FDIC
assessment. The Bank had previously paid assessments under the Savings Association Insurance Fund ("SAIF") and was eligible for certain credit against deposit insurance assessments when SAIF was
merged into the DIF in 2005. This credit had offset the majority of the Bank's FDIC premium expense in past fiscal years, but was fully utilized during the second quarter of fiscal 2009.

Recent
events in the financial markets produce uncertainties to management about future operating results and the future financial condition of the Company. The interdependencies of the
national economy and financial markets do affect the macro economics reviewed by management and may produce outcomes in the future that have not impacted the Company previously.

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General

The Company is a financial services provider and, as such, has inherent risks that must be managed in order to achieve net income.
Primary risks that affect net income include credit risk, liquidity risk, operational risk, regulatory compliance risk and reputation risk. The Company's net income is derived by management of the net
interest margin, the ability to collect fees from services provided, by controlling the costs of delivering services and the management of loan and lease losses. The primary source of revenues is 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 June 30, 2010, the Company had total assets of $1,253.0 million, an increase of $76.2 million from the level at
June 30, 2009. The increase in assets was due primarily to increases in securities available for sale of $41.5 million, net loans and leases receivable of $19.9 million and loans
held for sale of $10.4 million. The increase in liabilities of $50.5 million was primarily due to increases in deposits of $76.4 million and partially offset by decreased advances
from the FHLB and other borrowings of $22.2 million. In addition, stockholders' equity increased to $94.4 million at June 30, 2010, from $68.7 million at June 30,
2009, primarily due to additional stock issued of $21.6 million, net income of $5.7 million and partially offset by cash dividends paid of $2.5 million.

The
increase in securities available for sale of $41.5 million was due primarily to the purchases of mortgage-backed securities during the year. The increase in net loans and
leases receivable of $19.9 million was due primarily to an increase in originations over sales, amortization and repayments of principal. During the first quarter of fiscal 2008, the Company
announced that it had ceased origination of indirect auto loans. Indirect auto loan outstanding balances declined $21.4 million during the fiscal year to $8.2 million at June 30,
2010. In addition, loans held for sale increased $10.4 million, primarily due to the increase in one-to four-family loans held at June 30, 2010.

See
the Consolidated Statement of Cash Flows for an in-depth analysis of the change in cash and cash equivalents.

Deposits
increased $76.4 million primarily due to the increase of in-market deposits, which primarily consisted of money market and checking account increases. Public
funds, which are part of the in-market deposits, increased $32.4 million of the total. Advances from the FHLB and other borrowings decreased $22.2 million, at June 30,
2010 as compared to June 30, 2009, due to the reduced funding needs resulting from the increased deposits.

Stockholders'
equity increased $25.8 million at June 30, 2010 when compared to June 30, 2009, due primarily to stock issuance of $20.7 million during November
2009. The Company issued 2.9 million shares of its common stock in an underwritten public offering at $8.00 per share, for gross proceeds of $23.0 million. The net proceeds of the
offering after deducting underwriting discounts and commissions and estimated offering expenses totaled approximately $20.7 million. The increase in stockholders' equity was also attributed to
the net income of $5.7 million and partially offset by the cash dividends paid of $2.5 million.

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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. Average balances consist of daily average balances for the Bank with simple average balances for all other companies. 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.

Years Ended June 30,2010

2009

2008Average
Outstanding
Balance

Interest
Earned/
Paid

Yield/
Rate

Average
Outstanding
Balance

Interest
Earned/
Paid

Yield/
Rate

Average
Outstanding
Balance

Interest
Earned/
Paid

Yield/
Rate(Dollars in Thousands)Interest-earning assets:Loans and leases receivable(1)(3)

$
860,882

$
49,658


5.77
%
$
829,486

$
49,460


5.96
%
$
775,558

$
53,972


6.96
%Investment securities(2)(3)


241,126


7,414


3.07
%

241,294


11,060


4.58
%

176,652


8,844


5.01
%FHLB stock


11,948


282


2.36
%

12,274


168


1.37
%

8,511


358


4.21
%Total interest-earning assets


1,113,956

$
57,354


5.15
%

1,083,054

$
60,688


5.60
%

960,721

$
63,174


6.58
%Noninterest-earning assets


77,642








67,454








70,371Total assets

$
1,191,598







$
1,150,508







$
1,031,092Interest-bearing liabilities:Deposits:Checking and money market

$
240,051

$
1,357


0.57
%
$
231,362

$
1,956


0.85
%
$
268,264

$
6,978


2.60
%Savings


76,275


281


0.37
%

71,004


542


0.76
%

56,005


1,152


2.06
%Certificates of deposit


427,463


10,665


2.49
%

392,775


13,181


3.36
%

355,401


16,562


4.66
%Total interest-bearing deposits


743,789


12,303


1.65
%

695,141


15,679


2.26
%

679,670


24,692


3.63
%FHLB advances and other borrowings


209,079


6,550


3.13
%

232,206


7,841


3.38
%

152,289


6,467


4.25
%Subordinated debentures payable to trusts


27,837


1,828


6.57
%

27,837


1,839


6.61
%

27,837


2,138


7.68
%Total interest-bearing liabilities


980,705


20,681


2.11
%

955,184


25,359


2.65
%

859,796


33,297


3.87
%Noninterest-bearing deposits


93,101








76,838








79,313Other liabilities


33,522








38,152








27,914Total liabilities


1,107,328








1,070,174








967,023Equity


84,270








80,334








64,069Total liabilities and equity

$
1,191,598







$
1,150,508







$
1,031,092Net interest income; interest rate spread




$
36,673


3.04
%



$
35,329


2.95
%



$
29,876


2.71
%Net interest margin(4)








3.29
%







3.26
%







3.11
%Net interest margin, TE(5)








3.34
%







3.32
%







3.16
%


(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.


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(4)Net
interest margin is net interest income divided by average interest-earning assets.(5)Net
interest margin expressed on a fully taxable equivalent basis ("Net Interest Margin, TE") is a non-GAAP financial measure. The
tax-equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of
interest income and certain other permanent income tax differences. We believe that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable
equivalent basis, and accordingly believe the presentation of this non-GAAP financial measure may be useful for peer comparison purposes. As a non-GAAP financial
mea-sure, Net Interest Margin, TE should be considered supplemental to and not a substitute for or superior to, financial measures calculated in accordance with GAAP. As other companies
may use different calculations for Net Interest Margin, TE, this presentation may not be comparable to similarly titled measures reported by other companies.


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 that are due to the levels and volatility of
interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

Years Ended June 30,
2010 vs 2009

Years Ended June 30,
2009 vs 2008Increase
(Decrease)
Due to
Volume

Increase
(Decrease)
Due to
Rate

Total
Increase
(Decrease)

Increase
(Decrease)
Due to
Volume

Increase
(Decrease)
Due to
Rate

Total
Increase
(Decrease)(Dollars in Thousands)Interest-earning assets:Loans and leases receivable(1)

$
1,851

$
(1,653
)
$
198

$
3,762

$
(8,274
)
$
(4,512
)Investment securities(2)


(8
)

(3,638
)

(3,646
)

3,250


(1,034
)

2,216FHLB stock


(4
)

118


114


158


(348
)

(190
)Total interest-earning assets

$
1,839

$
(5,173
)
$
(3,334
)
$
7,170

$
(9,656
)
$
(2,486
)Interest-bearing liabilities:Deposits:Checking and money market

$
74

$
(673
)
$
(599
)
$
(962
)
$
(4,060
)
$
(5,022
)Savings


40


(301
)

(261
)

310


(920
)

(610
)Certificates of deposit


1,175


(3,691
)

(2,516
)

1,738


(5,119
)

(3,381
)Total interest-bearing deposits


1,289


(4,665
)

(3,376
)

1,086


(10,099
)

(9,013
)FHLB advances and other borrowings


(774
)

(517
)

(1,291
)

3,395


(2,021
)

1,374Subordinated debentures payable to trusts





(11
)

(11
)




(299
)

(299
)Total interest-bearing liabilities

$
515

$
(5,193
)
$
(4,678
)
$
4,481

$
(12,419
)
$
(7,938
)Net interest income increase







$
1,344







$
5,452


(1)Includes
loan fees and interest on accruing loans and leases past due 90 days or more.(2)Includes
federal funds sold.


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Application of Critical Accounting Policies

GAAP requires management to utilize estimates when reporting financial results. The Company has identified the policies discussed below
as Critical Accounting Policies because the accounting estimates require management to make certain assumptions about matters 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.

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

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

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

At
each balance sheet date, the MSRs are analyzed for impairment, which occurs when the fair value of the MSRs is lower than the amortized book value. The Company's MSRs are primarily
servicing rights acquired on South Dakota Housing Development Authority, first-time homebuyers program. Due to the lack of quoted markets for the Company's servicing portfolio, the Company
estimates the fair value of the MSRs using present value of future cash flow analysis. If the analysis produces a fair value that 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 earnings by initiating a MSR valuation account. If the Company determines this
impairment is temporary, any future changes in fair value are recorded as a change in earnings and the valuation. If the Company determines the impairment to be permanent, the valuation is written off
against the MSRs which results in a new amortized balance.

The
Company has included MSRs as a critical accounting policy because the use of estimates for determining fair value using present value concepts may produce results which may
significantly differ from other fair value analysis perhaps even to the point of recording impairment. The risk to earnings is when the underlying mortgages payoff significantly faster than the
assumptions used in the previously recorded amortization. Estimating future cash flows on the underlying mortgages is a difficult analysis and requires judgment based on the best information
available. The Company looks at alternative assumptions and projections when preparing a reasonable and supportable analysis. Based on the Company's quarterly analysis of MSRs, there was no impairment
to the MSRs at June 30, 2010.

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Security Impairment.Management continually monitors the investment security portfolio for impairment on a security by security basis.
During the
third quarter of fiscal 2009, the Company early adopted FASB Staff Position ("FSP") No. FAS 115-2,The Recognition and Presentation of
Other-Than-Temporary Impairments, which changed the recognition and presentation of other-than-temporary impairment for
securities. Management has a process in place to identify securities that could potentially have a credit impairment that is other than temporary. This process involves the length of time and extent
to which the fair value has been less than the amortized cost basis, review of available information regarding the financial position of the issuer, monitoring the rating of the security, cash flow
projections, and the Company's intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in
some cases, may extend to maturity. To the extent we determine that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized. If the Company
intends to sell a security or it is more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, less any current period credit loss, the
Company recognizes an other-than-temporary impairment in earnings for the difference between amortized cost and fair value. If we do not expect to recover the amortized cost
basis, we do not plan to sell the security and if it is not more likely than not that the Company would be required to sell a security before the recovery of it amortized cost, less any current period
credit loss, the recognition of the other-than-temporary impairment is bifurcated. For those securities, the Company separates the total impairment into a credit loss component
recognized in earnings, and the amount of the loss related to other factors is recognized in other comprehensive income net of taxes.

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

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

Self-Insurance.The Company has a self-insured healthcare plan for its employees up to certain limits. To mitigate a portion
of these risks, the Company has a stop-loss insurance policy through a commercial insurance carrier for coverage in excess of $65,000 per individual occurrence. 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 earnings if circumstances differ substantially from the assumptions used in estimating the accrual.

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Asset Quality

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, and, where appropriate, reviews 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.

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 $3.4 million to
$9.2 million at June 30, 2010. The decrease in non-performing assets was primarily attributable to one credit relationship, which was restructured in the third quarter of
fiscal 2010 and returned $4.0 million to performing status. The ratio of nonperforming assets to total assets, which is one indicator of credit risk exposure, decreased to 0.73% at
June 30, 2010, from 1.07% at June 30, 2009.

Nonaccruing
loans and leases decreased to $6.0 million at June 30, 2010 compared to $9.4 million at June 30, 2009. Included in nonaccruing loans and leases at
June 30, 2009 were five loans totaling $159,000 secured by one- to four-family real estate, seven commercial real estate loans totaling $716,000, one agricultural real
estate loan totaling $85,000, ten commercial business loans totaling $469,000, 12 agricultural business loans totaling $3.1 million, 25 equipment finance leases totaling $862,000, and 26
consumer loans totaling $649,000.

The
Company's nonperforming loans and leases, which represent nonaccrual and past due 90 days and still accruing, have decreased $3.2 million from the levels at
June 30, 2009. 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.

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As
of June 30, 2010 the Company had $946,000 of foreclosed assets. The balance of foreclosed assets at June 30, 2010 consisted of $212,000 in single-family residences,
$212,000 in equipment finance leases, $8,000 in consumer collateral, $32,000 in commercial business collateral, and $482,000 in agricultural collateral.

At
June 30, 2010, the Company had designated $50.7 million of its assets as special mention and classified $38.9 million of its assets that management has determined
need to be closely monitored because of possible credit problems of the borrowers or the cash flows of the secured properties and investment securities. At June 30, 2010, the Company had
$12.7 million in multi- family, commercial real estate, commercial business, and agricultural participation loans purchased, of which none of the amounts were classified at June 30,
2010. 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 June 30, 2010, recorded allowance for loan and lease losses was adequate to provide for probable losses on the related loans
and leases, there can be no assurance that the allowance existing at June 30, 2010 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 and categories of the Company's nonperforming assets from continuing operations for the periods indicated.

At June 30,2010

2009

2008

2007

2006(Dollars in Thousands)Nonaccruing loans and leases:One- to four-family

$
159

$
977

$
503

$
228

$
371Commercial real estate


716


177


429


25


Commercial business


469


405


555


1,441


341Equipment finance leases


862


272


27


118


36Consumer


649


355


566


378


287Agricultural


3,181


7,195


244





Total


6,036


9,381


2,324


2,190


1,035Accruing loans and leases delinquent more than 90 days:One- to four-family








306


470


358Commercial real estate


201


277


24


178


308Commercial business


167


349


71


213


814Equipment finance leases


334


264


9


88


302Consumer


22


8


119


1


7Agricultural


1,472


1,194


252


358


541Total


2,196


2,092


781


1,308


2,330Foreclosed assets:One- to four-family


212


406


76


158


96Equipment finance leases


212


105


443


180


254Commercial business


32











Consumer


8


92


124


170


177Agricultural


482


482








Total(1)


946


1,085


643


508


527Total nonperforming assets(2)

$
9,178

$
12,558

$
3,748

$
4,006

$
3,892Ratio of nonperforming assets to total assets(3)


0.73
%

1.07
%

0.34
%

0.40
%

0.40
%Ratio of nonperforming loans and leases to total loans and leases(4)(5)


0.92
%

1.32
%

0.39
%

0.45
%

0.46
%Accruing troubled debt restructures

$
4,000

$


$


$


$



(1)Total
foreclosed assets do not include land or other real estate owned held for sale.(2)Nonperforming
assets include nonaccruing loans and leases, accruing loans and leases delinquent more than 90 days and foreclosed assets.(3)Percentage
is calculated based upon total assets of the Company and its direct and indirect subsidiaries on a consolidated basis.(4)Nonperforming
loans and leases include both nonaccruing and accruing loans and leases delinquent more than 90 days.(5)Total
loans and leases include loans held for sale.


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

Years Ended June 30,2010

2009

2008

2007

2006(Dollars in Thousands)Balance at beginning of period

$
8,470

$
5,933

$
5,872

$
5,657

$
5,076Charge-offs:One- to four-family


(126
)

(140
)

(3
)

(12
)

(1
)Commercial real estate


(17
)

(112
)







Commercial business


(687
)

(36
)

(894
)

(386
)

(3,389
)Equipment finance leases


(324
)

(121
)

(475
)

(162
)

(165
)Consumer


(839
)

(1,080
)

(853
)

(701
)

(1,066
)Agricultural


(16
)

(80
)

(20
)

(31
)

(502
)Total charge-offs


(2,009
)

(1,569
)

(2,245
)

(1,292
)

(5,123
)Recoveries:One- to four-family


4


4


2


3


1Commercial real estate











1


6Commercial business





2,217


8


9


15Equipment finance leases


7





34





40Consumer


153


201


263


216


237Agricultural





5


5


80


126Total recoveries


164


2,427


312


309


425Net recoveries (charge-offs)


(1,845
)

858


(1,933
)

(983
)

(4,698
)Additions charged to operations


2,950


1,679


1,994


1,198


5,279Allowance related to assets acquired (sold), net














Balance at end of period

$
9,575

$
8,470

$
5,933

$
5,872

$
5,657Ratio of net recoveries (charge-offs) during the period to average loans and leases outstanding during the period


(0.21
)%

0.10
%

(0.25
)%

(0.13
)%

(0.67
)%Ratio of allowance for loan and lease losses to total loans and leases at end of period(1)


1.07
%

0.98
%

0.75
%

0.76
%

0.77
%Ratio of allowance for loan and lease losses to nonperforming loans and leases at end of period(2)


116.31
%

73.83
%

191.08
%

167.87
%

168.11
%


(1)Total
loans and leases include loans held for sale.(2)Nonperforming
loans and leases include both nonaccruing and accruing loans and leases delinquent more than 90 days.


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The distribution of the Company's allowance for loan and lease losses and impaired loss summary are summarized in the following tables.

At June 30,2010

2009

2008

2007

2006Amount

Percent of
Allowance

Amount

Percent of
Allowance

Amount

Percent of
Allowance

Amount

Percent of
Allowance

Amount

Percent of
Allowance(Dollars in Thousands)One- to four-family(1)

$
216


2.26
%
$
416


4.91
%
$
294


4.95
%
$
342


5.82
%
$
193


3.41
%Commercial and multi-family real estate(1)


1,884


19.67


1,302


15.37


875


14.75


647


11.02


396


7.00Commercial business(2)


2,569


26.83


2,698


31.86


2,174


36.64


2,795


47.60


3,133


55.39Consumer


1,273


13.30


1,280


15.11


1,190


20.06


1,178


20.06


1,432


25.31Agricultural


3,633


37.94


2,774


32.75


1,400


23.60


910


15.50


503


8.89Total

$
9,575


100.00
%
$
8,470


100.00
%
$
5,933


100.00
%
$
5,872


100.00
%
$
5,657


100.00
%


(1)Includes
construction loans.(2)Includes
equipment finance leases.


FAS 5
Allowance
for Loan and
Lease Losses

FAS 114
Impaired Loan
Valuation
Allowance

FAS 5
Allowance
for Loan and
Lease Losses

FAS 114
Impaired Loan
Valuation
AllowanceLoan Type

At June 30, 2010

At June 30, 2009(Dollars in Thousands)One- to four-family

$
216

$


$
416

$
Commercial real estate


1,614


165


1,110


Multi-family real estate


105





192


Commercial business


1,923


67


2,136


153Equipment finance leases


579





409


Consumer


1,273





1,280


Agricultural


3,540


93


2,724


50Total

$
9,250

$
325

$
8,267

$
203




Number of
Loan
Customers

Loan
Balance

Impaired
Loan
Valuation
Allowance

Number of
Loan
Customers

Loan
Balance

Impaired
Loan
Valuation
AllowanceLoan Type

At June 30, 2010

At June 30, 2009(Dollars in Thousands)Commercial real estate


4

$
731

$
165


3

$
177

$
Commercial business


5


362


67


4


453


153Agricultural


5


7,728


93


2


7,997


50Total


14

$
8,821

$
325


9

$
8,627

$
203


The
allowance for loan and lease losses was $9.6 million at June 30, 2010, as compared to $8.5 million at June 30, 2009. The ratio of the allowance for loan
and lease losses to total loans and leases was 1.07% at June 30, 2010, compared to 0.98% at June 30, 2009. 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

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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. OTS regulators have
reviewed the Company's methodology for determining allowance requirements on the Company's loan and lease portfolio and have made no required recommendations for changes in methodology in the
allowances during the three year period ended June 30, 2010.

Real
estate properties acquired through foreclosure are recorded at the lower of cost or fair value (less a deduction for disposition costs). Valuations are periodically updated by
management and a specific provision for losses on such properties is established by a charge to operations if the carrying values of the properties exceed their estimated net realizable values.

Although
management believes that it uses the best information available to determine the allowances, unforeseen market conditions could result in adjustments and net earnings being
significantly affected if circumstances differ substantially from the assumptions used in making the final determinations. Future additions to the Company's allowances result from periodic loan,
property and collateral reviews and thus cannot be predicted in advance. See Note 1 of "Notes to Consolidated Financial Statements," which is included in Part II, Item 8
"Financial Statements and Supplementary Data" of this Form 10-K for a description of the Company's policy regarding the provision for losses on loans and leases.

Comparison of the Years Ended June 30, 2010 and June 30, 2009

General.The Company's net income available for common stockholders was $5.7 million or $1.00 for basic and diluted earnings per
common share
for the year ended June 30, 2010, a $755,000 decrease in earnings compared to $6.5 million or $1.62 and $1.61 for basic and diluted earnings per common share, respectively, for the prior
year. Fiscal 2010 resulted in a return on average equity (i.e., net income divided by average equity) of 6.82%, compared to 9.73% in fiscal 2009. For the year ended June 30, 2010, the
return on average assets (i.e., net income divided by average assets) was 0.48% compared to 0.68% in the prior year. As discussed in more detail below, the decreases were due to a variety of
key factors, including decreases in noninterest income of $1.6 million and increases in noninterest expense of $1.5 million. These were partially offset by a decrease in preferred stock
dividends and accretion of $1.3 million and income taxes of $914,000.

Interest, Dividend and Loan Fee Income.Interest, dividend and loan fee income was $57.4 million for the year ended June 30,
2010, as
compared to $60.7 million for the prior year, a decrease of $3.3 million or 5.5%. Average yield on interest-earning assets decreased 8.0% which resulted in a decrease to overall interest
and dividend income of $5.2 million. This decrease was partially offset by an increase in the average volume of total interest-earning assets of 2.9%, resulting in an increase of overall
interest and dividends to increase by $1.9 million. The average yield on interest-earning assets was 5.15% for the year ended June 30, 2010, as compared to 5.60% for the prior year. The
average volume of loans and leases receivable increased from $829.5 million for the year ended June 30, 2009, to $860.9 million for the year ended June 30, 2010. For the
year ended June 30, 2010, the average yield on loans and leases receivable was 5.77%, a decrease of 3.2% from 5.96% in the prior year. The overall increase in interest and dividend income was
due in part to the repricing of loans and investments that generally reflected national interest rates.

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Interest Expense.Interest expense was $20.7 million for the year ended June 30, 2010, as compared to $25.4 million for
the
prior year, a decrease of $4.7 million or 18.4%. The $4.7 million decrease in interest expense was the result of a 26.7% decrease in the average rate paid on interest-bearing deposits,
while a $1.3 million increase in interest expense was the result of increase in deposit volume. The average rate on interest-bearing deposits was 1.65% for the year ended
June 30, 2010, as compared to 2.26% for the prior year. A $517,000 decrease in interest expense was the result of a 7.4% decrease in the average yield on FHLB advances and other borrowings to
3.13% for the year ended June 30, 2010, compared to 3.38% for the prior fiscal year, and a $774,000 decrease in interest expense was the result of a 10.0% decrease in the average balance of
FHLB advances and other borrowings.

Net Interest Income.The Company's net interest income for the year ended June 30, 2010, increased $1.3 million or 3.8%, to
$36.7 million as compared to the prior fiscal year. The increase in net interest income was due primarily to increases in the average volume on loans and leases receivable in excess of the
increase in average volume of the interest-bearing liabilities. The Company's net interest margin on a fully taxable equivalent basis was 3.34% for the year ended June 30, 2010, as compared to
3.32% for the prior year. The Company continues to have a diversified loan portfolio comprised of a mix of consumer and business type lending. This mix helps the Company manage the net interest margin
and interest rate risk by retaining loan and lease production on the balance sheet or looking at alternatives through secondary markets.

Provision for Losses on Loans and Leases.The allowance for loan and lease losses is maintained at a level which is believed 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 the 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.

Provision
for losses on loans and leases increased $1.3 million or 75.7%, to $3.0 million for the year ended June 30, 2010, as compared to $1.7 million in the
prior year. The increase in the provision was due in part to adding reserves for an increasing loan portfolio and continuing a policy of maintaining conservatism in estimating loan losses. Net
charge-offs increased from a net recovery of $858,000 during fiscal 2009 to $1.8 million of net charge-offs during fiscal 2010. The net
recovery in fiscal 2009 was largely a result of a previously announced net loan loss recovery of $2.2 million from a settlement of a previously disclosed lawsuit against MetaBank. Nonperforming
assets decreased $3.4 million for the year ended June 30, 2010, primarily due to one particular agriculture loan relationship, which was restructured in the third quarter of fiscal 2010
and returned $4.0 million to performing status.

The
allowance for losses on loans and leases at June 30, 2010 was $9.6 million. The allowance increased from the June 30, 2009 balance of $8.5 million
primarily as a result of the increased balance in loans and leases receivable at June 30, 2010 of $21.0 million compared to the balance at June 30, 2009. The ratio of allowance
for loan and lease losses to nonperforming loans and leases at June 30, 2010 was 116.31% compared to 73.83% at June 30, 2009. The allowance for loan and lease losses to total loans and
leases at June 30, 2010 was 1.07% compared to 0.98% at June 30, 2009. The Bank's management believes that the June 30, 2010 recorded allowance for loan and lease losses is
adequate to provide for probable losses on the related loans and leases, based on its evaluation of the collectability of loans and leases and prior loss experience.

Noninterest Income.Noninterest income was $11.0 million for the year ended June 30, 2010, as compared to $12.6 million
for the
year ended June 30, 2009, a decrease of $1.6 million or 12.6%.

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During
fiscal 2010, the decrease was primarily due to loan servicing income decrease of $259,000, fees on deposits decrease of $137,000 and net impairment losses recognized in earnings increase of
$2.3 million. Net gain on sale of securities increase of $949,000 and trust income increase of $144,000 partially offset the other decreases.

Loan
servicing income decreased by $259,000 to $2.0 million for the fiscal year 2010 due primarily to changes in the portfolio's performance attributes during the period based
upon the Company's quarterly analysis of portfolio prepayment experience.

Fees
on deposits decreased $137,000 to $5.6 million for the year ended June 30, 2010 as compared to the year ended June 30, 2009 due largely to a decrease in NSF and
overdraft fees of $597,000 and partially offset by an increase in point-of-sale interchange and ATM fee income of $519,000.

Net
impairment losses recognized in earnings were $2.7 million for the year ended June 30, 2010, as compared to $405,000 for the year ended June 30, 2009. The
Company determined that a total of $2.2 million of losses due to other-than-temporary impairments for trust preferred securities were incurred of which an additional
$460,000 was recognized in other
comprehensive income. The net of $2.7 million of losses were recognized as a reduction in other noninterest income for the year ended June 30, 2010, compared to $405,000 in the prior
year.

Net
gain on the sale of securities totaled $1.9 million, an increase of $949,000 for the year ended June 30, 2010 as compared to the prior fiscal year. The Company took
advantage of elevated fixed-rate mortgage-backed securities prices which were influenced by U.S. government participation in the mortgage-backed securities market, while also restructuring
the portfolio for a higher rate environment.

Trust
income increased by $144,000 to $820,000 during the year ended June 30, 2010, due in part to an increase in customers and managed assets from increased market values when
compared to the prior year. Assets under management increased from $77.5 million to $83.3 million.

Noninterest Expense.Noninterest expense was $36.0 million for the year ended June 30, 2010 as compared to $34.6 million
for the
year ended June 30, 2009, an increase of $1.4 million, or 4.3%. The increase was attributed to increases in salaries and wages of $925,000, occupancy and equipment of $498,000, marketing
and community development of $332,000 and goodwill impairment write-off of $585,000. The increases in noninterest expense were neutralized primarily by a decrease in performance-based
incentive pay and healthcare costs of $1.2 million and $415,000, respectively.

Compensation
and employee benefits were $20.7 million for the year ended June 30, 2010, a decrease of $232,000 or 1.1% when compared to the year ended June 30, 2009.
Performance-based incentive pay decreased $1.2 million, or 53.6%, due to a reduction in performance outcomes through the fiscal year 2010 as compared to the prior fiscal year. This decrease in
compensation was partially offset by an increase in salaries and wages of $925,000, or 6.5%, to $15.1 million for fiscal year 2010. The salary and wage expense increase was due to
year-over-year salary increases and personnel additions. Retirement costs, which are included in the total for compensation and employee benefits, increased $318,000, or 36.8%,
to $1.2 million for the fiscal year 2010 compared to fiscal year 2009 primarily due to the increased costs determined during the actuarial valuation in the first quarter of fiscal 2010. Net
healthcare costs decreased $415,000, or 16.2%, to $2.1 million due to a reduction of specific high dollar claims and general overall utilization for the fiscal year 2010 compared to the prior
fiscal year. Management currently believes the self-insured structure is a reasonable alternative to traditional healthcare plans over the long term. The level of healthcare costs which
the Company incurs may vary from year to year.

Occupancy
and equipment increased $498,000, or 12.5%, to $4.5 million for the year ended June 30, 2010 as compared to the prior fiscal year. A new facility in Watertown,
South Dakota was placed in service in July 2009, and subsequently sold and leased-back from an unrelated group in the third quarter of fiscal 2010. The depreciation of equipment, rental
expense, and other operating

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expenses
related to this new facility accounted for the majority of increased costs. Other equipment purchased during fiscal year 2010 also contributed to the increase in depreciation expense since
the prior fiscal year.

Marketing
and community development was $1.7 million for the year ended June 30, 2010 compared to $1.4 million for the year ended June 30, 2009, an increase
of $332,000 or 24.0%. This increase is primarily due to the costs related to the point of sale debit cards reward program implemented July 1, 2009.

Goodwill
impairment expense of $585,000 was recorded for the year ended June 30, 2010 compared to no impairment expense in the prior fiscal year. The Company performs annual
testing to determine if goodwill is impaired and at June 30, 2010, it was determined that the goodwill associated with the acquisition of the leasing division was impaired. Accordingly, the
Company wrote-off the amount of goodwill associated with this acquisition in the amount of $585,000. As of June 30, 2010, there was no impairment with respect to intangible assets
for the remaining amount of $4.4 million.

Income tax expense.The Company's income tax expense for the year ended June 30, 2010 decreased to $3.0 million compared to
$3.9 million for the prior fiscal year. The effective tax rates were 33.97% and 33.12% for the years ended June 30, 2010 and 2009, respectively. The amount of permanent tax difference as
a net deduction was a higher percentage to income before income taxes for fiscal year 2010 than for the prior fiscal year. Permanent tax differences as a net deduction decreased by $341,000 for the
year ended June 30, 2010 as compared to the prior year, primarily due to the write-off of goodwill of in the amount of $585,000.

Comparison of the Years Ended June 30, 2009 and June 30, 2008

General.The Company's net income available for common stockholders was $6.5 million or $1.62 and $1.61 for basic and diluted
earnings per
common share, respectively, for the year ended June 30, 2009, a $657,000 increase in earnings compared to $5.8 million or $1.47 and $1.45 for basic and diluted earnings per common share,
respectively, for the prior year. Fiscal 2009 resulted in a return on average equity (i.e., net income divided by average equity) of 9.73%, which is a 6.7% increase compared to 9.12% in fiscal
2008. For the year ended June 30, 2009, the return on average assets (i.e., net income divided by average assets) was 0.68%, a 19.3% increase compared to 0.57% in the prior year. As
discussed in more detail below, the increases were due to a variety of key factors, including increases in net interest income of $5.5 million and non-interest income of
$1.3 million. These increases were partially offset by increases in noninterest expense and preferred stock dividends and accretion in the amounts of $4.0 million and
$1.3 million, respectively, for fiscal 2009.

Interest, Dividend and Loan Fee Income.Interest, dividend and loan fee income was $60.7 million for the year ended June 30,
2009, as
compared to $63.2 million for the prior year, a decrease of $2.5 million or 3.9%. Average yield on interest-earning assets decreased 14.9% which resulted in a decrease to overall
interest and dividend income of $9.7 million. This decrease was partially offset by an increase in the average volume of total interest-earning assets of 12.7%, resulting in an increase of
overall interest and dividends to increase by $7.2 million. The average yield on interest-earning assets was 5.60% for the year ended June 30, 2009, as compared to 6.58% for the prior
year. The average volume of loans and leases receivable increased from $775.6 million for the year ended June 30, 2008, to $829.5 million for the year ended June 30, 2009.
For the year ended June 30, 2009, the average yield on loans and leases receivable was 5.96%, a decrease of 14.4% from 6.96% in the prior year. The overall increase in interest and dividend
income was due in part to the repricing of loans and investments that generally reflected national interest rates.

Interest Expense.Interest expense was $25.4 million for the year ended June 30, 2009, as compared to $33.3 million for
the
prior year, a decrease of $7.9 million or 23.8%. A $10.1 million

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decrease
in interest expense was the result of a 37.7% decrease in the average rate paid on interest-bearing deposits, while a $1.1 million increase in interest expense was the result of
increase in deposit volume. The average rate on interest-bearing deposits was 2.26% for the year ended June 30, 2009, as compared to 3.63% for the prior year. A $2.0 million decrease in
interest expense was the result of a 20.7% decrease in the average yield on FHLB advances and other borrowings to 3.38% for the year ended June 30, 2009, compared to 4.26% for the prior fiscal
year, and a $3.4 million increase in interest expense was the result of a 52.5% increase in the average balance of FHLB advances and other borrowings. In addition, interest expense decreased
$299,000 due to the average yield on subordinated debentures payable to trust decreasing to 6.61% for the year ended June 30, 2009, compared to 7.58% for the prior fiscal year.

Net Interest Income.The Company's net interest income for the year ended June 30, 2009, increased $5.5 million or 18.3%, to
$35.3 million as compared to the prior fiscal year. The increase in net interest income was due primarily to decreases in the average rate paid on interest-bearing liabilities. The Company's
net interest margin on a fully taxable equivalent basis was 3.32% for the year ended June 30, 2009, as compared to 3.16% for the prior year. The Company continues to have a diversified loan
portfolio comprised of a mix of consumer and business type lending. This mix helps the Company manage the net interest margin and interest rate risk by retaining loan and lease production on the
balance sheet or looking at alternatives through secondary markets.

Provision for Losses on Loans and Leases.The allowance for loan and lease losses is maintained at a level which is believed 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 the 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.

Provision
for losses on loans and leases decreased $315,000 or 15.8%, to $1.7 million for the year ended June 30, 2009, as compared to $2.0 million in the prior
year. The reduction in the provision was due in part to a large loan loss recovery which increased the allowance for loan and lease losses during the second quarter of fiscal 2009. Net
charge-offs decreased from $1.9 million during fiscal 2008 to a net recovery of $858,000 during fiscal 2009. The net recovery was largely a result of a previously announced net loan
loss recovery of $2.2 million from a settlement of a previously disclosed lawsuit against MetaBank. During the second quarter of fiscal 2009, the Company bolstered its methodology for
calculating the allowance for loan and lease losses to better capture the impact of the economic recession currently being experienced across the country. Nonperforming assets increased
$8.8 million for the year ended June 30, 2009, primarily due to one particular agriculture loan relationship.

The
allowance for losses on loans and leases at June 30, 2009 was $8.5 million. The allowance increased from the June 30, 2008, balance of $5.9 million
primarily as a result of recoveries exceeding charge-offs by $858,000 and provision for losses on loans and leases of $1.7 million recorded in fiscal 2009. The ratio of allowance
for loan and lease losses to nonperforming loans and leases at June 30, 2009, was 73.83% compared to 191.08% at June 30, 2008. The allowance for loan and lease losses to total loans and
leases at June 30, 2009, was 0.98% compared to 0.75% at June 30, 2008. The Bank's management believes that the June 30, 2009, recorded allowance for loan and lease losses is
adequate to provide for probable losses on the related loans and leases, based on its evaluation of the collectability of loans and leases and prior loss experience.

Noninterest Income.Noninterest income was $12.6 million for the year ended June 30, 2009, as compared to $11.3 million
for the
year ended June 30, 2008, an increase of $1.3 million or 11.2%. During fiscal 2009 the Company experienced increases in net gain on sale of loans of $709,000, net gain

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on
sale of securities of $901,000, fees on deposits of $372,000, and loan servicing income of $90,000. Trust income decreased $290,000 and net impairment losses recognized in earnings were $405,000,
which partially offset the other increases.

Net
gain on sale of loans increased by $709,000 to $1.9 million for the year ended June 30, 2009, as compared to $1.2 million for the prior year, primarily due to an
increase in mortgage loan activity and the related loan sales. Net gain on sale of securities increased to $904,000 for the year ended June 30, 2009, compared to $3,000 for the prior year.

Fees
on deposits increased by $372,000 to $5.8 million during the year ended June 30, 2009, as compared to $5.4 million for the prior year, primarily due to a
$152,000 net increase in income from point-of-sale purchases by customers and ATM service fees, and a $201,000 increase in net fees from insufficient funds and depositor
overdrafts.

Loan
servicing income increased by $90,000 to $2.3 million for the year ended June 30, 2009, as compared to $2.2 million for the prior year, primarily due to
increased originated and purchased servicing rights for mortgage loans. At June 30, 2009, the Bank serviced mortgage loans totaling $1.1 billion.

Trust
income decreased by $290,000 to $676,000 during the year ended June 30, 2009, due in part to a decrease in managed assets from decreased market values when compared to the
prior year. Assets under management decreased from $95.4 million to $77.5 million.

Net
impairment losses recognized in earnings were $405,000 for the year ended June 30, 2009. The Company determined that a total of $3.9 million of losses due to
other-than-temporary impairments for trust preferred securities were incurred of which $3.5 million were recognized in other comprehensive income. The net of $397,000 of
losses were recognized as a reduction in other noninterest income, in addition to $8,000 of impairment losses recognized in earnings for FNMA common stock. There were no impairment losses recognized
in the prior fiscal year.

Noninterest Expense.Noninterest expense was $34.6 million for the year ended June 30, 2009, as compared to
$30.6 million for
the prior year, an increase of $4.0 million. The increase in noninterest expense was due primarily to increases in compensation and employee benefits of $1.3 million and FDIC insurance
of $1.3 million.

Compensation
and employee benefits increased $1.3 million during the year ended June 30, 2009, as compared to the prior fiscal year. Employee compensation increased
$887,000, or 7.2%, variable pay relating to employee incentives and commissions decreased $606,000, or 24.6%, and net healthcare costs increased $1.1 million, or 72.9%. Employee compensation
increased due to annual raises awarded and sales-related personnel additions. Variable pay relating to employee incentive programs decreased due to a reduced change in performance outcomes. Healthcare
costs increased as a result of higher claim activity for fiscal year 2009. The Company has had a self-insured health plan since January 1994. Management continues to believe the current
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. The Company continues to
monitor its healthcare plans in an effort to provide its employees with affordable health care.

FDIC
insurance premiums increased $1.3 million during the year ended June 30, 2009, as compared to the prior fiscal year. The increase is a combination of new deposit
guarantee programs and assessment schedule changes initiated by the FDIC and the expiration of credits previously used to lower costs. On January 1, 2009, the FDIC raised premium rates by
approximately 7 basis points to a total of 12.5 basis points. The FDIC announced a special assessment to be accrued for June 30, 2009, and paid in September 2009, for which the Company's
special assessment accrual totaled $536,000.

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Professional fees increased $634,000 during the year ended June 30, 2009, as compared to the prior fiscal year. These costs increased due in part to
continuing costs associated with participation in the CPP.

Income Tax Expense.The Company's income tax expense increased $1.1 million for the year ended June 30, 2009 to
$3.9 million
compared to $2.8 million for the prior year. The increase was due primarily to the increase in income before taxes. The effective tax rate for the years ended June 30, 2009, and
June 30, 2008, was 33.12% and 32.13%, respectively.

Liquidity and Capital Resources

The Company's liquidity is comprised of three primary classifications: cash flows from operating activities, cash flows from investing
activities and cash flows from financing activities. Net cash used in operating activities was $5.0 million for the fiscal year ended June 30, 2010. For the fiscal year ended
June 30, 2009, net cash provided by operating activities was $2.4 million. Net cash used in investing activities was $64.8 million for the fiscal year ended June 30, 2010.
For the fiscal
year ended June 30, 2009, net cash used in investing activities was $71.6 million. Net cash provided by financing activities for the fiscal year ended June 30, 2010, was
$72.1 million. This compares to net cash provided by financing activities in the prior fiscal year of $66.6 million.

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

Liquidity
management is both a daily and long-term responsibility of management. The Bank adjusts its investments in liquid assets based upon management's assessment of
(i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits, and (v) the objectives of its
asset/liability management program. Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term government and agency obligations. During the year
ended June 30, 2010, the Bank decreased its borrowings with the FHLB and other borrowings by $22.2 million.

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 June 30, 2010, the Bank had the following sources of additional
borrowings:



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 line of federal funds with First Tennessee Bank,

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NA
and Zions Bank at June 30, 2010. The Bank, as a member of the FHLB of Des Moines, is required to acquire and hold shares of capital stock in the FHLB of Des Moines equal to 0.12% of the
total assets of the Bank at December 31 annually. The Bank is also required to own activity-based stock, which is based on 4.45% of the Bank's outstanding advances. These percentages are
subject to change at the discretion of the FHLB Board of Directors. For further discussion of our advances from FHLB of Des Moines, see Note 7 of "Notes to Consolidated Financial Statements,"
which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Form 10-K.

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 June 30, 2010, the Bank had $22.9 million in out-of-market certificates of deposit.

On
September 30, 2009, the Company entered into a Loan Agreement (the "Loan Agreement") with United Bankers' Bank (the "Lender") in order to refinance its outstanding borrowings
of $5.966 million under its line of credit with First Tennessee Bank, NA that matured. Under the Loan Agreement, the Lender committed to lend to the Company an aggregate principal amount not to
exceed $6.0 million. On November 25, 2009, the Company repaid its outstanding borrowings of $6.044 million (principal plus accrued interest) under the Loan Agreement. The loan is
evidenced by a promissory note, accrues interest at the United Bankers' Bank Rate with a minimum interest rate of 4.75% per annum, and the principal balance (plus any accrued and unpaid interest) is
due and payable in full on October 1, 2010. There was no additional activity or an outstanding balance at June 30, 2010. The Company was required to pledge 100% of the Bank's stock as
collateral. See Note 7 of "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this
Form 10-K, Part II, Item 7 "Financial Condition Data" of this Form 10-K and Exhibit 10.36 of this Form 10-K for additional
information.

The
Bank anticipates that it will have sufficient funds available to meet current loan commitments. At June 30, 2010, the Bank had outstanding commitments to originate and
purchase mortgage and commercial loans of $28.4 million and to sell mortgage loans of $29.4 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 June 30, 2010, the Bank had one
outstanding commitment to purchase $160,000 investment securities available for sale and no commitments to sell investment securities available for sale.

The
Company uses its capital resources to pay dividends to its stockholders, to repurchase Company stock in the market pursuant to a Board of Directors-approved stock buyback program, to
support organic growth, to make any acquisitions, to service its debt obligations and to provide funding for investment into the Bank as Tier 1 (core) capital.

The
Company had in effect a stock buyback program, which began on May 1, 2008, and was publicly announced on April 28, 2008. Under this program, the Company was permitted
to repurchase up to 10% of the common stock of the Company outstanding on May 1, 2008. In conjunction with the Company's participation in the CPP, the Company's Board of Directors terminated
the stock buy back program in the second quarter of fiscal year 2009, which had been in place through November 21, 2008. There were no shares purchased under the program during fiscal 2010 and
2009.

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 June 30, 2010, the Bank met all current capital requirements.

The
OTS has adopted capital requirements for savings institutions comparable to the requirement for national banks. The minimum OTS core capital requirement for
well-capitalized institutions is 5%

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of
total adjusted assets. The Bank had Tier 1 (core) capital of 8.69% at June 30, 2010. The minimum OTS risk-based capital requirement for well-capitalized
institutions is 10% of risk-weighted assets. The Bank had risk-based capital of 11.68% at June 30, 2010.

The
Company has entered into interest rate swap contracts to convert variable-rate trust preferred debt and deposits into a fixed rate instrument to modify interest rate
risk. At June 30, 2010, the total notional amount of interest rate swap contracts was $79.0 million with a fair value loss of $3.0 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 9 of "Notes to Consolidated Financial Statements" of this
Form 10-K for additional information.

Impact of Inflation and Changing Prices

The Consolidated Financial Statements and Notes thereto presented in Part II, Item 8 "Financial Statements and
Supplementary Data" of this Form 10-K 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.

Off-Balance Sheet Arrangements

None.

Effect of New Accounting Standards

Note 1, "Summary of Significant Accounting Policies," of "Notes to Consolidated Financial Statements" of this
Form 10-K discusses new accounting policies adopted by the Company during fiscal 2010. The expected impact of accounting policies recently issued or proposed but not yet required to
be adopted are discussed below. To the extent the adoption of new accounting standards materially affects the Company's financial condition, results of operations, or liquidity, the impacts are
discussed in the applicable sections of this financial review and the notes to consolidated financial statements.

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

In
December 2007, FASB issued Statement of Financial Accounting Standards No. 160 (SFAS 160), "Non-controlling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51." SFAS 160 is effective for the Company beginning July 1, 2009. SFAS 160 improves the relevance, comparability, and
transparency of financial information provided to investors by requiring all entities to report non-controlling (minority) interest in subsidiaries in the same wayas equity in

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the
consolidated financial statements. The Company does not currently have any non-controlling interests to be included in the consolidated financial statements.

In
December 2008, FASB issued Staff Position No. FAS 132(R)-1 (FAS 132(R)-1), amending the disclosure guidance in FASB Statement No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." FAS 132(R)-1 states that the purpose is to increase the transparency in the disclosure of Postretirement
Benefit Plan Assets and to provide users an understanding of the following: investment allocation decision-making, including the factors that are pertinent to the investment policies and strategies;
the major categories of plan assets; the valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs
(Level 3) on changes in plan assets for the period; and significant concentrations of risk with plan assets. The Company adopted this guidance effective July 1, 2009 and the adoption did
not have a material effect on the Company's consolidated financial condition, results of operations or cash flow.

In
April 2009, FASB issued Staff Position No. 141(R)-1 (FAS 141R-1), "Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies." FAS 141R-1 amends and clarifies FAS 141R to address the application issues on the initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FAS 141R-1 is effective July 1, 2009. The Company
adopted this guidance effective July 1, 2009 and the adoption did not have a material effect on the Company's consolidated financial condition, results of operations or cash flow.

In
June, 2009, the FASB issued Statement of Financial Accounting Standards No. 166 (SFAS 166), "Accounting for Transfers of Financial Assetsan amendment of
FASB Statement No. 140," which removes the concept of a qualifying special-purpose entity from GAAP, changes the requirements for derecognizing financial assets, including defining the term
"participating interest" to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale, and requires additional disclosures about a transferor's continuing
involvement in transferred financial assets. SFAS 166 is effective for annual reporting periods beginning after November 15, 2009 for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. Management has reviewed SFAS 166 does not expect the adoption of this statement on July 1, 2010 to have a material impact
on the Company's consolidated financial condition, results of operations or cash flow.

In
June, 2009, the FASB issued Statement of Financial Accounting Standards No. 167 (SFAS 167), "Amendments to FASB Interpretation No. 46(R)," which eliminates
exceptions to consolidating qualifying special purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine
whether a company is the primary beneficiary of a variable interest entity. SFAS 167 clarifies, but does not significantly change, the characteristics that identify a variable interest entity.
SFAS 167 also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity's status as a variable interest entity, a company's
power over a variable interest entity, or a company's obligation to absorb losses or its right to receive benefits of a variable interest entity must be disregarded in applying the provisions of
Interpretation 46(R). SFAS 167 is effective for interim and annual reporting periods beginning after November 15, 2009. The adoption of SFAS 167 is not expected to impact the
Company's consolidated financial statements.

In
June, 2009, the FASB issued Statement of Financial Accounting Standards No. 168 (SFAS 168), "The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principlesa replacement of FASB Statement No. 162," which replaces the GAAP hierarchy with two levels of GAAP: authoritative and nonauthoritative. On
July 1, 2009, the FASB Accounting Standards Codification became the single source of authoritative nongovernmental GAAP, except for rules and interpretive releases of the SEC. All other
non-grandfathered accounting literature became

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nonauthoritative.
SFAS 168 is effective July 1, 2009. The Company adopted this guidance effective July 1, 2009 and the adoption did not have a material effect on the Company's
consolidated financial condition, results of operations or cash flow.

In
January 2010, FASB issued ASU No. 2010-06, "Improving Disclosures about Fair Value Measurements", (ASC Topic 820). This accounting standard provides additional
guidance relating to fair value measurement disclosures. Specifically, companies are required to separately disclose significant transfers into and out of Level 1 and Level 2
measurements in the fair value hierarchy and the reasons for those transfers. Significance should generally be based on earnings and total assets or liabilities, or when changes are recognized in
other comprehensive income, based on total equity. Companies may take different approaches in determining when to recognize such transfers, including using the actual date of the event or change in
circumstances causing the transfer, or using the beginning or ending of a reporting period. For Level 3 fair value measurements, the new guidance requires presentation of separate information
about purchases, sales, issuances and settlements. Additionally, the FASB also clarified existing fair value measurement disclosure requirements relating to the level of disaggregation, inputs, and
valuation techniques. This accounting standard is effective for interim and annual reporting periods after July 1, 2009, except for the detailed Level 3 disclosures, which will be
effective for interim and annual reporting periods after July 1, 2010. The Company adopted this update in the first quarter of fiscal 2010, except for the detailed Level 3 disclosures,
and the adoption did not have a material effect on the Company's consolidated financial condition, results of operations or cash flow. The Company will adopt the Level 3 disclosures in the
first quarter of fiscal 2011 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
April 2010, FASB issued ASU No. 2010-18,"Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset". As a result of this
update, modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans
would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash
flows for the pool change. ASU No. 2010-18 is effective for the Company in the first interim period of fiscal 2011 (September 30, 2010) and the annual reporting period
beginning June 30, 2011. Management is currently evaluating the impact of adopting this update on the Company's consolidated financial condition, results of operations and cash flow.

In
July 2010, FASB issued ASU 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses" (ASC Topic 310). This guidance will
expand disclosures by requiring additional disaggregated information related to the current disclosures. It will also require additional disclosures to provide information based on credit quality,
past due aging information, trouble debt restructuring information, and significant purchases and sales of financing receivables. ASU 2010-20 is effective for the Company for interim and
annual reporting periods ending after December 15, 2010 and the Company does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of
operations or cash flow.

Asset/Liability and Risk Management

Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency
exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. The Bank, like other financial institutions, is subject to interest rate risk to
the extent that its interest-bearing liabilities with short- and medium-term maturities mature or reprice more rapidly than its interest-earning assets. The Company does not currently
engage in trading activities to control interest rate risk although it may in the future, if necessary, to manage interest rate risk. Interest rate swaps may be entered into to modify interest rate

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risk.
See Note 9 of "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this
Form 10-K, for additional information related to interest rate contracts.

As
a continuing part of its financial strategy, the Bank considers methods of managing this asset/liability mismatch consistent with maintaining acceptable levels of net interest income.
In order to properly monitor interest rate risk, the Board of Directors has created an Asset/Liability Committee
whose principal responsibilities are to assess the Bank's asset/liability mix and recommend strategies to the Board that will enhance income while managing the Bank's vulnerability to changes in
interest rates.

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. 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.

One
approach used to quantify interest rate risk is the Bank's net portfolio value ("NPV") analysis. In essence, 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 table sets forth, at June 30, 2010 and June 30, 209, an
analysis of the Company's interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve (+300 or -100 basis
points, measured in 100 basis point increments). Due to the low prevailing interest rate environment, -200 and -300 NPV was not estimated by the Bank at June 30, 2010
and June 30, 2009.

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

June 30, 2010Estimated Increase
(Decrease) in NPVChange in
Interest Rates

Estimated
NPV
AmountAmount

Percent(Dollars in Thousands)Basis Points+300

$
124,944

$
9,853


9
%+200


123,941


8,850


8+100


120,976


5,885


5


115,091





-100


105,817


(9,274
)

(8
)




June 30, 2009Estimated Increase
(Decrease) in NPVChange in
Interest Rates

Estimated
NPV
AmountAmount

Percent(Dollars in Thousands)Basis Points+300

$
121,961

$
7,108


6
%+200


121,894


7,041


6+100


120,044


5,191


5


114,853





-100


109,351


(5,502
)

(5
)


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Contractual Obligations

The following table sets forth information with respect to the Company's contractual obligations as of June 30, 2010. Operating
lease obligations are primarily related to the lease of certain branch offices, which the Company has committed to as of June 30, 2010.

Payments due by periodTotal

Less Than
1 Year

1 to 3 Years

3 to 5 Years

Greater Than
5 Years(Dollars in Thousands)Deposits without a stated maturity

$
490,327

$
490,327

$


$


$
Certificates of Deposit


423,937


227,772


177,099


19,061


6Advances from FHLB and other borrowings


190,719


46,405


52,500


38,100


53,714Long-Term Debt Obligations


27,837











27,837Operating Lease Obligations


3,692


632


667


554


1,839Total Contractual Obligations

$
1,136,512

$
765,136

$
230,266

$
57,715

$
83,396
 Subsequent Event Management has evaluated subsequent events for potential disclosure or recognition through the date that the financial statements were
available to be issued. In September 2010, the Company has been notified by a borrower of the borrower's intention to no longer perform on its agricultural loan obligations. The current balance
related to this obligation is $3,138. The Company has initiated formal collection procedures and collateral evaluation. The financial effect of this transaction cannot be reasonably estimated as of
the date that the financial statements were available to be issued.


Item 7A.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 changes in interest rates, management monitors the Company's interest rate risk. The Asset/Liability Committee meets periodically to review the
Bank'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 that can have an adverse effect on net income. The Company does not currently engage in
trading activities to control interest rate risk although it may in the future, if necessary, to manage interest rate risk. The Company has entered into interest rate swap contracts to convert
variable-rate trust preferred debt into a fixed rate instrument to modify interest rate risk. In addition, the Bank has entered into interest rate swap contracts to convert

88

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Table of Contents

variable-rate
deposits into a fixed rate instrument. See Note 9 of "Notes to Consolidated Financial Statements" of this Form 10-K for additional information.

In
adjusting the Company's asset/liability position, management attempts to manage the Company's interest rate risk while enhancing net interest margins. 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 determine to increase the Company's
interest rate risk position somewhat 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.

Consistent
with the asset/liability management philosophy described above, the Company has taken several steps to manage its interest rate risk. The Company has structured its security
portfolio to shorten the repricing of its interest-earning assets. The Company's residential mortgage-backed securities and securities available for sale typically have either short or medium terms to
maturity or
adjustable interest rates. At June 30, 2010, the Company had investment securities available for sale of $10.7 million with contractual maturities of five years or less.
Adjustable-rate residential mortgage-backed securities totaled $224.6 million at June 30, 2010. Residential mortgage-backed securities amortize and experience prepayments of
principal. The Company has received average cash flows from principal paydowns, maturities, sales and calls of all securities available for sale of $100.6 million annually over the past three
fiscal years. The Company also manages interest rate risk reduction by utilizing non-certificate depositor accounts for certain liquidity purposes. The Board and management believe that
such accounts carry a lower cost than certificate accounts, and that a material portion of such accounts may be more resistant to changes in interest rates than are certificate accounts. At
June 30, 2010, the Company had $83.1 million of savings accounts, $189.8 million of money market accounts and $217.4 million of checking accounts, representing 53.63% of
total depositor account balances.

One
approach used to quantify interest rate risk is the Bank's NPV analysis. In essence, this analysis calculates the difference between the present value of liabilities and the present
value of expected cash flows from assets and off-balance sheet contracts. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
OperationsAsset/Liability and Risk Management" of this Form 10-K for further discussion regarding the NPV analysis and
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.

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Item 8.Financial Statements and Supplementary Data

Management's Report on  Internal Control over Financial Reporting

The management of HF Financial Corp. and its subsidiaries (the "Company") is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended) for the Company. The Company's
internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.

Under
the supervision and with the participation of the Company's management, including its Chairman, President and Chief Executive Officer and its Executive Vice President, Chief
Financial Officer and Treasurer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting as of June 30, 2010 based on the criteria set forth in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the
Company's internal control over financial reporting was effective as of June 30, 2010.

This
Annual Report on Form 10-K does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform Act,
which exempts the Company from the requirement that it include an attestation report of the Company's public accounting firm regarding internal control over our management's assessment of internal
controls over financial reporting.

/s/ CURTIS L. HAGE Curtis L. Hage Chairman, President and
Chief Executive Officer

/s/ DARREL L. POSEGATE Darrel L. Posegate Executive Vice President,
Chief Financial Officer and Treasurer


90

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TABLE OF CONTENTS



INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S
REPORT ON THE FINANCIAL STATEMENTS


92CONSOLIDATED FINANCIAL STATEMENTSStatements of Financial Condition


93Statements of Income


94Statements of Stockholders' Equity


95Statements of Cash Flows


96Notes to Consolidated Financial Statements


97


91

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Table of Contents

LOGO



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders
HF Financial Corp.
Sioux Falls, South Dakota

We
have audited the accompanying consolidated statements of financial condition of HF Financial Corp. as of June 30, 2010 and 2009, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2010. HF Financial Corp.'s management is responsible for these consolidated
financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HF Financial Corp. as of June 30, 2010
and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2010, in conformity with accounting principles generally
accepted in the United States of America.

We
also have audited, in accordance with attestation standards established by the American Institute of Certified Public Accountants, HF Financial Corp.'s internal control over financial
reporting as of June 30, 2010, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated September 10, 2010 expressed an unqualified opinion.

GRAPHIC

Sioux
Falls, South Dakota
September 10, 2010

GRAPHIC

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HF FINANCIAL CORP.        CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION        JUNE 30, 2010 AND 2009        (DOLLARS IN THOUSANDS, except share data)

2010

2009ASSETSCash and cash equivalents

$
20,805

$
18,511Securities available for sale (Note 2)


264,442


222,910Federal Home Loan Bank stock (Note 7)


10,334


12,476Loans held for sale (Note 3)


25,287


14,881Loans and leases receivable (Note 3)


862,704


842,812Accrued interest receivable


8,785


7,598Office properties and equipment, net of accumulated depreciation (Note 5)


14,973


16,917Foreclosed real estate and other properties


946


1,085Cash value of life insurance


15,144


14,594Servicing rights (Note 4)


12,733


11,768Goodwill, net


4,366


4,951Other assets (Note 10)


12,496


8,293$
1,253,015

$
1,176,796LIABILITIES AND STOCKHOLDERS' EQUITYLiabilitiesDeposits (Note 6)

$
914,264

$
837,868Advances from Federal Home Loan Bank and other borrowings (Note 7)


190,719


212,869Subordinated debentures payable to trusts (Note 8)


27,837


27,837Advances by borrowers for taxes and insurance


11,460


11,899Accrued expenses and other liabilities (Note 14)


14,300


17,648Total liabilities


1,158,580


1,108,121Stockholders' equity (Notes 11, 12 and 13)Preferred stock, $.01 par value, 500,000 shares authorized, none outstanding





Series A Junior Participating Preferred Stock, $1.00 stated value, 50,000 shares authorized, none outstanding





Common stock, $.01 par value, 10,000,000 shares authorized, 9,025,792 and 6,109,437 shares issued at June 30, 2010 and June 30, 2009,
respectively


90


61Common stock subscribed for but not issued





224Additional paid-in capital


44,496


22,911Retained earnings, substantially restricted


84,011


80,735Accumulated other comprehensive (loss), net of related deferred tax effect (Note 17)


(3,265
)

(4,359
)Less cost of treasury stock, 2,083,455 and 2,083,455 shares at June 30, 2010 and June 30, 2009, respectively


(30,897
)

(30,897
)94,435


68,675$
1,253,015

$
1,176,796


93

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HF FINANCIAL CORP.        CONSOLIDATED STATEMENTS OF INCOME        YEARS ENDED JUNE 30, 2010, 2009 AND 2008        (DOLLARS IN THOUSANDS, except share
data)

2010

2009

2008Interest, dividend and loan fee income:Loans and leases receivable

$
49,658

$
49,460

$
53,972Investment securities and interest-bearing deposits


7,696


11,228


9,20257,354


60,688


63,174Interest expense:Deposits


12,303


15,679


24,693Advances from Federal Home Loan Bank and other borrowings


8,378


9,680


8,60520,681


25,359


33,298Net interest income


36,673


35,329


29,876Provision for losses on loans and leases


2,950


1,679


1,994Net interest income after provision for losses on loans and leases


33,723


33,650


27,882Noninterest income:Fees on deposits


5,624


5,761


5,389Loan servicing income


2,042


2,301


2,211Gain on sale of loans, net


1,841


1,906


1,197Earnings on cash value of life insurance


652


641


626Trust income


820


676


966Commission and insurance income


563


519


447Gain on sale of securities, net


1,853


904


3Total other-than-temporary impairment losses


(2,223
)

(3,905
)

Portion of loss recognized in other comprehensive income


(460
)

3,500


Net impairment losses recognized in earnings


(2,683
)

(405
)

Other


302


299


49411,014


12,602


11,333Noninterest expense:Compensation and employee benefits


20,710


20,942


19,616Occupancy and equipment


4,479


3,981


3,832FDIC insurance


1,321


1,376


92Check and data processing expense


2,750


2,577


2,416Professional fees


1,798


1,800


1,166Marketing and community investment


1,716


1,384


1,292Foreclosed real estate and other properties, net


223


292


181Goodwill impairment


585





Other


2,454


2,214


2,01136,036


34,566


30,606Income before income taxes


8,701


11,686


8,609Income tax expense (Note 10)


2,956


3,870


2,766Net income


5,745


7,816


5,843Preferred stock dividends and accretion





1,316


Net income available to common stockholders

$
5,745

$
6,500

$
5,843Basic earnings per common share (Note 13):

$
1.00

$
1.62

$
1.47Diluted earnings per common share (Note 13):


1.00


1.61


1.45Dividend declared per common share


0.45


0.45


0.43


94

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Table of Contents

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED JUNE 30, 2010, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

Common
Stock

Common
Stock
Subscribed

Preferred
Stock

Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
(Loss)

Treasury
Stock

TotalBalance, June 30, 2007

$
60

$
81

$


$
20,898

$
71,900

$
(1,502
)
$
(29,167
)
$
62,270Comprehensive incomeNet income














5,843








5,843Net changes in unrealized gain (loss) on securities available for sale, net of deferred taxes

















(664
)




(664
)Net unrealized losses on defined benefit plan, net of deferred taxes

















(755
)




(755
)Net unrealized losses on derivatives and hedging activities, net of deferred taxes

















(80
)




(80
)Comprehensive income























4,344Issuance of common stock and exercise of stock options (Note 16)





(81
)




630











549Common stock subscribed for but not issued





95





(95
)










Cash dividends paid on common stock














(1,702
)







(1,702
)Purchase of treasury stock




















(1,730
)

(1,730
)Amortization of stock-based compensation











472











472Balance, June 30, 2008


60


95





21,905


76,041


(3,001
)

(30,897
)

64,203Comprehensive incomeNet income














7,816








7,816Net changes in unrealized gain (loss) on securities available for sale, net of deferred taxes

















257





257Net unrealized losses on defined benefit plan, net of deferred taxes

















(1,067
)




(1,067
)Net unrealized losses on derivatives and hedging activities, net of deferred taxes

















(548
)




(548
)Comprehensive income























6,458Issuance of common stock and exercise of stock options (Note 16)


1


(95
)




641











547Common stock subscribed for but not issued





224





(224
)










Cash dividends paid on common stock














(1,805
)







(1,805
)Cash dividends paid on preferred stock














(667
)







(667
)Issuance of 25,000 shares of preferred stock and common warrant











25,000











25,000Redemption of preferred stock and common warrant











(25,071
)

(579
)







(25,650
)Amortization of discount on common warrant











71


(71
)







Amortization of stock-based compensation











589











589Balance, June 30, 2009


61


224





22,911


80,735


(4,359
)

(30,897
)

68,675Comprehensive incomeNet income














5,745








5,745Net changes in unrealized gain (loss) on securities available for sale, net of deferred taxes

















1,217





1,217Net unrealized losses on defined benefit plan, net of deferred taxes

















1,201





1,201Net unrealized losses on derivatives and hedging activities, net of deferred taxes

















(1,324
)




(1,324
)Comprehensive income























6,839Issuance of common stock and exercise of stock options (Note 16)


29


(224
)




20,912











20,717Cash dividends paid on common stock














(2,469
)







(2,469
)Amortization of stock-based compensation











673











673Balance, June 30, 2010

$
90

$


$


$
44,496

$
84,011

$
(3,265
)
$
(30,897
)
$
94,435


95

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HF FINANCIAL CORP.        CONSOLIDATED STATEMENTS OF CASH FLOWS        YEARS ENDED JUNE 30, 2010, 2009 AND 2008        (DOLLARS IN THOUSANDS, except share
data)

2010

2009

2008Cash Flows From Operating ActivitiesNet income

$
5,745

$
7,816

$
5,843Adjustments to reconcile net income to net cash provided by operating activities Provision for losses on loans and leases


2,950


1,679


1,994Depreciation


1,994


1,737


1,633Goodwill impairment


585





Amortization of discounts and premiums on securities and other


3,669


2,430


1,710Stock based compensation


673


589


472Deferred income taxes (credits)


(630
)

(340
)

11Net change in loans held for resale


(8,565
)

(4,179
)

1,177(Gain) on sale of loans, net


(1,841
)

(1,906
)

(1,197
)Realized (gain) on sale of securities, net


(1,853
)

(904
)

(3
)Other-than-temporary impairments recognized in non-interest income


2,683


405


Losses and provision-for-losses on sales of foreclosed real estate and other properties, net


1


44


58(Gain) on disposal of office properties and equipment, net


4





(1
)Change in other assets and liabilities (Note 20)


(10,404
)

(5,008
)

2,588Net cash provided by (used in) operating activities


(4,989
)

2,363


14,285Cash Flows From Investing ActivitiesNet change in loans outstanding


(23,438
)

(68,271
)

(19,842
)Securities available for saleSales, maturities and repayments


124,142


110,432


67,302Purchases


(166,688
)

(108,502
)

(151,405
)Purchase of Federal Home Loan Bank stock


(6,590
)

(5,565
)

(9,846
)Redemption of Federal Home Loan Bank stock


8,732


4,334


3,659Proceeds from sale of office properties and equipment


2,048





1,283Purchase of office properties and equipment


(2,102
)

(3,805
)

(1,934
)Purchase of servicing rights


(1,402
)

(930
)

(1,392
)Proceeds from sale of foreclosed real estate and other properties


526


710


701Net cash (used in) investment activities


(64,772
)

(71,597
)

(111,474
)Cash Flows From Financing ActivitiesNet increase (decrease) in deposit accounts

$
76,396

$
53,631

$
(31,627
)Proceeds of advances from Federal Home Loan Bank and other borrowings


1,752,730


6,471,132


1,926,299Payments on advances from Federal Home Loan Bank and other borrowings


(1,774,880
)

(6,456,717
)

(1,796,445
)Proceeds from issuance of subordinated debentures








5,000Redemption of subordinated debentures








(5,000
)Increase (decrease) in advances by borrowers


(439
)

1,104


458Purchases of treasury stock








(1,730
)Repurchase of warrant





(650
)

Repurchase of preferred stock





(25,000
)

Proceeds from issuance of preferred stock





25,000


Proceeds from issuance of common stock


20,717


547


630Cash dividends paid


(2,469
)

(2,472
)

(1,702
)Net cash provided by financing activities


72,055


66,575


95,883Increase (decrease) in cash and cash equivalents


2,294


(2,659
)

(1,306
)Cash and Cash EquivalentsBeginning


18,511


21,170


22,476Ending

$
20,805

$
18,511

$
21,170


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HF FINANCIAL CORP.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        JUNE 30, 2010 AND 2009        (DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of HF Financial Corp. and subsidiaries ("the Company") conform to accounting principles generally accepted in the United States of America and to
general practice within the industry. The following is a description of the more significant of those policies that the Company follows in preparing and presenting its consolidated financial
statements.

Nature of Operations

The Company, a unitary thrift holding company, was formed in November 1991, for the purpose of owning all of the outstanding stock of
Home Federal Bank ("the Bank"). 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 executive offices of the Company and its direct and indirect subsidiaries are located in Sioux Falls, South Dakota.

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, to meet the needs of its market place. 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, commercial business, consumer, multi-family, commercial real estate, construction and agricultural
loans. The Bank's consumer loan portfolio includes, among other things, automobile loans, home equity loans, loans secured by deposit accounts and student loans. The Bank also purchases residential
mortgage-backed securities and invests in U.S. Government and agency obligations and other permissible investments. The Bank receives loan servicing income on loans serviced for others and commission
income from credit-life insurance on consumer loans. Through its trust department, the Bank acts as trustee, personal representative, administrator, guardian, custodian, agent, advisor and
manager for various accounts. The Bank, through its wholly-owned subsidiaries, offers annuities, mutual funds, life insurance and other financial products, and equipment leasing services.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company, the Company's wholly-owned subsidiaries,
HomeFirst Mortgage Corp. (the Mortgage Corp.), HF Financial Group, Inc. (HF Group), and Home Federal Bank (the Bank) and the Bank's wholly-owned subsidiaries, Hometown Investment
Services, Inc. (Hometown), Mid America Capital Services, Inc. (Mid America Capital), Home Federal Securitization Corp. (HFSC), Mid-America Service Corporation
(Mid-America) and PMD, Inc (PMD). All intercompany balances and transactions have been eliminated in consolidation.

Basis of Financial Statement Presentation and Use of Estimates

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the statement of financial condition and revenues and expenses for the fiscal year. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

change
in the near-term related to the determination of the allowance for loan and lease losses, self-insurance, security impairment and servicing rights. Management has
evaluated subsequent events for potential disclosure or recognition through September 10, 2010, the date of the filing of the consolidated financial statements with the Securities and Exchange
Commission.

Cash and Cash Equivalents

For purposes of reporting the statements of cash flows, the Company includes as cash equivalents all cash accounts which are not
subject to withdrawal restrictions or penalties and time deposits with original maturities of 90 days or less.

Trust Assets

Assets of the trust department, other than trust cash on deposit at the Bank, are not included in these consolidated financial
statements because they are not assets of the Bank.

Securities

Management determines the appropriate classification of securities at the date individual securities are acquired and evaluates the
appropriateness of such classifications at each statement of financial condition date.

Securities
available for sale are those debt securities that the Company intends to hold for an indefinite period of time, but may not hold necessarily to maturity, and all equity
securities. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value and unrealized gains or losses
are reported as increases or decreases in other comprehensive income net of the related deferred tax effect.

Premiums
and discounts on securities are amortized over the contractual lives of those securities, except for residential mortgage-backed securities, for which prepayments are probable
and predictable, which are amortized over the estimated expected repayment terms of the underlying mortgages. The method of amortization results in a constant effective yield on those securities (the
interest method). Interest on debt securities is recognized in income as accrued. Realized gains and losses on the sale of securities are determined using the specific identification method.

Securities Impairment

Management continually monitors the investment security portfolio for impairment on a security by security basis. During the third
quarter of Fiscal 2009, the Company early adopted FASB Staff Position ("FSP") No. FAS 115-2,The Recognition and Presentation of
Other-Than-Temporary Impairments, which changed the recognition and presentation of other-than-temporary impairment for
securities. Management has a process in place to identify securities that could potentially have a credit impairment that is other than temporary. This process involves the length of time and extent
to which

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

the
fair value has been less than the amortized cost basis, review of available information regarding the financial position of the issuer, monitoring the rating of the security, cash flow
projections, and the Company's intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in
some cases, may extend to
maturity. To the extent we determine that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized. If the Company intends to sell a
security or it is more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, less any current period credit loss, the Company recognizes an
other-than-temporary impairment in earnings for the difference between amortized cost and fair value. If we do not expect to recover the amortized cost basis, we do not plan to
sell the security and if it is not more likely than not that the Company would be required to sell a security before the recovery of it amortized cost, less any current period credit loss, the
recognition of the other-than-temporary impairment is bifurcated. For those securities, the Company separates the total impairment into a credit loss component recognized in
earnings, and the amount of the loss related to other factors is recognized in other comprehensive income net of taxes.

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

Level 3 Fair Value Measurement

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

Loans Held for Sale

Loans receivable, which the Bank may sell or intend to sell prior to maturity, are carried at the lower of net book value or fair value
on an aggregate basis. Such loans held for sale include loans receivable that management intends to use as part of its asset/liability strategy, or that may be sold in response to changes in interest
rates, changes in prepayment risk or other similar factors.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans and Leases Receivable

Loans receivable are stated at unpaid principal balances, less the allowance for loan losses, and net of deferred loan origination
fees, costs and discounts.

Interest
income on loans is accrued over the term of the loan based upon the outstanding principal amount. Discounts and premiums on loans are amortized to income using the interest
method over the remaining period to contractual maturity, adjusted for prepayments.

Loans
and leases 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. Uncollectible interest on loans and leases that are impaired or contractually past due is charged off based on
management's periodic evaluation. The charge to interest income is equal to all interest previously accrued, and income is subsequently recognized only to the extent cash payments are received until,
in management's judgment, the borrower's ability to make periodic interest and principal payments is no longer in doubt, in which case the loan is returned to accrual status.

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.

The
allowance for loan and lease losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against
the allowance when management believes the uncollectability of a loan balance is confirmed.

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.

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 and construction loans by either the present value of expected future cash flows

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

discounted
at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large
groups of similar balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential
loans for impairment disclosures.

Loan Origination Fees and Related Discounts

Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest
income using the interest method over the contractual life of the loans, adjusted for prepayments.

Commitment
fees and costs relating to commitments, the likelihood of exercise of which is remote, are recognized during the commitment period. If the commitment is subsequently exercised
during the commitment period, the remaining unamortized commitment fee at the time of exercise is recognized over the life of the loan as an adjustment of yield.

Loan Servicing

The cost allocated to servicing rights purchased or retained has been recognized as a separate asset, is initially measured at fair
value, and is being amortized in proportion to and over the period of estimated net servicing income. Servicing rights are periodically evaluated for impairment based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on current market rates of interest. For purposes of measuring impairment, the rights are stratified by one or more predominant risk
characteristics of the underlying loans. The Bank stratifies its capitalized servicing rights based on loan type. The Company performs quarterly testing to determine if loan servicing rights purchased
and retained servicing rights are impaired. As of June 30, 2010, and 2009, there was no impairment to loan servicing rights purchased and retained servicing rights.

Goodwill

Goodwill is the difference between the purchase price and the amounts assigned to the net assets acquired and accounted for under the
purchase method of accounting. The Company performs annual testing to determine if goodwill is impaired. During this testing, it was determined that the goodwill associated with the acquisition of the
leasing division was impaired at June 30, 2010. Accordingly, the Company wrote-off the amount of goodwill associated with this acquisition of $585. As of June 30, 2010, there
is no impairment with respect to intangible assets for the remaining amount of $4,366.

Foreclosed Real Estate and Other Properties

Real estate and other properties acquired through, or in lieu of, loan foreclosure are initially recorded at lower of cost or fair
value less estimated costs to sell at the date of foreclosure. Costs relating to improvement of property are capitalized, whereas costs relating to the holding of property

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

are
expensed. Valuations are periodically performed by management and charge-offs to operations are made if the carrying value of a property exceeds its estimated fair value less estimated
costs to sell.

Office Properties and Equipment

Land is carried at cost. All other properties and equipment are carried at cost, less accumulated depreciation and amortization.
Buildings and improvements and leasehold improvements are depreciated primarily on the straight-line method over the estimated useful lives of the assets, which are five to fifty years.
Furniture, fixtures, equipment and automobiles are depreciated using both the straight-line and declining balance methods over the estimated useful lives of the assets, which are three to
twelve years.

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax-basis
carrying amounts. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled.

In
the preparation of income tax returns, tax positions are taken based on interpretation of federal and state income tax laws. Management periodically reviews and evaluated the status
of uncertain tax positions and makes estimates of amounts ultimately due or owed. The benefits of tax positions is recorded in income tax expense in the consolidated financial statements, net of the
estimates of ultimate amounts due or owed including any applicable interest and penalties. The Company's policy is to report interest and penalties, if any, related to unrecognized tax benefits in
income tax expense in the Consolidated Statements of Income. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period in which the enactment
date occurs.

The
determination of current and deferred income taxes is an accounting estimate which is based on the analyses of many factors including interpretation of federal and state income tax
laws, the evaluation of uncertain tax positions, differences between the tax and financial reporting bases of assets and liabilities (temporary differences), estimates of amounts due or owed such as
the timing of reversal of temporary differences and current financial accounting standards. Actual results could differ from the estimates and tax law interpretations used in determining the current
and deferred income tax liabilities.

Earnings Per Share (EPS)

Basic EPS represents income available to common stockholders divided by the weighted-average number of common shares outstanding during
the period, inclusive of non-vested share-based payment awards. Diluted EPS reflects additional common shares that would have been outstanding if dilutive potential common shares had been
issued.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

operating
decisions, allocating resources, and monitoring performance, which is primarily based on products.

Banking

Other

Total2010Net interest income

$
38,540

$
(1,867
)
$
36,673Provision for losses on loans and leases


(2,950
)




(2,950
)Noninterest income


9,694


1,320


11,014Intersegment noninterest income


(148
)

(101
)

(249
)Noninterest expense


(34,461
)

(1,575
)

(36,036
)Intersegment noninterest expense





249


249Income (loss) before income taxes

$
10,675

$
(1,974
)
$
8,701Total assets

$
1,238,075

$
14,940

$
1,253,0152009Net interest income

$
37,085

$
(1,756
)
$
35,329Provision for losses on loans and leases


(1,679
)




(1,679
)Noninterest income


12,260


342


12,602Intersegment noninterest income


(95
)

(148
)

(243
)Noninterest expense


(33,086
)

(1,480
)

(34,566
)Intersegment noninterest expense





243


243Income (loss) before income taxes

$
14,485

$
(2,799
)
$
11,686Total assets

$
1,172,911

$
3,885

$
1,176,7962008Net interest income

$
31,907

$
(2,031
)
$
29,876Provision for losses on loans and leases


(1,994
)




(1,994
)Noninterest income


10,980


353


11,333Intersegment noninterest income


(105
)

(71
)

(176
)Noninterest expense


(29,703
)

(903
)

(30,606
)Intersegment noninterest expense





176


176Income (loss) before income taxes

$
11,085

$
(2,476
)
$
8,609Total assets

$
1,098,592

$
4,902

$
1,103,494


Stock-based compensation

The Company adopted SFAS No. 123RShare-Based Paymenteffective as of
July 1, 2005 using the Black-Scholes option-pricing model and the modified prospective method in which compensation cost is recognized for all awards granted subsequent to the Company's
adoption of this statement as well as for the unvested portion of awards outstanding as of the Company's adoption of this statement. See Note 16 for more information on stock option and
incentive plans.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Self-insurance

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. To mitigate a portion of the risks involved with a self-insured health plan, the Company has a
stop-loss insurance policy through a commercial insurance carrier for coverage in excess of $65 per individual occurrence.

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 during fiscal years 2010, 2009 and 2008.

2010

2009

2008Quarter ended September 30

$
748

$
358

$
221Quarter ended December 31


311


945


409Quarter ended March 31


486


704


328Quarter ended June 30


602


555


524Net healthcare costs

$
2,147

$
2,562

$
1,482


Interest Rate Contracts and Hedging Activities

The Company uses derivative financial instruments to modify exposures to changes in interest rates and market prices for other
financial instruments. To qualify for and maintain hedge accounting, the Company must meet formal documentation and effectiveness evaluation
requirements both at the hedge's inception and on an ongoing basis. The application of the hedge accounting policy requires strict adherence to documentation and effectiveness testing requirements,
judgment in the assessment of hedge effectiveness, identification of similar hedged item groupings, and measurement of changes in the fair value of hedged items. If in the future derivative financial
instruments used by the Company no longer qualify for hedge accounting, the impact on the consolidated results of operations and reported earnings could be significant, as discussed below.

The
Company discontinues hedge accounting prospectively when (1) it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged
item (including

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

forecasted
transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is de-designated as a hedge instrument, because it is unlikely
that a forecasted transaction will occur; or (4) management determines that designation of the derivative as a hedge instrument is no longer appropriate.

When
hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will continue to be carried on the balance sheet at its fair
value, and gains and losses that were accumulated in other comprehensive income will be recognized immediately in earnings. In all other situations in which hedge accounting is discontinued, the
derivative will be carried at its fair value on the balance sheet, with subsequent changes in its fair value recognized in current-period earnings.

Interest
rate swaps utilized by the Company are each accounted for as a cash flow hedge, which hedge the interest rate risk in the cash flows of long-term,
variable-rate subordinated debentures. Interest rate swaps utilized by the Bank are each accounted for as a cash flow hedge, which hedge the interest rate risk in the cash flows of
variable-rate deposits. The cumulative change in fair value of the hedging derivatives, to the extent that it is expected to be offset by the cumulative change in anticipated interest cash
flows from the hedged exposures, will be deferred and reported as a component of other comprehensive income (OCI). Any hedge ineffectiveness will be charged to current-period earnings.

Recent Accounting Pronouncements

FASB Establishes Accounting Standards Codification

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

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

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

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Value Accounting

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

In
2008, FASB issued Staff Position No. FAS 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" (ASC Topic 715-20-65).
This guidance will expand disclosure by requiring the following new disclosures: 1) how investment allocation decisions are made by management; 2) major categories of plan assets; and
3) significant concentrations of risk. Additionally, ASC 715-20-65 will require an employer to disclose information about the valuation of plan assets similar to that
required in ASC Topic 820 Fair Value Measurements and Disclosures. ASC 715-20-65 is effective for the Company for annual reporting periods beginning July 1, 2009 and the
Company does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of operations or cash flow.

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

In
January 2010, FASB issued ASU No. 2010-06, "Improving Disclosures about Fair Value Measurements", (ASC Topic 820). This accounting standard provides additional
guidance relating to fair value measurement disclosures. Specifically, companies are required to separately disclose significant transfers into and out of Level 1 and Level 2
measurements in the fair value hierarchy and the reasons for those transfers. Significance should generally be based on earnings and total assets or

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

liabilities,
or when changes are recognized in other comprehensive income, based on total equity. Companies may take different approaches in determining when to recognize such transfers, including
using the actual date of the event or change in circumstances causing the transfer, or using the beginning or ending of a reporting period. For Level 3 fair value measurements, the new guidance
requires presentation of separate information about purchases, sales, issuances and settlements.
Additionally, the FASB also clarified existing fair value measurement disclosure requirements relating to the level of disaggregation, inputs, and valuation techniques. This accounting standard is
effective for interim and annual reporting periods after July 1, 2009, except for the detailed Level 3 disclosures, which will be effective for interim and annual reporting periods after
July 1, 2010. The Company adopted this update in the first quarter of fiscal 2010, except for the detailed Level 3 disclosures, and the adoption did not have a material effect on the
Company's consolidated financial condition, results of operations or cash flow. The Company will adopt the Level 3 disclosures in the first quarter of fiscal 2011 and does not expect the
adoption to have a material effect on the Company's consolidated financial condition, results of operations or cash flow.

Business Combinations and Noncontrolling Interests

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

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

In
June 2009, FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities" (ASC Topic 810-10). This
updated guidance requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. It also requires an ongoing reassessment
and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This updated guidance was effective January 1, 2010, and the adoption
did not have a material effect on the Company's consolidated financial condition, results of operations or cash flow.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other Accounting Changes

In June 2009, FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assets", (ASC Topic 860). This updated guidance
removed the concept of a qualifying special-purpose entity and removed the exception from applying consolidation guidance to these entities. This update also clarified the requirements for isolation
and limitations on portions of financial assets that are eligible for sale accounting. ASC Topic 860 is reportable for interim and annual reports and effective for the Company on reporting periods
beginning July 1, 2010 and the Company does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of operations or cash flow.

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

In
July 2010, FASB issued ASU 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses" (ASC Topic 310). This guidance will
expand disclosures by requiring additional disaggregated information related to the current disclosures. It will also require additional disclosures to provide information based on credit quality,
past due aging information, trouble debt restructuring information, and significant purchases and sales of financing receivables. ASU 2010-20 is effective for the Company for interim and
annual reporting periods ending after December 15, 2010 and the Company does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of
operations or cash flow.

During
fiscal 2010, FASB issued several ASUs: ASU No. 2009-03 through ASU No. 2010-24. Except for ASU no. 2010-06,
2010-18 and 2010-20 mentioned above, the ASUs issued entail technical corrections or clarifications to existing guidance or affect guidance related to specialized industries or
entities and therefore have minimal, if any, impact on the Company.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 2INVESTMENTS IN SECURITIES

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

June 30, 2010Amortized
Cost

Total Other-Than
Temporary
Impairment
Recognized in
Accumulated Other
Comprehensive Income

Adjusted
Carrying
Cost

Gross
Unrealized
Gains

Gross
Unrealized
(Losses)

Fair
ValueDebt securities:U.S. government agencies

$
4,551

$


$
4,551

$
25

$


$
4,576Municipal bonds


13,820





13,820


435


(31
)

14,224Trust preferred securities


12,337


(3,080
)

9,257





(5,355
)

3,90230,708


(3,080
)

27,628


460


(5,386
)

22,702Equity securities:FNMA


8


(8
)










Federal Ag Mortgage


7





7





(1
)

6Other Investments


253





253








253268


(8
)

260





(1
)

259Residential mortgage-backed securities


237,513





237,513


4,322


(354
)

241,481$
268,489

$
(3,088
)
$
265,401

$
4,782

$
(5,741
)
$
264,442


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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 2INVESTMENTS IN SECURITIES (Continued)



June 30, 2009Amortized
Cost

Total Other-Than
Temporary
Impairment
Recognized in
Accumulated Other
Comprehensive Income

Adjusted
Carrying
Cost

Gross
Unrealized
Gains

Gross
Unrealized
(Losses)

Fair
ValueDebt securities:U.S. government agencies

$
2,632

$


$
2,632

$
43

$
(4
)
$
2,671Municipal bonds


14,356





14,356


163


(218
)

14,301Trust preferred securities


12,276


(397
)

11,879





(5,828
)

6,05129,264


(397
)

28,867


206


(6,050
)

23,023Equity securities:FNMA


8


(8
)










Federal Ag Mortgage


7





7





(5
)

2Other Investments


253





253








253268


(8
)

260





(5
)

255Residential mortgage-backed securities


196,704





196,704


3,827


(899
)

199,632$
226,236

$
(405
)
$
225,831

$
4,033

$
(6,954
)
$
222,910


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.

111

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 2INVESTMENTS IN SECURITIES (Continued)

The
following tables present the age of gross unrealized losses and fair value by investment category.

June 30, 2010Less than 12 Months

12 Months or More

TotalFair
Value

Gross
Unrealized
(Losses)

Fair
Value

Gross
Unrealized
(Losses)

Fair
Value

Gross
Unrealized
(Losses)Debt securities:Municipal bonds

$
863

$
(2
)
$
1,768

$
(29
)
$
2,631

$
(31
)Trust preferred securities








3,902


(5,355
)

3,902


(5,355
)863


(2
)

5,670


(5,384
)

6,533


(5,386
)Federal Ag Mortgage


9


(1
)







9


(1
)Residential mortgage-backed securities


67,361


(347
)

374


(7
)

67,735


(354
)$
68,233

$
(350
)
$
6,044

$
(5,391
)
$
74,277

$
(5,741
)




June 30, 2009Less than 12 Months

12 Months or More

TotalFair
Value

Gross
Unrealized
(Losses)

Fair
Value

Gross
Unrealized
(Losses)

Fair
Value

Gross
Unrealized
(Losses)Debt securities:U.S. government agencies

$
1,507

$
(4
)
$


$


$
1,507

$
(4
)Municipal bonds


3,864


(56
)

1,900


(162
)

5,764


(218
)Trust preferred securities








6,051


(5,828
)

6,051


(5,828
)5,371


(60
)

7,951


(5,990
)

13,322


(6,050
)Federal Ag Mortgage


2


(5
)







2


(5
)Residential mortgage-backed securities


41,499


(346
)

26,249


(553
)

67,748


(899
)$
46,872

$
(411
)
$
34,200

$
(6,543
)
$
81,072

$
(6,954
)


The
unrealized losses reported for municipal bonds relate to 16 municipal general obligation or revenue bonds. The unrealized losses are primarily attributed to changes in credit spreads
or market interest rate increases since the securities were originally acquired, rather than due to credit or other causes. Management does not believe any individual unrealized losses as of
June 30, 2010, represent an other-than-temporary impairment for these investments. The Company does not have the intent to sell these securities (has not made a decision
to sell) and has assessed that
it is not more likely than not that the Company will be required to sell these securities before anticipated recovery of fair value.

112

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 2INVESTMENTS IN SECURITIES (Continued)

The unrealized losses reported for residential mortgage-backed securities relate to 32 securities issued by the Federal National Mortgage Association ("FNMA"), the Government National
Mortgage Association ("GNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC"). These unrealized losses are primarily attributable to changes in interest rates and the contractual cash flows
of those investments which are guaranteed by an agency of the U.S. government. Management does not believe any of these unrealized losses as of June 30, 2010, represent an
other-than-temporary impairment for those investments. The Company does not have the intent to sell these securities (has not made a decision to sell) and has assessed that it
is not more likely than not that the Company will be required to sell these securities before anticipated recovery of fair value.

The
unrealized losses reported for trust preferred securities are attributable to six rated pooled securities. Rating downgrades regarding these investments have occurred placing each in
a below investment grade rating. The securities have an amortized cost of $1,908 rated Caa3, $2,341 rated Caa1, and $5,008 rated Ca. The market for these securities is currently inactive. The CUSIPs
of the trust preferred securities are 74042TAE1 rated Caa3, 740417AB6 and 74042CAE8 rated Caa1, and 74041EAC9, 74041RAB2 and 55312HAE9 rated Ca. The Company performed assessments of available
information for each security during fiscal year 2010, and also considered factors such as overall deal structure and its position within the structure, quality of underlying issuers within each pool,
defaults and recoveries, loss severities and prepayments. Based upon scenarios developed in regard to this information, management compared the present value of best estimates of cash flows expected
to be collected from each security at the security's effective interest rate to the amortized cost basis of each security. Management determined that four trust preferred securities exhibited an
other-than-temporary impairment. The difference between the present value of cash flows and the amortized cost basis for each of the four securities was recorded as credit loss
impairment and recognized in earnings in the amount of $2,683. The amortized cost basis of the four securities was reduced by the amount of credit loss. The amount of recognized losses due to amounts
in other comprehensive income was $460, thus reducing the overall credit impairment losses related to these securities to $2,223. The unrealized losses on these trust preferred securities can
primarily be attributed to changes in credit spreads since the securities were acquired. See Note 18 "Financial Instruments" for additional information related to the determination of fair
value. The Company does not have the intent to sell these six securities (has not made a decision to sell) and has assessed that it is not more likely than not that the Company will be required to
sell these securities before anticipated recovery of fair value. Within this segment, five securities with amortized cost of $7,424 are quarterly variable-rate securities tied to
3-month LIBOR.

113

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 2INVESTMENTS IN SECURITIES (Continued)

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

Year Ended
June 30, 2010Beginning balance of credit losses on securities held as of July 1, 2009 for which a portion of other-than-temporary impairment was recognized in
other comprehensive income(1)

$
405Credit losses for which an other-than-temporary impairment was not previously recognized


71Increases to the amount related to the credit losses for which other-than-temporary was previously recognized


2,612Ending balance of credit losses on securities held as of June 30, 2010 for which a portion of other-than-temporary impairment was recognized in
other comprehensive income(1)

$
3,088


(1)Includes
$8 of other-than-temporary impairment related to Fannie Mae common stock


The
amortized cost and fair value of debt securities as of June 30, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities
because the borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized
Cost

Fair
ValueDue in one year or less

$
480

$
480Due after one year through five years


10,035


10,266Due after five years through ten years


5,204


5,412Due after ten years


11,909


6,54427,628


22,702Residential mortgage-backed securities


237,513


241,481$
265,141

$
264,183


Equity
securities have been excluded from the maturity table above because they do not have contractual maturities associated with debt securities.

Proceeds
from the sale of securities available for sale in fiscal 2010 were $60,961 and resulted in gross gains and gross losses of $1,969 and $116, respectively. Proceeds from the sale
of securities available for sale in fiscal 2009 were $57,246 and resulted in gross gains and gross losses of $952 and $48, respectively. Proceeds from the sale of securities available for sale in
fiscal 2008 were $5,511 and resulted in gross gains of $3.

At
June 30, 2010, and 2009, securities with a fair value of $245,341 and $209,114, respectively, were pledged as collateral for public deposits, borrowing and other purposes.

114

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 3LOANS AND LEASES RECEIVABLE

Loans and leases receivable at June 30, 2010, and 2009, consist of the following:

2010

2009Loans secured by real estateResidentialOne-to-four family

$
72,853

$
85,349Multi-family


50,538


49,054Commercial


227,874


221,246Agriculture


118,956


102,676Construction


32,743


12,827Business, consumer and otherCommercial business


104,576


116,231Automobile


23,420


36,359Junior liens on real estate


97,031


91,570Agriculture


154,860


134,331Equipment financing leases


10,549


15,880Other loans


9,066


8,367Loans on savings accounts


1,438


1,645903,904


875,535Add (less)Undisbursed portion of loans in process


(30,973
)

(23,791
)Deferred loan fees and unamortized discounts and premiums, net


(652
)

(462
)Allowance for loan and lease losses


(9,575
)

(8,470
)$
862,704

$
842,812


Loans
held for sale totaling $25,287 at June 30, 2010, consist of $20,394 of one-to-four family fixed-rate loans and $4,893 of student loans.
Loans held for sale totaling $14,881 at June 30, 2009, consist of $8,888 of one-to-four family fixed-rate loans and $5,993 of student loans.

Activity
in the allowance for loan losses included in continuing operations is summarized as follows for the fiscal years ended June 30:

2010

2009

2008Balance, beginning

$
8,470

$
5,933

$
5,872Provision charged to income


2,950


1,679


1,994Charge-offs


(2,009
)

(1,569
)

(2,245
)Recoveries


164


2,427


312Balance, ending

$
9,575

$
8,470

$
5,933


115

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 3LOANS AND LEASES RECEIVABLE (Continued)

The
following is a summary of information pertaining to impaired loans and nonaccrual loans as of and for the fiscal years ended June 30, 2010, 2009, and 2008:

2010

2009

2008Impaired loans without a valuation allowance

$
7,261

$
7,927

$
514Impaired loans with a valuation allowance


1,560


700


316Total impaired loans

$
8,821

$
8,627

$
830Valuation allowance related to impaired loans

$
325

$
203

$
130Nonaccruing loans and leases

$
6,036

$
9,381

$
2,324Accruing loans and leases delinquent more than 90 days


2,196


2,092


781Average investment in impaired loans


8,264


2,902


885Interest income recognized on impaired loans


22


11


17


No
additional funds are committed to be advanced in connection with impaired loans.

The
Company has granted loans to directors, executive officers or related interests in the normal course of business. These loans were made on substantially the same terms, including
rates and collateral, as those prevailing at the time for comparable transactions with other unrelated customers, and do not involve more than a normal risk of collection. The aggregate amount of
loans to such related parties was approximately $2,877 and $3,651 at June 30, 2010, and 2009.

NOTE 4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
unpaid principal balances of mortgage loans serviced for others were $1,138,793 and $1,046,600, at June 30, 2010, and 2009, respectively.

Custodial
balances maintained in connection with mortgage loan servicing, and included in advances by borrowers for taxes and insurance, were approximately $10,388 and $10,911, at
June 30, 2010, and 2009, respectively.

The
carrying values of mortgage rights were $12,733 and $11,768, at June 30, 2010, and 2009, respectively. The fair values of these rights were $17,022 and $15,055, at
June 30, 2010, and 2009, respectively. The fair values of the servicing rights were estimated as the present value of the expected future cash flows using a discount rate of 9% and 10% at
June 30, 2010, and 2009, respectively. During fiscal years 2010 and 2009, servicing rights approximating $2,477 and $1,920, respectively, were capitalized. The Company recognized expense for
amortization of the cost of servicing rights in the
amount of $1,512, $1,341 and $1,317 for the fiscal years ended June 30, 2010, 2009, and 2008, respectively.

No
valuation allowances were provided for servicing rights capitalized during the fiscal years ended June 30, 2010, and 2009.

116

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 5OFFICE PROPERTIES AND EQUIPMENT

2010

2009Land

$
2,345

$
2,136Buildings and improvements


18,588


20,249Leasehold improvements


2,750


2,408Furniture, fixtures, equipment and automobile


19,140


18,13442,823


42,927Less accumulated depreciation and amortization


(27,850
)

(26,010
)$
14,973

$
16,917


The
Company leases numerous telephone and office equipment, which require minimum rentals totaling $84 through May 2013. The Company incurred rent expense of $973, $858 and $791, for
fiscal years 2010, 2009 and 2008, respectively. In addition, the Company has leased property under various operating lease agreements, which expire at various times. The total rental commitments at
June 30, 2010, under the leases are as follows:

2011

$
6322012


3822013


2852014


2772015


277Thereafter


1,839$
3,692


NOTE 6DEPOSITS

Deposits at June 30, 2010, and 2009 consist of the following:

2010

2009Noninterest bearing checking accounts

$
117,139

$
94,067Interest bearing accounts


100,231


94,846Money market accounts


189,821


145,214Savings accounts


83,136


81,417In-market certificates of deposit


401,033


401,291Out-of-market certificates of deposit


22,904


21,033$
914,264

$
837,868


117

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 6DEPOSITS (Continued)

Scheduled
maturities of certificates of deposit are as follows:

Maturing in fiscal year:2011

$
227,7722012


155,3542013


21,7442014


9,9822015


9,079Thereafter


6$
423,937


Under
the Dodd-Frank Act, non-IRA deposit accounts are permanently insured up to $250 by the Deposit Insurance Fund (DIF) under management of the Federal Deposit
Insurance Corporation (FDIC). Previous to the legislation in 2010, the coverage of $250 was temporary until December 2013. IRA deposit accounts are permanently insured up to $250 by the DIF under
management of the FDIC. The aggregate amount of jumbo certificates of deposit with a minimum denomination of $100 was approximately $212,270 and $214,930 at June 30, 2010, and 2009,
respectively. Deposits at June 30, 2010, and 2009 include $89,408 and $78,087, respectively, of deposits from one local governmental entity, the majority of which are savings accounts.

The
Company has deposits from directors, executive officers or related interests in the normal course of business. These deposits are substantially at the same terms and rates for
comparable transactions with other unrelated customers. The aggregate amount of deposits from such related parties was approximately $624 and $713 at June 30, 2010, and 2009.

NOTE 7ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS

Advances from the Federal Home Loan Bank of Des Moines (FHLB) and other borrowings at June 30, 2010, and 2009, are summarized as follows:

2010

2009Overnight federal funds purchased (with a rate of 0.30%)

$
21,405

$
26,495Fixed-rate advances (with rates ranging from 2.02% to 4.68%)


169,100


180,655Other borrowings(1)(2)


214


5,719$
190,719

$
212,869


(1)The
Company has an available line of credit with United Bankers' Bank for liquidity needs of $6,000 with no funds advanced at June 30, 2010. The
Company had a line of credit for $6,000 with First Tennessee Bank, NA with outstanding advances of $5,500 at June 30, 2009. The Company's has pledged 100% of bank stock as collateral for the
United Bankers' Bank line of credit.


118

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 7ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS (Continued)

(2)The
Bank is a participating lender in the South Dakota Housing Development Authority program for flood victims in the north-eastern part of the state of
South Dakota, as of May 2007. The money is provided to the Bank at a zero percent interest rate to be used in making loans to such flood victims. This is a revolving line of credit, in which the
participating lender may borrow, prepay and re-borrow for a term of 10 years. The outstanding balances at June 30, 2010, and 2009 were $214 and $219, respectively.


Aggregate
maturities of advances from FHLB and other borrowings, computed based upon contractual maturity date, are as follows:

Maturing in fiscal year:2011(1)

$
46,4052012


10,0002013


42,5002014


23,6002015


14,500Thereafter


53,714$
190,719


(1)Includes
the maturity of the overnight federal funds purchased.


Prepayment
of convertible, or callable, advances results in a prepayment fee as negotiated between the Bank and the FHLB. Convertible advances without a strike rate are subject to be
called at the FHLB's discretion. Convertible advances tied to LIBOR strike rates may only be called if the three-month LIBOR rate is equal to or greater than the indicated strike rate.

Advances
with the FHLB are secured by stock in the FHLB, which is comprised of membership stock and activity-based stock. The membership stock requirement is based as a percentage of
total assets as of the preceding December 31. At June 30, 2010, and 2009, the Bank held $1,407 and $1,407, respectively, in membership stock. The activity-based stock requirement is
based on 4.45% of advances outstanding. At June 30, 2010, and 2009, the Bank held $8,927 and $11,069, respectively, in activity-based stock.

In
addition, advances with the FHLB are secured by one-to-four family first mortgage loans, multi-family first mortgage loans and investment securities. In order
to provide additional borrowing collateral, commercial real estate first mortgage loans, agricultural real estate first mortgage loans, home equity line of credit loans and home equity second mortgage
loans have also been pledged with the FHLB. At June 30, 2010, the Bank had total collateral with the FHLB of $239,671 of which $49,166 was available for additional borrowing. At June 30,
2009, the Bank had total collateral with FHLB of $217,820 of which $10,670 was available for additional borrowing.

119

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 7ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS (Continued)

Advances with the Federal Reserve Bank are secured by commercial business loans. At June 30, 2010, the Bank had total collateral with the Federal Reserve Bank of $60,766 of which
$60,766 was available for borrowing.

The
Bank currently has a $15,000 unsecured line of federal funds with First Tennessee Bank, NA, which did not have activity or an outstanding balance at June 30, 2010 and 2009.

The
Bank currently has a $10,000 unsecured line of federal funds with Zions Bank, which did not have activity or an outstanding balance at June 30, 2010.

On
September 30, 2009, the Company entered into a Loan Agreement (the "Loan Agreement") with United Bankers' Bank (the "Lender") in order to refinance its outstanding borrowings
of $5,966 under its line of credit with First Tennessee Bank, NA that matured. Under the Loan Agreement, the Lender committed to lend to the Company an aggregate principal amount not to exceed $6,000.
On November 25, 2009, the Company repaid its outstanding borrowings of $6,044 (principal plus accrued interest) under the Loan Agreement. The loan is evidenced by a promissory note, accrues
interest at the United Bankers' Bank Rate with a minimum interest rate of 4.75% per annum, and the principal balance (plus any accrued and unpaid interest) is due and payable in full on
October 1, 2010. There was no additional activity or an outstanding balance at June 30, 2010.

NOTE 8SUBORDINATED DEBENTURES PAYABLE TO TRUSTS

On July 11, 2002, the Company issued 5,000 shares totaling $5,000 of Company Obligated Mandatorily Redeemable Preferred Securities of Trust II. Trust II was established and exists
for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the Company. These subordinated debentures constitute the sole asset of Trust II.
The securities provide for cumulative cash distributions calculated at a rate based on three- month LIBOR plus 3.65% adjusted quarterly. The Company may, at one or more times, defer interest payments
on the capital securities for up to 20 consecutive quarterly periods, but not beyond October 7, 2032. The capital securities were scheduled for redemption on October 7, 2032; however on
July 7, 2007, the Company exercised its option to redeem the 5,000 shares totaling $5,000 of Trust II. Proceeds from Trust VI were used to fund this redemption.

On
December 19, 2002, the Company issued 5,000 shares totaling $5,000 of Company Obligated Mandatorily Redeemable Preferred Securities of Trust III. Trust III was established and
exists for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the Company. These subordinated debentures constitute the sole asset of Trust
III. The securities provide for cumulative cash distributions calculated at a rate based on three-month LIBOR plus 3.35% adjusted quarterly. The Company may, at one or more times, defer interest
payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond January 7, 2033. At the end of the deferral period, all accumulated and unpaid distributions must
be paid. The capital securities must be redeemed on January 7, 2033; however, the Company has the option to shorten the maturity date as the call option date has passed. Holders of the capital
securities have no voting rights, are unsecured,

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 8SUBORDINATED DEBENTURES PAYABLE TO TRUSTS (Continued)

and
rank junior in priority of the payment to all of the Company's indebtedness and senior to the Company's capital stock.

On
September 25, 2003, the Company issued 7,000 shares totaling $7,000 of Company Obligated Mandatorily Redeemable Preferred Securities of Trust IV. Trust IV was established and
exists for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures
of the Company. These subordinated debentures constitute the sole asset of Trust IV. The securities provide for cumulative cash distributions calculated at a rate based on three-month LIBOR plus 3.10%
adjusted quarterly. The Company may, at one or more times, defer interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond October 8, 2033. At the
end of the deferral period, all accumulated and unpaid distributions must be paid. The capital securities must be redeemed on October 8, 2033; however, the Company has the option to shorten the
maturity date as the call option date has passed. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of the payment to all of the Company's
indebtedness and senior to the Company's capital stock.

On
December 7, 2006, the Company issued 10,000 shares totaling $10,000 of Company Obligated Mandatorily Redeemable Preferred Securities of Trust V. Trust V was established and
exists for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the Company. These subordinated debentures constitute the sole asset of Trust
V. The securities provide for cumulative cash distributions calculated at a rate based on three-month LIBOR plus 1.83%, fixed for five years at 6.61%; thereafter, adjusted quarterly. The Company may,
at one or more times, defer interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond March 1, 2037. At the end of the deferral period, all
accumulated and unpaid distributions must be paid. The capital securities must be redeemed on March 1, 2037; however, the Company has the option to shorten the maturity date to a date not
earlier than March 1, 2012. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of the payment to all of the Company's indebtedness and senior to
the Company's capital stock.

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

121

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 9INTEREST RATE CONTRACTS

Interest rate swap contracts are entered into primarily as an asset/liability management strategy of the Company to modify interest rate risk. The primary risk associated with all swaps
is the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contract. The Company is exposed to losses if the counterparty fails to make its payments
under a contract in which the Company is in a receiving status. The Company minimizes its risk by monitoring the credit standing of the counterparty. The Company anticipates the counterparty will be
able to fully satisfy its obligations under the remaining agreements.

During
the first quarter of fiscal 2008, the Company entered into an interest rate swap agreement with a $5,000 notional amount to convert the variable-rate Trust Preferred
VI security into a fixed-rate instrument for a term of five years at a fixed rate of 6.69%. This rate swap is designated as a cash flow hedge. The fair value of the derivative was an
unrealized loss of $514 and $494 at June 30, 2010, and 2009, respectively. During the second quarter of fiscal 2010, the Company entered into a forward-starting interest rate swap agreement and
will replace the existing swap agreement for the variable-rate Trust Preferred VI security upon the existing swap's maturity. The $5,000 notional amount fixed-rate instrument
has a term of five years at a fixed rate of 5.95%, effective October 1, 2012. The fair value of the derivative was an unrealized loss of $234 at June 30, 2010.

During
the fourth quarter of fiscal 2008, the Company entered into an interest rate swap agreement with a $7,000 notional amount to convert the variable-rate Trust Preferred
IV security into a fixed-rate instrument for a term of three years at a fixed rate of 6.19%. This rate swap is designated as a cash flow hedge. The fair value of the derivative was an
unrealized loss of $138 and $235 at June 30, 2010, and 2009, respectively. During the second quarter of fiscal 2010, the Company entered into a forward-starting interest rate swap agreement and
will replace the existing swap agreement for the variable-rate Trust Preferred IV security upon the existing swap's maturity. The $7,000 notional amount fixed-rate instrument
has a term of three years at a fixed rate of 5.93%, effective January 8, 2011. The fair value of the derivative was an unrealized loss of $243 at June 30, 2010.

During
the first quarter of fiscal 2009, the Company entered into an interest rate swap agreement with a $3,000 notional amount to convert a portion of the variable-rate
Trust Preferred III security into a fixed-rate instrument for a term of three years at a fixed rate of 6.70%. The Company also entered into an interest rate swap agreement with a $2,000
notional amount to convert the remaining portion of variable-rate Trust Preferred III security into a fixed rate instrument for a term of four years at a fixed rate of 6.91%. The fair
value of the $3,000 notional derivative was an unrealized loss of $121 and $129 at June 30, 2010, and 2009, respectively. The fair value of the $2,000 notional derivative was an unrealized loss
of $131 and $94 at June 30, 2010, and 2009, respectively. During the fourth quarter of fiscal 2010, the Company entered into two forward-starting interest rate swap agreements and will replace
the existing swap agreements for the variable-rate Trust Preferred III security upon the existing swaps' maturity. The $3,000 notional amount fixed-rate instrument has a term
of four years at a fixed rate of 6.58%, effective October 7, 2011. The $2,000 notional amount fixed-rate instrument has a term of two years at a fixed rate of 6.58%, effective
October 9, 2012. The fair values of the $3,000 and $2,000 notional amount derivatives were unrealized losses of $82 and $23, respectively, at June 30, 2010.

122

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 9INTEREST RATE CONTRACTS (Continued)

During
the second quarter of fiscal 2010, the Company entered into a forward-starting interest rate swap agreement with a $10,000 notional amount to convert the variable-rate
Trust Preferred V security into a fixed-rate instrument. The $10,000 notional amount fixed-rate instrument has a term of five years at a fixed rate of 5.68%, effective
December 1, 2011. The fair value of the derivative was an unrealized loss of $471 at June 30, 2010.

During
the fourth quarter of fiscal 2010, the Bank entered into five forward-starting interest rate swap agreements with notional amounts totaling $35,000 to convert the
variable-rate attributes of deposits into fixed-rate instruments. The $3,000 notional amount fixed-rate instrument has a term of four years at a fixed rate of
2.20%, effective November 18, 2010. The $7,000 notional amount fixed-rate instrument has a term of 30 months at a fixed rate of 2.09%, effective March 7, 2011. The
$10,000 notional amount fixed-rate instrument has a term of 42 months at a fixed rate of 2.44%, effective May 10, 2011. The $10,000 notional amount fixed-rate
instrument has a term of three years at a fixed rate of 2.56%, effective April 21, 2011. The $5,000 notional amount fixed-rate instrument has a term of three years at a fixed rate
of 2.30%, effective January 21, 2011. The fair values of the $3,000, $7,000, $10,000, $10,000 and $5,000 notional amount derivatives were unrealized losses of $84, $163, $271, $329 and $153,
respectively, at June 30, 2010.

No
gain or loss was recognized in earnings for the fiscal years 2010 and 2009 related to interest rate swaps. No deferred net losses on interest rate swaps in other comprehensive loss as
of June 30, 2010, are expected to be reclassified into earnings during the next twelve months. See Note 17 "Accumulated Other Comprehensive Loss" for amounts reported as other
comprehensive income.

The
Company posted $1,944 in cash and $858 in securities under collateral arrangements as of June 30, 2010, to satisfy collateral requirements associated with our interest rate
swap contracts.

The
following table summarizes the derivative financial instruments utilized as of June 30, 2010:

Estimated
Fair ValueNotional
AmountCash flow hedge

Balance Sheet Location

Gain

LossInterest rate swap contracts

Other assets

$
44,000

$


$
(1,957
)Interest rate swap contracts

Accrued expenses and other liabilities


35,000





(1,000
)$
79,000

$


$
(2,957
)


The
following table details the derivative financial instruments, the average remaining maturities and the weighted-average interest rates being paid and received as of June 30,
2010:

Weighted
Average RateNotional
Value

Average
Maturity
(years)

Fair
ValueLiability conversion swaps

Receive

PayInterest rate swap contracts

$
79,000


3.1

$
(2,957
)

3.04
%

4.48
%


123

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 10INCOME TAX MATTERS

The Company and subsidiaries file a consolidated federal income tax return on a fiscal year basis in the U.S. federal jurisdiction and various states. The Company is no longer
subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2006. The Bank is allowed bad debt deductions based on actual
charge-offs.

The
consolidated provision for income taxes from continuing operations consists of the following for the years ended June 30:

2010

2009

2008CurrentFederal

$
2,984

$
3,560

$
2,163State


602


650


592Deferred expense


(630
)

(340
)

11$
2,956

$
3,870

$
2,766


Income
tax expense is different from that calculated at the statutory federal income tax rate. The reasons for this difference in tax expense are as follows:

2010

2009

2008Computed "expected" tax expense

$
3,045

$
4,090

$
3,013Increase (decrease) in income taxes resulting fromTax exempt income


(408
)

(439
)

(385
)State taxes, net of federal benefit


470


482


369Increase in cash surrender value of life insurance


(193
)

(190
)

(186
)Stock options





(13
)

8Benefit of income taxed at lower rates


(69
)

(92
)

(64
)Change in valuation allowance





(1
)

Other, net


111


33


11$
2,956

$
3,870

$
2,766


124

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 10INCOME TAX MATTERS (Continued)

The
components of the net deferred tax asset as of June 30, 2010, and 2009 are as follows:

2010

2009Deferred tax assetsAllowance for loan and lease losses

$
3,439

$
3,026Cash flow hedges


1,005


324Accrued expenses


437


434Net unrealized loss on securities available for sale


364


1,110Pension cost


441


1,177Other


544


3526,230


6,423Less valuation allowance





6,230


6,423Deferred tax liabilitiesDefined benefit pension plan


645


775Property and equipment


506


601Mortgage servicing rights


817


669Other assets


357


344Other


113


712,438


2,460$
3,792

$
3,963


Retained
earnings at June 30, 2010, and 2009, include approximately $4,805 related to the pre-1987 allowance for loan losses for which no deferred federal income tax
liability has been recognized. These amounts represent an allocation of income to bad debt deductions for tax purposes only. If the Bank no longer qualifies as a bank, or in the event of a liquidation
of the Bank, income would be created for tax purposes only, which would be subject to the then current corporate income tax rate. The unrecorded deferred income tax liability on the above amount for
financial statement purposes was approximately $1,634.

The
Company had no unrecognized tax benefits as of June 30, 2010 and 2009. The Company recognized no interest and penalties on the underpayment of income taxes during fiscal years
June 30, 2010 and 2009, and had no accrued interest and penalties on the balance sheet as of June 30, 2010 and 2009. The Company has no tax positions for which it is reasonably possible
that the total amounts of unrecognized tax benefits will significantly increase with the next twelve months.

125

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 11REGULATORY CAPITAL

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatoryand possibly additional discretionaryactions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.

Quantitative
measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and
Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to adjusted total assets (as defined). Management
believes, as of June 30, 2010, and 2009, that the Bank meets all capital adequacy requirements to which it is subject.

As
of June 30, 2010, the Office of Thrift Supervision (OTS) categorized the Bank as "well capitalized" under the regulatory framework. To be categorized as well capitalized, the
Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I (core) capital ratios as set forth in the table. There are no conditions or events
since that notification that management believes have unfavorably changed the Bank's category.

The
following table summarizes the Bank's compliance with its regulatory capital requirements at June 30, 2010, and 2009:

Actual

Requirement

To Be Well
Capitalized
Under Prompt
Corrective
Action ProvisionsAmount

Percent

Amount

Percent

Amount

PercentAs of June 30, 2010Tier I (core) capital (to adjusted total assets)

$
108,428


8.69
%
$
49,907


4.00
%
$
62,384


5.00
%Total risk-based capital (to risk-weighted assets)


117,406


11.68
%

80,402


8.00
%

100,503


10.00
%Tangible capital (to tangible assets)


108,428


8.69
%

18,715


1.50
%

N/A


N/ATier I (core) capital (to risk-weighted assets)


108,428


10.79
%

N/A


N/A


60,302


6.00
%As of June 30, 2009Tier I (core) capital (to adjusted total assets)

$
99,067


8.45
%
$
46,910


4.00
%
$
58,638


5.00
%Total risk-based capital (to risk-weighted assets)


107,252


11.05
%

77,666


8.00
%

97,083


10.00
%Tangible capital (to tangible assets)


99,067


8.45
%

17,591


1.50
%

N/A


N/ATier I (core) capital (to risk-weighted assets)


99,067


10.20
%

N/A


N/A


58,250


6.00
%


126

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 12STOCKHOLDERS' EQUITY

During the second quarter of fiscal 2010, the Company issued 2.875 million shares of its common stock at a public offering price of $8.00 per share, for gross proceeds of $23,000.
The net proceeds of the offering after deducting underwriting discounts and commissions and estimated offering expenses totaled approximately $20,667. Per share earnings calculations were based on a
diluted weighted average shares outstanding of 5.77 million shares versus 4.03 million and 4.02 million shares in the comparable periods in fiscal 2009 and fiscal 2008,
respectively.

The
Company previously had in effect a publicly announced stock buy-back program in which up to 10% of the common stock of the Company outstanding on a stated date could be
acquired within a year. In conjunction with the Company's participation in the CPP in November 2008, the Company's Board of Directors terminated the stock buy-back program. Pursuant to a
series of stock buy-back programs initiated by the Company since 1996, the Company has purchased an aggregate of 2.08 million shares of common stock through June 30, 2010.

The
Company has authorized 50,000 shares of Preferred Stock, designated as "Series A Junior Participating Preferred Stock" with a stated value of $1.00 per share. Outstanding
shares of the Junior Preferred Stock are entitled to cumulative dividends. Such shares have voting rights of 100 votes per share and a preference in liquidation. The shares are not redeemable after
issuance.

Under
current regulations, the Bank is not permitted to pay dividends on its stock if its regulatory capital would reduce below (i) the amount required for the liquidation account
established to provide a limited priority claim to the assets of the Bank to qualifying depositors (Eligible Account Holders) at March 31, 1992, who continue to maintain deposits at the Bank
after its conversion from a federal mutual savings and loan association to a federal stock savings bank pursuant to its Plan of Conversion adopted August 21, 1991, or (ii) the Bank's
regulatory capital requirements. Capital distributions are
limited to the greater of 100% of net income for the year to date plus 50% of the amount of which the lesser of the institution's tangible core or risk-based capital exceeds its capital
requirement for such capital commitment, as measured at the beginning of the calendar year or up to 75% of net income over the most recent four quarter period. Subsequent to June 30, 2010, the
Bank will provide written notification to the OTS of its intention to pay dividends for each quarter in the year ending June 30, 2011, to the Company, while maintaining its capital
requirements.

The
Company entered into an agreement with the U.S. Department of the Treasury pursuant to which the Company issued and sold to the Treasury Department (i) 25,000 shares of Fixed
Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share and having a liquidation preference of $1,000 per share, and (ii) a ten-year warrant to
purchase up to 302,419 shares of the Company's common stock, par value $0.01 per share, at an initial exercise price of $12.40 per share, for an aggregate purchase price of $25,000 in cash. The
securities were issued and sold in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Cumulative dividends on the Preferred Stock
accrued on the liquidation preference at a rate of 5.00% per annum for the first five years, and at a rate of 9.00% per annum thereafter, but paid only if, as and when declared by the Company's Board
of Directors. As the issuance of Preferred Stock included a warrant for common stock, this transaction increased the weighted average number of diluted common shares outstanding by a total of 3,301
for the fiscal year ended June 30, 2009.

127

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 12STOCKHOLDERS' EQUITY (Continued)

The
Company repurchased all of its outstanding shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, on June 3, 2009 and completed its repurchase of the
warrant on June 30, 2009. The repurchase price of the preferred stock was $25,000 plus a final accrued dividend of $63, while the warrant was repurchased at a price of $650. The preferred stock
and warrant were issued to the Treasury on November 21, 2008 as part of the voluntary Capital Purchase Program (CPP).

On
July 21, 2010, the Board of Directors declared a $0.1125 per share dividend payable on August 13, 2010, to shareholders of record as of August 6, 2010. This cash
dividend has not been reflected in the consolidated financial statements.

NOTE 13EARNINGS PER SHARE

A reconciliation of the income available to common shareholders and common stock share amounts used in the calculation of basic and diluted EPS for the fiscal years ended June 30,
2010, 2009, and 2008, follow:

2010

2009

2008Net income

$
5,745

$
7,816

$
5,843Preferred stock dividends and accretion





1,316


Net income available to common shareholders

$
5,745

$
6,500

$
5,843Basic EPS:Weighted average number of common shares outstanding


5,768,095


4,006,820


3,969,988Earnings per common share

$
1.00

$
1.62

$
1.47Diluted EPS:Weighted average number of common shares outstanding


5,768,095


4,006,820


3,969,988Common share equivalentsstock options / Stock Appreciation Rights (SARs) under employee compensation plans/warrant


4,699


20,683


53,486Weighted average number of common shares and common share equivalents


5,772,794


4,027,503


4,023,474Earnings per common share

$
1.00

$
1.61

$
1.45


Options
and SARs outstanding of approximately 280,100 shares of common stock at a weighted average share price of $14.11 during the fiscal year ended June 30,
2010, were not included in the computation of diluted earnings per share because the exercise price of those instruments exceeded the average market price of the common shares during the year. Options
outstanding of approximately 170,000 shares of common stock at a weighted average share price of $15.23 during the fiscal year ended June 30, 2009, were not included in the computation of
diluted earnings per share because the exercise price of those instruments exceeded the average market price of the common shares during the year. Options outstanding of approximately 16,100 shares of
common stock at a weighted average share price of $17.27 during the fiscal year ended June 30, 2008, were not included in the computation of diluted earnings per share because the exercise
price of those instruments exceeded the average market price of the common shares during the year.

128

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 14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 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.

Information
relative to the components of net periodic benefit cost measured as of June 30, 2010, and June 30, 2009, for the Company's defined benefit plan is presented
below.

2010

2009Changes in benefit obligationsBenefit obligations, beginning

$
7,836

$
6,294Service cost


567


474Interest cost


574


480Benefits paid


(307
)

(191
)Assumption changes


(905
)

887Actuarial (gain) loss


(494
)

(108
)Benefit obligations, ending

$
7,271

$
7,836Changes in plan assetsFair value of plan assets, beginning

$
7,191

$
5,504Actual return (loss) on plan assets


911


(472
)Company contributions


425


2,350Benefits paid


(306
)

(191
)Fair value of plan assets, ending

$
8,221

$
7,191Funded status at end of year

$
950

$
(645
)Amounts recognized in accumulated other comprehensive loss consists of net loss

$
1,160

$
3,097Accumulated benefit obligation

$
6,206

$
5,469


129

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 14DEFINED BENEFIT PLAN (Continued)

The components of net periodic benefit cost for the fiscal years ended June 30 consist of the following:

2010

2009

2008Net periodic benefit costService cost

$
567

$
474

$
447Interest cost


574


480


437Expected return on plan assets


(555
)

(532
)

(487
)Amortization of net loss


182


62


Net periodic benefit cost


768


484


397Other changes in plan assets and benefit obligations recognized in other comprehensive loss:Net (gain) / loss


(1,937
)

1,783


1,218Amortization of net loss





(62
)

Total recognized in other comprehensive loss


(1,937
)

1,721


1,218Total recognized in net periodic benefit cost and other comprehensive loss

$
(1,169
)
$
2,205

$
1,615


The
estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is $94.

The
weighted-average assumptions used to determine benefit obligations at June 30 are as follows:

2010

2009Discount ratepre-retirement


7.50
%

7.50
%Discount ratepost-retirement


4.62
%

3.59
%Rate of compensation increase


4.00
%

4.00
%


The
weighted-average assumptions used to determine net periodic benefit cost for fiscal years ended June 30 are as follows:

2010

2009

2008Discount ratepre-retirement


7.50
%

7.50
%

7.50
%Discount ratepost-retirement


4.62
%

3.59
%

4.82
%Rate of compensation increase


4.00
%

4.00
%

4.00
%Expected long-term return on plan assets


8.00
%

8.00
%

8.00
%


The
overall expected long-term rate of return on assets is based on economic forecasts and projected asset allocation.

130

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 14DEFINED BENEFIT PLAN (Continued)

The
Company's pension plan weighted-average asset allocations by asset category are as follows:

2010Investment Category

Market
Value

Unrealized
Gain/(Loss)

Actual Asset
Mix as a % of
Market Value

Target Asset
Mix as a % of
Market ValueEquities

$
4,400

$
(13
)

53.5
%

55.0
%(1)Fixed


2,870


214


34.9
%

30.0
%(2)Other


587


9


7.2
%

10.0
%(3)Cash and cash equivalents


363





4.4
%

5.0
%(2)Total pension plan assets

$
8,220

$
210


100.0
%

100.0
%


(1)includes
a plus/minus range of 10.0%(2)includes
a plus/minus range of 5.0% and includes cash and cash equivalents(3)maximum
allowed of 10.0%


2009Investment Category

Market
Value

Unrealized
Gain/(Loss)

Actual Asset
Mix as a % of
Market Value

Target Asset
Mix as a % of
Market ValueEquities

$
4,046

$
113


56.3
%

55.0
%(1)Fixed


2,326


98


32.3
%

30.0
%(2)Other


557


(17
)

7.8
%

10.0
%(3)Cash and cash equivalents


262





3.6
%

5.0
%(2)Total pension plan assets

$
7,191

$
194


100.0
%

100.0
%


(1)includes
a plus/minus range of 10.0%(2)includes
a plus/minus range of 5.0% and includes cash and cash equivalents(3)maximum
allowed of 10.0%


131

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 14DEFINED BENEFIT PLAN (Continued)




The
fair value of the Company's pension plan assets at June 30, 2010, by asset category are as follows:

Asset Category

Quoted Prices
In Active
Markets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total at
Fair ValueCash

$
363

$


$


$
363Equity securitiesDomestic large-cap


2,555








2,555Domestic small/mid-cap


628








628International large-cap


896








896Emerging markets


321








321Fixed income securitiesCorporate bonds


2,094








2,094Mortgage-backed securities


776








776Other types of investmentsAlternative assets


587








587Total assets

$
8,220

$


$


$
8,220


The
objective of the pension plan investment policy for equities is to pursue a growth strategy that results in capital appreciation. The objective of the pension plan investment policy
for fixed rate instruments and cash equivalents is to ensure safety of principal and interest.

The
Company expects to contribute $455 to its pension plan in fiscal 2011. The minimum required contribution is $0.

Estimated
Future Benefit Payments: The following benefit payments which reflect expected future service, as appropriate, are expected to be paid during the years ended June 30:

2011

$
3732012


7402013


3372014


7692015


618Years 2016 - 2020


4,376


132

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 15RETIREMENT SAVINGS PLAN

The Company has a retirement savings plan covering all employees of the Company who have attained age 21 and completed one expected year of service during which they worked at least
1,000 hours. The plan is intended to be a qualified profit sharing plan with a cash or deferred arrangement pursuant to IRS Code Section 401(k) and regulations issued there under. The
plan allows voluntary contributions by eligible employees, and also allows discretionary contributions by the Company as determined annually by the Board of Directors. The total compensation cost
charged to expense related to the plan was $311, $282 and $335 for 2010, 2009 and 2008, respectively.

NOTE 16STOCK-BASED COMPENSATION PLANS

During fiscal 2003, the Company established the 2002 Stock Option and Incentive Plan (2002 Option Plan). Under the 2002 Option Plan, awards for an aggregate amount of 907,500 common
shares may be granted to directors and employees of the Bank. Options granted under the Option Plan may be either options that qualify as Incentive Stock Options, as defined in the Code, or options
that do not qualify. Options granted may have a maximum term of 10 years. The 2002 Option Plan also provides for the award of stock appreciation rights, limited stock appreciation rights and
nonvested stock.

The
Company has a long-term incentive plan, which provides for the grant of nonvested stock awards and for stock appreciation rights ("SARs") settled in stock under the 2002
Option Plan if the Company achieves certain performance levels. For fiscal years 2009 and 2008, the Company met a performance level in the plan and, accordingly, for fiscal 2010 no nonvested stock or
SARs will be issued in fiscal 2011. During fiscal years 2010 and 2009, 16,232 and 6,584 shares, respectively of nonvested stock were issued and 115,747 and 47,051 SARs were issued in fiscal 2010 and
2009 respectively, under the 2002 Option Plan. The nonvested shares and SARs vest 25% in each of the first through fourth anniversaries of the date of grant. The issuance value of the nonvested shares
was $203
and $97 for fiscal years 2010 and 2009, respectively, and is being amortized over the vesting period of four years with the unamortized balance included in additional paid in capital in the
consolidated statements of financial condition. During fiscal years 2010, 2009 and 2008, $331, $336 and $391, respectively, were recorded as amortization expense. The issuance value of the 2010 and
2009 SARs was $203 and $97 and each issuance is being amortized over the vesting period of four years. During fiscal years 2010, 2009 and 2008, $77, $38 and $30, respectively, were recorded as
amortization expense.

In
connection with the failure to meet the performance level of the long-term incentive plan, no shares of nonvested stock or SARs will be issued in fiscal 2011 under the
plan.

During
fiscal 2004, the Company created a pool of 12,100 nonvested shares for grants under the 2002 Option Plan (2002 Pool). The key provisions of the 2002 Pool include: outright grant
of shares with restrictions as to sale, transfer, and pledging; during the restriction period, the grantee receives dividends and has voting rights related to the shares awarded; and all nonvested
shares are forfeited upon termination. During fiscal years 2010 and 2009, 2,204 and 2,507 nonvested shares, respectively, were awarded under the Pool. The issuance value of these nonvested shares was
$28 and $37 in 2010 and 2009, respectively, and is being amortized over their vesting periods with the unamortized balance

133

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 16STOCK-BASED COMPENSATION PLANS (Continued)

included
in additional paid in capital in the consolidated balance sheet. During fiscal years 2010, 2009, and 2008, $40, $38 and $28, respectively, were recorded as amortization expense.

In
association with the 2002 Option Plan, awards of nonvested shares of the Company's common stock are made to outside directors of the Company. Each outside director is entitled to all
voting, dividend and distribution rights during the vesting period. During fiscal years 2010 and 2009, shares of nonvested stock awarded were 19,626 and 14,511, respectively. The nonvested shares vest
on the first anniversary of the date of grant. During fiscal years 2010, 2009, and 2008, amortization expenses recorded was $141, $177 and $138, respectively.

The
fair value of each incentive stock option and each stock appreciation right grant is estimated at the grant date using the Black-Scholes option pricing model. The following
assumptions were used for grants in fiscal years 2010, 2009, and 2008:

2010

2009

2008Expected volatility


22.00
%

19.00
%

22.00
%Expected dividend yield


3.61
%

3.06
%

2.61
%Risk-free interest rate


2.35
%

2.87
%

3.94
%Expected term (in years)


5


5


4


Stock
option activity for the fiscal year ended June 30, are as follows:

2010Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
ValueBeginning Balance


139,919

$
12.89Granted





Forfeited





Exercised


(6,679
)

7.75Ending Balance


133,240

$
13.15


3.16

$
4Vested and exercisable at June 30


133,240

$
13.15


3.16

$
4


134

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 16STOCK-BASED COMPENSATION PLANS (Continued)

Stock
appreciation rights activity for the fiscal year ended June 30, are as follows:

2010SARs

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
ValueBeginning Balance


87,650

$
15.35Granted


115,747


12.48Forfeited


(5,261
)

14.29Exercised





Ending Balance


198,136

$
13.70


8.50

$
Vested and exercisable at June 30


35,463

$
15.62


7.19

$



The
Company applied a forfeiture rate of 14.00% when calculating the amount of options and stock appreciation rights expected to vest at June 30, 2010. This rate is based upon
historical activity and will be revised if necessary in subsequent periods if actual forfeitures differ from these estimates. The weighted-average grant date fair value of stock appreciation rights
granted during the fiscal years 2010, 2009, and 2008 was $1.75, $2.06 and $2.84. The total intrinsic value of options exercised during the fiscal years 2010, 2009, and 2008, was $18, $188 and $155,
respectively. During fiscal years 2010, 2009, and 2008, $77, $38 and $53, respectively, were recorded as amortization expense. As of June 30, 2010, there was $252 of total unrecognized
compensation cost related to nonvested SARs awards. The cost is expected to be recognized over a weighted-average period of 26 months for SARs awards. Cash received from the exercise of options
and SARs for the fiscal years 2010, 2009, and 2008, was $7, $526 and $432, respectively. The tax benefit realized for the tax deductions from cashless option exercises totaled $6, $1 and $7 for the
fiscal years 2010, 2009, and 2008, respectively. The company generally uses treasury shares to satisfy stock option exercises.

Nonvested
share activity for the fiscal years ended June 30 follows:

2010

2009

2008Shares

Weighted
Average
Grant Date
Fair Value

Shares

Weighted
Average
Grant Date
Fair Value

Shares

Weighted
Average
Grant Date
Fair ValueNonvested Balance, beginning


90,708

$
15.81


121,746

$
16.57


144,711

$
16.11Granted


38,062


10.80


23,602


13.33


19,165


16.62Vested


(55,909
)

15.31


(53,089
)

16.42


(31,236
)

14.51Forfeited


(3,386
)

11.30


(1,551
)

16.70


(10,894
)

16.44Nonvested Balance, ending


69,475

$
13.68


90,708

$
15.81


121,746

$
16.57


Pretax
compensation expense recognized for nonvested shares for the fiscal years 2010, 2009, and 2008, was $455, $373 and $419, respectively. The tax benefit for the fiscal years 2010,
2009, and 2008

135

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 16STOCK-BASED COMPENSATION PLANS (Continued)

was
$173, $142 and $159, respectively. As of June 30, 2010, there was $378 of total unrecognized compensation cost related to nonvested shares granted under the Plan. That cost is expected to
be recognized over a weighted-average period of 19 months. The total fair value of shares vested during the fiscal years 2010, 2009, and 2008 was $675, $698 and $350, respectively.

In
association with the 2002 Option Plan, awards of nonvested shares of the Company's common stock are made to outside directors of the Company. Each outside director is entitled to all
voting, dividend and distribution rights during the vesting period. Pretax compensation expense recognized for nonvested shares for the fiscal years 2010, 2009, and 2008, was $141, $172 and $92,
respectively. The tax benefit for the fiscal years 2010, 2009, and 2008 was $54, $65 and $35, respectively. As of June 30, 2010, there was $80 of total unrecognized compensation cost related to
nonvested shares granted under the Plan. That cost is expected to be recognized over a weighted-average period of 6 months. The total fair value of shares vested during the fiscal years 2010,
2009, and 2008 was $181, $174 and $103, respectively.

136

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 17ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss as of June 30, are as follows:

2010

2009

2008Net income

$
5,745

$
7,816

$
5,843Other comprehensive income (loss), net of tax:Securities available for sale:Change in unrealized losses for which a portion of an other-than-temporary impairment has been recognized in earnings


(2,222
)

(3,905
)

Change in unrealized gains (losses) on other securities


3,356


4,819


(1,069
)Reclassification adjustment:Net impairment credit loss recognized in earnings


2,682


405


Security (gains) recognized in earnings


(1,853
)

(904
)

(3
)Income tax (expense) benefit


(746
)

(158
)

408Other comprehensive income (loss) on securities available for sale


1,217


257


(664
)Defined benefit plan:Net unrealized gain (loss)


1,937


(1,721
)

(1,218
)Income tax (expense) benefit


(736
)

654


463Other comprehensive income (loss) on defined benefit plan


1,201


(1,067
)

(755
)Cash flow hedging activities-interest rate swap contracts:Net unrealized (losses)


(2,005
)

(831
)

(121
)Income tax benefit


681


283


41Other comprehensive (loss) on cash flow hedging activities-interest rate swap contracts


(1,324
)

(548
)

(80
)Total other comprehensive income (loss)


1,094


(1,358
)

(1,499
)Comprehensive income

$
6,839

$
6,458

$
4,344


Cumulative
other comprehensive (loss) balances were:

2010

2009

2008Unrealized loss on securities available for sale net of related tax effect of $364, $1,110 and $1,268

$
(594
)
$
(1,811
)
$
(2,068
)Unrealized loss on defined benefit plan net of related tax effect of $441, $1,177 and $523


(719
)

(1,920
)

(853
)Unrealized loss on cash flow hedging activities net of related tax effect of $1,005, $324 and $41


(1,952
)

(628
)

(80
)$
(3,265
)
$
(4,359
)
$
(3,001
)


137

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 18FINANCIAL INSTRUMENTS

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

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

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

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



138

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 18FINANCIAL INSTRUMENTS (Continued)



Estimated
fair values of the Company's financial instruments are as follows at June 30:

2010

2009Carrying
Amount

Fair
Value

Carrying
Amount

Fair
ValueFinancial assetsCash and cash equivalents

$
20,805

$
20,805

$
18,511

$
18,511Securities


264,442


264,442


222,910


222,910Federal Home Loan Bank stock


10,334


10,334


12,476


12,476Loans and leases


887,991


893,282


857,693


863,453Accrued interest receivable


8,785


8,785


7,598


7,598Mortgage servicing rights


12,733


17,022


11,768


15,055Interest rate swap contracts


(1,957
)

(1,957
)

(952
)

(952
)Financial liabilitiesDeposits


914,264


921,410


837,868


844,243Interest rate swap contracts on deposits


1,000


1,000





Borrowed funds


190,719


199,323


212,869


219,249Subordinated debentures payable to trusts


27,837


16,344


27,837


9,990Accrued interest payable and advances by borrowers for taxes and insurance


15,205


15,205


17,421


17,421


139

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 18FINANCIAL INSTRUMENTS (Continued)

Fair Value Measurement

Effective July 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements(ASC topic
820). In accordance with the FASB Staff Position 157-2,Effective Date of SFAS
No. 157, the Company applied the provisions of this statement to non-financial assets and liabilities effective July 1, 2009 and it did not have a
material impact on the Company's consolidated financial condition, results of operations or cash flow. The Company early adopted FASB Staff Position 157-4, dated April 9, 2009, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly, during the third quarter of Fiscal 2009 which amended FASB Staff Position 157-3, dated October 10, 2008,Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active. SFAS 157 defines fair value and establishes a consistent framework for measuring fair value
under GAAP and expands disclosure requirements for fair value measurements. Fair values represent the estimated price that would be received from selling an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date under current market conditions. The standard describes three levels of inputs that may be used to measure fair value:



140

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 18FINANCIAL INSTRUMENTS (Continued)

The
table below presents the Company's balances of financial instruments measured at fair value on a recurring basis by level within the hierarchy at June 30, 2010:

Quoted Prices
In Active
Markets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total at
Fair ValueSecurities available for saleDebt securities:U.S. government agencies

$


$
4,576

$


$
4,576Municipal bonds





14,224





14,224Trust preferred securities








3,902


3,902Equity securities:Federal Ag Mortgage


6








6Other investments





253





253Residential mortgage-backed securities





241,481





241,481Securities available for sale


6


260,534


3,902


264,442Interest rate swaps





(1,957
)




(1,957
)Total assets


6


258,577


3,902


262,485Interest rate swaps on deposits





1,000





1,000Total liabilities

$


$
1,000

$


$
1,000


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

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

The
securities shown in Level 3 relate to trust preferred securities which are currently part of an inactive market. The inactivity was evidenced first by a significant widening
of the bid-ask spread in the brokered markets in which these securities trade, and then by a significant decrease in the volume of

141

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 18FINANCIAL INSTRUMENTS (Continued)

trades
relative to historical levels. Given conditions in the debt markets and the absence of observable orderly transactions in the secondary and new issue markets, management determined that an
income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative
of fair value than the market approach valuation technique. The results of a third party valuation and a valuation derived by management were weighted each at 50% and used to measure fair value for
each security.

The
approaches to determining fair value for the trust preferred securities included the following factors:



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

142

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 18FINANCIAL INSTRUMENTS (Continued)

The
following table reconciles the beginning and ending balances of the assets or liabilities of the Company that are measured at fair value on a recurring basis using significant
unobservable inputs for the fiscal years ended June 30:

Fair Value Measurements Using Significant  Unobservable Inputs (Level 3)

Securities
Available for Sale2010

2009Beginning balance

$
6,051

$
Total realized/unrealized gains (losses)Included in earnings


(2,683
)

(397
)Included in other comprehensive loss


470


(2,956
)Purchases, issuances, (paydowns) and (sales)


64


(94
)Transfers into or (out) of Level 3





9,498Ending balance

$
3,902

$
6,051


The
table below presents the Company's balances of financial instruments measured at fair value on a nonrecurring basis by level within the hierarchy at June 30, 2010:

Quoted Prices
In Active
Markets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Fiscal 2010
Incurred
LossesLoans held for sale

$


$
25,287

$


$
Impaired loans





6,496


2,000


Mortgage servicing rights








12,733


Foreclosed assets








18


48Goodwill








4,366


585


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

Impaired
loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value. Market value is measured based on the value of the
collateral securing these loans. Collateral is primarily real estate and its fair value is generally determined based on real estate appraisals or other evaluations by qualified professionals.
Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. Impaired loans that are
collateral dependent are written down to their fair value, less costs to sell, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeds
the fair value. Valuation techniques consistent with the market

143

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 18FINANCIAL INSTRUMENTS (Continued)

approach,
income approach, and/or cost approach were used to measure fair value and primarily included observable inputs such as recent sales of similar assets or observable market data for
operational or carrying costs.

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

Goodwill
does not have readily observable prices for valuation and is classified within Level 3 of the fair value hierarchy. The Company uses a two-step valuation
process to determine if there has been impairment to existing goodwill and the amount which has become impaired, if any. The first step includes a screen for potential impairment and the second step
measures the amount of impairment. The analysis uses both an income and market approach as part of that analysis. The key assumptions used to determine fair value under the income approach included
the cash flow period, terminal values based on a terminal growth rate and the discount rate. The market approach calculated the change of control price a market participant could have been reasonably
expected to pay for the reporting unit by adding a change of control premium. Goodwill was tested for impairment at the reporting unit level and an impairment loss for the Mid America Capital
subsidiary was recorded as a result of management's determination that the carrying amount of goodwill exceeded its implied fair value.

NOTE 19COMMITMENTS, CONTINGENCIES AND CREDIT RISK

The Bank originates first mortgage, consumer and other loans primarily in eastern South Dakota and holds residential and commercial real estate loans which were purchased from other
originators of loans located throughout the United States. Collateral for substantially all consumer loans are security agreements and/or Uniform Commercial Code (UCC) filings on the purchased asset.
Unused lines of credit amounted to $138,797 and $129,627 at June 30, 2010, and 2009, respectively. Unused letters of credit amounted to $3,347 and $2,055 at June 30, 2010, and 2009,
respectively. The lines of credit and letters of credit are collateralized in substantially the same manner as loans receivable.

144

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 19COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Continued)

The
Bank had outstanding commitments to originate or purchase loans of $28,386 and to sell loans of approximately $29,431 at June 30, 2010. The portion of commitments to originate
or purchase fixed rate loans totaled $11,325 with a range in interest rates of 4.13% to 7.05%. At June 30, 2010, the Bank had one outstanding commitment to purchase $160 investment securities
available for sale and no
commitments to sell investment securities available for sale. No losses are expected to be sustained in the fulfillment of any of these commitments.

The
Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, based upon consultation with legal counsel, the
ultimate disposition of these matters will not have a materially adverse effect on the Company's consolidated financial position.

NOTE 20CASH FLOW INFORMATION

Changes in other assets and liabilities for the years ended June 30, consist of:

2010

2009

2008(Increase) decrease in accrued interest receivable

$
(1,187
)
$
(58
)
$
955Earnings on cash value of life insurance


(550
)

(544
)

(531
)Increase (decrease) in net deferred loan fees and other assets


(4,319
)

(4,086
)

742Increase (decrease) in accrued expenses and other liabilities


(4,348
)

(320
)

1,422$
(10,404
)
$
(5,008
)
$
2,588Supplemental Disclosure of Cash Flows InformationCash payments for interest

$
22,458

$
25,846

$
32,940Cash payments for income and franchise taxes


3,318


4,273


3,836Supplemental Disclosure of Noncash Investing and Financing ActivitiesForeclosed real estate and other properties acquired in settlement of loans

$
139

$
442

$
135


145

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 21FINANCIAL INFORMATION OF HF FINANCIAL CORP. (PARENT ONLY)

The Company's condensed balance sheets as of June 30, 2010, and 2009, and related condensed statements of income and cash flows for each of the years in the three-year
period ended June 30, 2010, are as follows:

Condensed Statements of Financial Condition

2010

2009AssetsCash primarily with the Bank

$
11,854

$
1,325Investments in subsidiaries


110,572


100,076Investment securities


250


250Other


7


825$
122,683

$
102,476LiabilitiesOther borrowings

$
27,837

$
27,837Other liabilities


411


5,965Stockholders' equity


94,435


68,674$
122,683

$
102,476


Condensed Statements of Income

2010

2009

2008Dividends from subsidiaries

$
2,500

$
2,350

$
5,206Interest and other income


46


96


109Expenses


(2,958
)

(2,799
)

(2,628
)Income tax benefit


948


1,109


819Equity in undistributed income of subsidiaries


5,209


7,060


2,337Net income

$
5,745

$
7,816

$
5,843


146

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 21FINANCIAL INFORMATION OF HF FINANCIAL CORP. (PARENT ONLY) (Continued)

Condensed Cash Flows

2010

2009

2008Cash Flows From Operating ActivitiesNet income

$
5,745

$
7,816

$
5,843Adjustments to reconcile net income to net cash provided by operating activitiesAmortization


10


10


141Equity in (earnings) of subsidiaries


(7,709
)

(9,410
)

(7,543
)Cash dividends received from subsidiaries


2,500


2,350


5,206(Decrease) in liabilities


(94
)

(12
)

(99
)Other, net


329


351


(109
)Net cash provided by operating activities


781


1,105


3,439Cash Flows From Investing ActivitiesPurchase of investment securities








(69
)Capital contribution to the Bank


(3,000
)

(6,000
)

Net cash used in investment activities


(3,000
)

(6,000
)

(69
)Cash Flows From Financing ActivitiesPurchase of treasury stock








(1,730
)Cash dividends paid


(2,469
)

(2,472
)

(1,702
)Repurchase of preferred stock





(25,000
)

Repurchase of warrant





(650
)

Proceeds from issuance of preferred stock and warrant





25,000


Proceeds from issuance of common stock


20,717


547


630Proceeds from issuance of subordinated debentures








5,000Redemption of subordinated debentures








(5,000
)Proceeds from other borrowings





5,500


Payments on other borrowings


(5,500
)




Net cash provided by (used in) financing activities


12,748


2,925


(2,802
)Increase (decrease) in cash


10,529


(1,970
)

568Cash at beginning of period


1,325


3,295


2,727Cash at end of period

$
11,854

$
1,325

$
3,295


147

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Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2010 AND 2009

(DOLLARS IN THOUSANDS, except share data)

NOTE 22QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
QuarterFiscal Year 2010Total interest income

$
14,633

$
14,347

$
14,120

$
14,254Net interest income


8,751


8,858


9,353


9,711Provision for losses on loans and leases


343


424


981


1,202Net income


855


1,961


1,791


1,138Net income available for common shareholders


855


1,961


1,791


1,138Basic earnings per share

$
0.21

$
0.37

$
0.26

$
0.16Diluted earnings per share


0.21


0.37


0.26


0.16Fiscal Year 2009Total interest income

$
15,831

$
15,566

$
15,008

$
14,283Net interest income


8,689


9,007


9,150


8,483Provision for losses on loans and leases


387





414


878Net income


1,975


1,846


2,171


1,824Net income available for common shareholders


1,975


1,846


1,831


848Basic earnings per share

$
0.50

$
0.46

$
0.45

$
0.21Diluted earnings per share


0.49


0.46


0.45


0.21


NOTE 23SUBSEQUENT EVENTS

Management has evaluated subsequent events for potential disclosure or recognition through the date that the financial statements were available to be issued. In September 2010, the
Company has been
notified by a borrower of the borrower's intention to no longer perform on its agricultural loan obligations. The current balance related to this obligation is $3,138. The Company has initiated formal
collection procedures and collateral evaluation. The financial effect of this transaction cannot be reasonably estimated as of the date that the financial statements were available to be issued.

148

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Table of Contents

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

Not applicable.

Item 9A.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, 2010, an evaluation was performed by the Company's management, including the Company's Chairman, President and
Chief Executive Officer and the Company's Executive Vice President, Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) to provide reasonable assurance that information required
to be disclosed in the reports the Company files and submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission's rules and forms. Based upon that evaluation, the Company's Chairman, President and Chief Executive Officer and the Company's Executive Vice President, Chief
Financial Officer and Treasurer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2010.

Management's Report on Internal Control over Financial Reporting

Management's report on internal control over financial reporting is included in Part II, Item 8 "Financial Statements and
Supplementary Data," and is furnished herein.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company's internal control over financial reporting that occurred during the fourth quarter ended
June 30, 2010, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Item 9B.Other Information

None.

PART III

Item 10.Directors, Executive Officers and Corporate Governance

Directors

Information regarding Directors of the Company is incorporated by reference from the discussion under the heading "Information with
Respect to Nominees and Continuing Directors" in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on November 17, 2010, a copy of which will be filed not later
than 120 days after June 30, 2010 (the "2010 Proxy Statement").

Executive Officers

Information regarding Executive Officers of the Company is contained in Part I, Item 1 "Business" of this
Form 10-K pursuant to Instruction 3 to Item 401(b) of Regulation S-K, and is incorporated by reference herein.

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Table of Contents

Compliance with Section 16(a) of the Exchange Act

Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by
reference from the discussion under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 2010 Proxy Statement.

Code of Ethics

Information regarding the Company's Code of Conduct and Ethics is incorporated by reference from the discussion under the heading "Code
of Conduct and Ethics" in the Company's 2010 Proxy Statement.

Director Nominations

Information regarding material changes, if any, to the procedures by which the Company's stockholders may recommend nominees to the
Company's Board of Directors is incorporated by reference from the discussion under the heading "Director Nominations" in the Company's 2010 Proxy Statement.

Audit Committee and Audit Committee Financial Expert

Information regarding the Company's Audit Committee and Audit Committee Financial Expert is incorporated by reference from the
discussion under the heading "Meetings of the Board of Directors, Committees of the Board of Directors and Independent Directors" in the Company's 2010 Proxy Statement.

Item 11.Executive Compensation

Information regarding executive compensation and other related disclosures required by this Item are incorporated by reference from the
discussion under the headings "Compensation Discussion and Analysis," "Personnel Compensation and Benefits Committee Report," "Executive Compensation," "Director Compensation" and "Personnel,
Compensation And Benefits Committee Interlocks and Insider Participation" in the Company's 2010 Proxy Statement.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information on the securities authorized for issuance under the Company's compensation plans (including any individual compensation
arrangements) is contained in Part II, Item 5 "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" of this
Form 10-K, and is incorporated by reference herein.

Information
concerning security ownership of certain beneficial owners and management is incorporated by reference from the discussion under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's 2010 Proxy Statement.

Item 13.Certain Relationships and Related Transactions, and Director Independence

Certain Transactions

Information concerning transactions with related persons and the review, approval or ratification thereof is incorporated by reference
from the discussion under the headings "Transactions with Related Persons" and "Policy on Review, Approval or Ratification of Transactions with Related Persons" in the Company's 2010 Proxy Statement.

150

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Table of Contents

Information
concerning director independence is incorporated by reference from the discussion under the headings "Meetings of the Board of Directors, Committees of the Board of Directors
and Independent Directors" in the Company's 2010 Proxy Statement.

Item 14.Principal Accountant Fees and Services

Information concerning the fees for professional services rendered by the Company's registered public accounting firm and the
pre-approval policies and procedures of the Company's Audit Committee is incorporated by reference from the discussion under the heading "Proposal No. IIRatification of
Independent Registered Public Accounting Firm" in the Company's 2010 Proxy Statement.

PART IV

Item 15.Exhibits and Financial Statement Schedules

(a)   The
following documents are filed as part of this Form 10-K:





Report of Independent Registered Public Accounting Firm

92Management's Report on Internal Control Over Financial Reporting

90Consolidated Statements of Financial Condition at June 30, 2010 and 2009

93Consolidated Statements of Income for the years ended June 30, 2010, 2009 and 2008

94Consolidated Statements of Stockholders' Equity for the years ended June 30, 2010, 2009 and 2008

95Consolidated Statements of Cash Flows for the years ended June 30, 2010, 2009 and 2008

96Notes to Consolidated Financial Statements

97




151

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.Date: September 10, 2010

By:

/s/ CURTIS L. HAGE Curtis L. Hage, Chairman, President and Chief Executive Officer
(Duly Authorized Representative)


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Curtis L. Hage and Darrel
L. Posegate, or any of them, his or her attorneys-in-fact, for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or
substitute or substitutes, may do or cause to be done by virtue hereof

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.

Name

Title

Date/s/ CURTIS L. HAGE Curtis L. Hage

Chairman, President and Chief
Executive Officer (Principal Executive
and Operating Officer)

September 10, 2010/s/ DARREL L. POSEGATE Darrel L. Posegate

Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)

September 10, 2010/s/ CHARLES T. DAY Charles T. Day

Director

September 10, 2010/s/ CHRISTINE E. HAMILTON Christine E. Hamilton

Director

September 10, 2010/s/ ROBERT L. HANSON Robert L. Hanson

Director

September 10, 2010


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Table of Contents

Name

Title

Date/s/ DAVID J. HORAZDOVSKY David J. Horazdovsky

Director

September 10, 2010/s/ THOMAS L. VAN WYHE Thomas L. Van Wyhe

Director

September 10, 2010


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Table of Contents

Exhibit Index

Exhibit
Number

Description3.1

Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 from the Company's Current Report on Form 8-K dated August 11, 2009, and filed with the SEC on August 17, 2009,
file no. 033-44383).3.2

Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 from the Company's Current Report on Form 8-K dated October 15, 2008, and filed with the SEC on October 17,
2008, file no. 033-44383).3.3

Form of Certificate of Designations of Series A Junior Participating Preferred Stock, dated October 23, 1996 (incorporated herein by reference to Exhibit A to Exhibit 1 of the Company's 8A filed with
the SEC on October 29, 1996, file no. 033-44383).3.4

Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, dated November 19, 2008 (incorporated herein by reference to Exhibit 3.1 from the Company's Current Report on
Form 8-K dated November 20, 2008, and filed with the SEC on November 24, 2008, file no. 033-44383).3.5

Certificate of Elimination of Series A Junior Participating Preferred Stock and Fixed Rate Cumulative Perpetual Preferred Stock, Series A of HF Financial Corp. (incorporated herein by reference to
Exhibit 3.1 from the Company's Current Report on Form 8-K dated August 11, 2009, and filed with the SEC on August 17, 2009, file no. 033-44383).4.1

Form of Common Stock Certificate, par value $0.01 per share. (incorporated herein by reference to Exhibit 4.1 from the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009, file
no. 033-443831).4.2

Form of Series A Junior Participating Preferred Stock Certificate, par value $1.00 per share (incorporated herein by reference to Exhibit B to Exhibit 1 of the Company's Form 8A filed with the SEC on
October 29, 1996, file no. 033-44383).4.3

Warrant to Purchase Common Stock, dated November 21, 2008 (incorporated herein by reference to Exhibit 4.1 from the Company's Current Report on Form 8-K dated November 20, 2008, and filed with the SEC
on November 24, 2008, file no. 033-44383).4.4

Form of Stock Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated herein by reference to Exhibit 4.2 from the Company's Current Report on Form 8-K dated November 20,
2008, and filed with the SEC on November 24, 2008, file no. 033-44383).10.1

Guarantee Agreement dated July 11, 2002, by HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.1 from the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002, file no. 033-44383).10.2

Indenture dated July 11, 2002, between HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.2 from the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002, file no. 033-44383).10.3

Guarantee Agreement dated December 19, 2002, by HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.1 from the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 2002, file no. 033-44383).


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Table of Contents

Exhibit
Number

Description10.4

Indenture dated December 19, 2002, between HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.2 from the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2002, file no. 033-44383).10.5

Guarantee Agreement dated September 25, 2003, by HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.1 from the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003, file no. 033-44383).10.6

Indenture dated September 25, 2003, between HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.2 from the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, file no. 033-44383).10.7

Guarantee Agreement dated December 7, 2006, by HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.1 from the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 2006, file no. 033-44383).10.8

Indenture dated December 7, 2006, between HF Financial Corp. and Wilmington Trust Company (incorporated herein by reference to Exhibit 10.2 from the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2006, file no. 033-44383).10.9

Letter Agreement dated June 3, 2003, between HF Financial Corp. and First Tennessee Bank, NA (incorporated herein by reference to Exhibit 10.19 from the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2003, file no. 033-44383).10.10

Letter Agreement dated June 26, 2008, between HF Financial Corp. and First Tennessee Bank, NA (incorporated herein by reference to Exhibit 10.10 from the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2008, file no. 033-44383).10.11

Commitment Letter/Letter Agreement effective May 15, 2009, between HF Financial Corp. and FTN Financial Group (incorporated herein by reference to Exhibit 10.1 from the Company's Current Report on Form 8-K
dated May 15, 2009, and filed with the SEC on May 21, 2009, file no. 033-44383).10.12
+
HF Financial Corp. 1991 Stock Option and Incentive Plan (incorporated herein by reference to the exhibits from the Company's Annual Report on Form 10-K405 for the fiscal year ended June 30, 1993, file
no. 033-44383).10.13
+
Amendment No. 1 to the HF Financial Corp. 1991 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.6 from the Company's Annual Report on Form 10-K405 for the fiscal year ended
June 30, 1997, file no. 033-44383).10.14
+
HF Financial Corp. 1996 Director Restricted Stock Plan (incorporated herein by reference to Exhibit 10.7 from the Company's Annual Report on Form 10-K405 for the fiscal year ended June 30, 1997, file
no. 033-44383).10.15
+
HF Financial Corp. 2002 Stock Option and Incentive Plan (incorporated herein by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A, filed with the SEC on October 15, 2002,
file no. 033-44383).10.16
+
Amendment No. 1 to the HF Financial Corp. 2002 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.16 from the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2009, file no. 033-44383).


155

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Table of Contents

Exhibit
Number

Description10.17
+
Form of HF Financial Corp. 2002 Stock Option and Incentive Plan Stock Appreciation Rights Agreement (incorporated herein by reference to Exhibit 10.1 from the Company's Current Report on Form 8-K dated
September 13, 2006, and filed with the SEC on September 19, 2006, file no. 033-44383).10.18
+
Form of HF Financial Corp. 2002 Stock Option and Incentive Plan Stock Option Agreement (incorporated herein by reference to Exhibit 10.1 from the Company's Current Report on Form 8-K dated September 26,
2005, and filed with the SEC on September 30, 2005, file no. 033-44383).10.19
+
Restated Employment Agreement, made and entered into as of December 31, 2008, between Home Federal Bank and Curtis L. Hage (incorporated herein by reference to Exhibit 10.1 from the Company's Current Report on
Form 8-K dated December 31, 2008, and filed with the SEC on January 7, 2009, file no. 033-44383).10.20
+
Restated Change-in-Control Agreement, made and entered into as of December 31, 2008, between Home Federal Bank and Curtis L. Hage (incorporated herein by reference to Exhibit 10.3 from the Company's Current
Report on Form 8-K dated December 31, 2008, and filed with the SEC on January 7, 2009, file no. 033-44383).10.21
+
Form of Restated Employment Agreement, made and entered into as of December 31, 2008, between Home Federal Bank and each of Darrel L. Posegate, David A. Brown, Jon M. Gadberry, Brent R. Olthoff, Natalie A. Sundvold
and Stephen M. Bianchi (incorporated herein by reference to Exhibit 10.2 from the Company's Current Report on Form 8-K dated December 31, 2008, and filed with the SEC on January 7, 2009, file no. 033-44383).10.22
+
Restated Change-in-Control Agreement, made and entered into as of December 31, 2008, between Home Federal Bank and Darrel L. Posegate (incorporated herein by reference to Exhibit 10.4 from the Company's Current
Report on Form 8-K dated December 31, 2008, and filed with the SEC on January 7, 2009, file no. 033-44383).10.23
+
Restated Change-in-Control Agreement, made and entered into as of December 31, 2008, between Home Federal Bank and David A. Brown (incorporated herein by reference to Exhibit 10.5 from the Company's Current
Report on Form 8-K dated December 31, 2008, and filed with the SEC on January 7, 2009, file no. 033-44383).10.24
+
Form of Restated Change-in-Control Agreement, made and entered into as of December 31, 2008, between Home Federal Bank and each of Jon M. Gadberry, Brent R. Olthoff, Natalie A. Sundvold and Stephen M. Bianchi
(incorporated herein by reference to Exhibit 10.6 from the Company's Current Report on Form 8-K dated December 31, 2008, and filed with the SEC on January 7, 2009, file no. 033-44383).10.25
+
Home Federal Bank Amended and Restated Deferred Compensation Agreement for Curtis L. Hage, made December 31, 2008, by and between Home Federal Bank and Curtis L. Hage (incorporated herein by reference to
Exhibit 10.7 from the Company's Current Report on Form 8-K dated December 31, 2008, and filed with the SEC on January 7, 2009, file no. 033-44383).10.26
+
HF Financial Corp. Excess Pension Plan for Executives (as amended and restated effective January 1, 2009) (incorporated herein by reference to Exhibit 10.8 from the Company's Current Report on Form 8-K
dated December 31, 2008, and filed with the SEC on January 7, 2009, file no. 033-44383).


156

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Table of Contents

Exhibit
Number

Description10.27
+
Home Federal Bank Short-Term Incentive Plan (as amended and restated effective July 1, 2008) (incorporated herein by reference to Exhibit 10.9 from the Company's Current Report on Form 8-K dated
December 31, 2008, and filed with the SEC on January 7, 2009, file no. 033-44383).10.28
+
Home Federal Bank Fifth Amended and Restated Long-Term Incentive Plan (as amended and restated effective July 1, 2008) (incorporated herein by reference to Exhibit 10.10 from the Company's Current Report on
Form 8-K dated December 31, 2008, and filed with the SEC on January 7, 2009, file no. 033-44383).10.29
+
Form of Letter Agreement with Senior Executive Officers (incorporated herein by reference to Exhibit 10.2 from the Company's Current Report on Form 8-K dated November 20, 2008, and filed with the SEC on
November 24, 2008, file no. 033-44383).10.30
+
Form of Waiver executed by Senior Executive Officers (incorporated herein by reference to Exhibit 10.3 from the Company's Current Report on Form 8-K dated November 20, 2008, and filed with the SEC on
November 24, 2008, file no. 033-44383).10.31

Letter Agreement, dated November 21, 2008, including Securities Purchase AgreementStandard Terms incorporated by reference therein, between HF Financial Corp. and the United States Department of the Treasury
(incorporated herein by reference to Exhibit 10.1 from the Company's Current Report on Form 8-K dated November 20, 2008, and filed with the SEC on November 24, 2008, file no. 033-44383).10.32

Repurchase Letter Agreement, dated June 3, 2009, between HF Financial Corp. and the United States Department of the Treasury (incorporated herein by reference to Exhibit 10.1 from the Company's Current Report on
Form 8-K dated June 3, 2009, and filed with the SEC on June 4, 2009, file no. 033-44383).10.33

Warrant Repurchase Letter Agreement, dated June 30, 2009, between HF Financial Corp. and the United States Department of the Treasury (incorporated herein by reference to Exhibit 10.1 from the Company's Current
Report on Form 8-K dated June 30, 2009, and filed with the SEC on June 30, 2009, file no. 033-44383).10.34

Loan Agreement, dated September 30, 2009, by and between the Company and United Bankers' Bank (incorporated herein by reference to Exhibit 10.1 from the Company's Current Report on 8-K dated September 30,
2009, and filed with the SEC on October 6, 2009, file no. 033-44383).10.35

Promissory Note, dated September 30, 2009, payable to United Bankers' Bank (incorporated herein by reference to Exhibit 10.2 from the Company's Current Report on 8-K dated September 30, 2009, and filed with
the SEC on October 6, 2009, file no. 033-44383).10.36

Commercial Pledge Agreement, dated September 30, 2009, by and between the Company and United Bankers' Bank (incorporated herein by reference to Exhibit 10.3 from the Company's Current Report on 8-K dated
September 30, 2009, and filed with the SEC on October 6, 2009, file no. 033-44383). Home Federal Bank Short-Term Incentive Plan (as amended and restated effective July 1, 2010).10.37
+
Home Federal Bank Short-Term Incentive Plan (as amended and restated effective July 1, 2010).10.38
+
Home Federal Bank Sixth Amended and Restated Long-Term Incentive Plan (as amended and restated effective July 1, 2010).


157

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Exhibit
Number

Description10.39
+
Revised Employment Agreement by and among Home Federal Bank and Curtis L. Hage (incorporated herein by reference to Exhibit 10.1 from the Company's Current Report on 8-K dated July 22, 2010 and filed with the
SEC on July 22, 2010, file no. 033-44383).21.1
*
Subsidiaries of Registrant.23.1
*
Consent of Independent Registered Accounting Firm.24.1
*
Power of Attorney (set forth on the signature page).31.1
*
Certification of Chairman, President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
*
Certification of Executive Vice President, Chief Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
**
Certification of Chairman, President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
**
Certification of Executive Vice President, Chief Financial Officer and Treasurer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*Filed
herewith.**Furnished
herewith.+Indicates
a management contract or compensation plan.


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Index of Attached Exhibits

Exhibit
Number10.37

Home Federal Bank Short-Term Incentive Plan (as amended and restated effective July 1, 2010).10.38

Home Federal Bank Sixth Amended and Restated Long-Term Incentive Plan (as amended and restated effective July 1, 2010).21.1

Subsidiaries of Registrant.23.1

Consent of Independent Registered Accounting Firm.31.1

Certification of Chairman, President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Executive Vice President, Chief Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Chairman, President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Executive Vice President, Chief Financial Officer and Treasurer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


159

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