Use these links to rapidly review the documentAnnual Report on Form 10-K Table of Contents TABLE OF CONTENTS



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, 2009ORo

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, 2008, was approximately $51.6 million.

As
of September 17, 2009, there were 4,044,418 shares of the registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information regarding (i) compliance with Section 16(a) of the Exchange Act, the code of ethics, director nominations and the audit committee and
the audit committee financial expert called for in Item 10 of Part III of this report and (ii) principal accounting fees and services and the pre-approval policies and
procedures of the Audit Committee called for in Item 14 of Part III of this report, are incorporated by reference herein from the registrant's definitive proxy statement to be delivered
to stockholders in connection with the 2009 Annual Meeting of Stockholders to be held on November 18, 2009.



---





Table of Contents



Annual Report on Form 10-K  Table of Contents



Page
NumberPART IItem 1.

Business

3Item 1A.

Risk Factors

39Item 1B.

Unresolved Staff Comments

51Item 2.

Properties

51Item 3.

Legal Proceedings

51Item 4.

Submission of Matters to a Vote of Security Holders

51PART IIItem 5.

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

52Item 6.

Selected Financial Data

55Item 7.

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

57Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

82Item 8.

Financial Statements and Supplementary Data

84Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

139Item 9A.

Controls and Procedures

139Item 9B.

Other Information

139PART IIIItem 10.

Directors, Executive Officers and Corporate Governance

140Item 11.

Executive Compensation

144Item 12.

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

172Item 13.

Certain Relationships and Related Transactions, and Director Independence

175Item 14.

Principal Accounting Fees and Services

176PART IVItem 15.

Exhibits and Financial Statement Schedules

177


---





Table of Contents

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:



1

---



Table of Contents



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.

2

---



Table of Contents

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") issued in the mutual to stock conversion of the Bank. 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.

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, 2009, the trust department of the Bank maintained approximately $77.5 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.

3

---



Table of Contents

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.

Subsidiary Activities

In addition to the Bank, the Company had six other wholly-owned subsidiaries as of June 30, 2009: 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 2009. HF Group has an approved line of credit with the Company of $100,000,
with no funds advanced as of June 30, 2009. Intercompany interest income and interest expense are 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 2008 and fiscal 2009.

4

---



Table of Contents

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 five 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").

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. As of June 30, 2009, the Bank had advanced $40,000 on an approved line of credit of $100,000. Intercompany interest income and
interest expense are eliminated in the preparation of consolidated financial statements.

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, 2009, Mid America Capital had advanced $13.4 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.

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 2008 and fiscal 2009.

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 2008 and fiscal 2009.

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 2008 and fiscal 2009.

Market Area

Based on total assets at June 30, 2009, 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.

5

---



Table of Contents

Business Strategy

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



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

6

---



Table of Contents

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 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

7

---



Table of Contents

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, 2009 was $400.3 million, has not materially limited the Bank's lending practices.

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 $15.5 million at June 30, 2009. 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 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.
These construction loans have rates and terms which match the one- to four-family residential mortgage loans offered by the Bank. 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
Treasury Note maturity.

Construction
loans are generally originated with a maximum loan-to-value ratio of 80%, 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

8

---



Table of Contents

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.

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 10-, 15-, 20- and 30-year fixed- and adjustable-rate ("ARM") one- to
four-family residential mortgage loans at loan-to-value ratios consistent with FNMA/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 having 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 10- 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 Bank is the largest
servicer of loans for the SDHDA. At June 30, 2009, the Bank serviced $930.8 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

9

---



Table of Contents

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 on-line 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.

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.

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 less than 100% of the appraised or assessed value of the property securing the
loan and generally have maximum terms that do not exceed 10 to 15 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

10

---



Table of Contents

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 a five-state 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 upper Midwest. Mid America Capital offers three types of commercial leases: capital, tax and terminal rental adjustment clause ("TRAC") leases. TRAC leases are
generally for medium- to heavy-duty titled equipment, such as semi-tractors and trailers and medium- to heavy-duty trucks. Leases may be structured with a
contracted residual value of as little as $1.00 up to 20% to 25% of the equipment cost. 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.

11

---





Table of Contents

Loan and Lease Portfolio Composition.Over the past several years, the Company has transformed the loan and lease portfolio away 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 from 59.17% of its total loan and lease portfolio at June 30, 2008 to 65.04% at June 30,
2009, while its one- to- four family residential and consumer loan portfolio has decreased from 31.90% of its total loan and lease portfolio to 26.20% over that period.
Nevertheless, the Company continues to prioritize and invest in mortgage lending as it believes this to be a core component of its personal banking strategy.

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 30,2009

2008

2007

2006

2005Amount

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)

$
94,237


10.59
%
$
108,546


13.36
%
$
125,525


15.97
%
$
108,342


14.57
%
$
106,832


15.46
%Multi-family


49,054


5.51


46,118


5.68


34,126


4.34


34,161


4.59


34,241


4.95Commercial business and real estate(2)(3)


337,477


37.90


310,378


38.20


281,357


35.79


248,060


33.35


223,812


32.39Agricultural real estate


102,676


11.53


78,043


9.60


48,030


6.11


31,484


4.23


23,954


3.47Construction


12,827


1.44


8,286


1.02


18,674


2.38


33,596


4.52


15,454


2.24Equipment finance leases(2)


15,880


1.78


19,250


2.37


22,267


2.83


29,343


3.95


33,090


4.79Agricultural business


134,331


15.09


91,934


11.31


69,608


8.86


57,985


7.80


50,088


7.25Consumer Loans:Automobile


36,359


4.08


58,807


7.24


98,238


12.50


106,900


14.37


108,621


15.72Deposit account


1,645


0.19


1,580


0.19


1,772


0.23


1,553


0.21


1,253


0.18Student(4)


5,993


0.67


614


0.08


263


0.03


420


0.06


400


0.06Junior liens on mortgages


91,570


10.28


81,250


10.00


79,113


10.06


84,898


11.42


87,243


12.63Other


8,367


0.94


7,727


0.95


7,079


0.90


6,932


0.93


5,968


0.86Total consumer loans


143,934


16.16


149,978


18.46


186,465


23.72


200,703


26.99


203,485


29.45Total gross loans and leases


890,416


100.00
%

812,533


100.00
%

786,052


100.00
%

743,674


100.00
%

690,956


100.00
%Less:Undisbursed portion of loans in process


(23,791
)




(19,834
)




(10,387
)




(9,674
)




(6,350
)Deferred fees and discounts


(462
)




(193
)




582





883





1,289Allowance for losses


(8,470
)




(5,933
)




(5,872
)




(5,657
)




(5,076
)Total loans and leases receivable, net

$
857,693




$
786,573




$
770,375




$
729,226




$
680,819


---

12

---





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 30,2009

2008

2007

2006

2005Amount

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)

$
68,547


7.70
%
$
76,392


9.40
%
$
89,086


11.33
%
$
70,341


9.46
%
$
65,605


9.49
%Multi-family, commercial & construction(2)(3)


85,951


9.65


107,511


13.23


121,046


15.40


115,939


15.59


70,121


10.14Agricultural real estate


23,552


2.64


23,841


2.93


13,591


1.73


9,495


1.28


4,096


0.59Consumer(4)


93,546


10.51


110,702


13.63


146,686


18.66


151,354


20.35


141,942


20.54Agricultural business


24,988


2.81


17,020


2.09


14,007


1.78


6,673


0.90


6,759


0.98Equipment finance leases(2)


15,880


1.78


19,250


2.37


22,267


2.83


29,343


3.95


33,090


4.79Total fixed-rate loans and leases


312,464


35.09


354,716


43.65


406,683


51.73


383,145


51.53


321,613


46.53Adjustable-Rate Loans:One- to four-family(1)


25,690


2.88


32,154


3.96


36,439


4.64


38,001


5.11


41,227


5.97Multi-family, commercial & construction


313,407


35.20


257,271


31.67


213,111


27.12


199,878


26.87


203,386


29.44Agricultural real estate


79,124


8.89


54,202


6.67


34,439


4.38


47,770


6.42


19,858


2.87Consumer(4)


50,388


5.66


39,276


4.83


39,779


5.06


49,349


6.64


61,543


8.92Agricultural business


109,343


12.28


74,914


9.22


55,601


7.07


25,531


3.43


43,329


6.27Total adjustable-rate loans


577,952


64.91


457,817


56.35


379,369


48.27


360,529


48.47


369,343


53.47Total loans and leases


890,416


100.00
%

812,533


100.00
%

786,052


100.00
%

743,674


100.00
%

690,956


100.00
%Less:Undisbursed portion of loans in process


(23,791
)




(19,834
)




(10,387
)




(9,674
)




(6,350
)Deferred fees and discounts


(462
)




(193
)




582





883





1,289Allowance for loan and lease losses


(8,470
)




(5,933
)




(5,872
)




(5,657
)




(5,076
)Total loans and leases receivable, net

$
857,693




$
786,573




$
770,375




$
729,226




$
680,819


---

13

---



Table of Contents

The following schedule illustrates the scheduled principal contractual repayments of the Company's loan and lease portfolio at June 30, 2009. 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

$
5,993

$
4,806

$
40,953

$
12,380

$
8,739

$
35,525

$
84,832

$
113,180

$
306,408Due in 1 to 5 years


18,443


15,474


64,268


25,446


2,746


89,745


32,597


18,989


267,708Due 5 years or greater


69,801


28,774


116,025


64,850


1,342


18,664


14,682


2,162


316,300Total

$
94,237

$
49,054

$
221,246

$
102,676

$
12,827

$
143,934

$
132,111

$
134,331

$
890,416


---

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 30,2009

2008

2007

2006

2005(Dollars in Thousands)One-to four-family

$
(500
)
$
(599
)
$
(691
)
$
(616
)
$
(576
)Multi-family, commercial real estate & construction


(252
)

(232
)

(276
)

(348
)

(278
)Consumer


16


44


103


113


122Agricultural


(99
)

(70
)

(44
)

(32
)

(32
)Equipment finance leases


131


39


40


63


80Commercial business


28


21


14


5


(15
)Dealer reserve


214


604


1,436


1,698


1,988Total deferred fees and discounts

$
(462
)
$
(193
)
$
582

$
883

$
1,289


Deferred
fees and discounts on loans and leases have trended to a net deferred cost position. In fiscal year 2009, the net deferred fees and discounts on loans and leases decreased by
$269,000. This decrease was primarily due to a $390,000 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

---



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, 2009, the Company had designated $21.0 million of its assets as special mention and $30.0 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, 2009, approximately 89.6% of our investment portfolio was in AAA-rated, liquid
residential mortgage-backed securities. Our $199.6 million of residential mortgage-backed securities at June 30, 2009 consisted of agency securities, with a single $1.8 million
private label collateralized mortgage obligation security.

15

---



Table of Contents

At
June 30, 2009, the Company's investments in residential mortgage-backed securities totaled $199.6 million, or 17.0% of its total assets. As of such date, the Bank also
had a $12.5 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, 2009Less 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

$
1,121


4.70
%
$
1,511


4.99
%
$




%
$




%
$
2,632

$
2,671Municipal bonds


1,203


2.62


3,403


3.57


7,033


3.85


2,717


4.03


14,356


14,301Trust preferred securities




















11,879


2.81


11,879


6,051Residential mortgage-backed securities








1,419


5.32


32,072


5.60


163,213


4.51


196,704


199,632Total investment securities

$
2,324




$
6,333




$
39,105




$
177,809




$
225,571

$
222,655


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 $137.3 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 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, 2009, the Company had $222.9 million of securities available for sale, including residential mortgage-backed securities of
$199.6 million. See Note 2 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 information on the Company's investment portfolio.

16

---



Table of Contents

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, 2009, 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 30,2009

2008

2007Amount

Percent of
Total

Amount

Percent of
Total

Amount

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

$
94,067


11.23
%
$
90,598


11.55
%
$
86,679


10.62
%Interest bearing accounts weighted average rates of .15%, .64% and 1.97% at June 30, 2009, 2008 and 2007


94,846


11.32


90,125


11.49


87,030


10.67Savings accounts weighted average rates of .35%, 1.46% and and 3.26% at June 30, 2009, 2008 and 2007


81,417


9.72


78,575


10.02


66,235


8.12Money market accounts weighted average rates of .64%, 1.53% and 3.84% at June 30, 2009, 2008 and 2007


145,214


17.33


171,689


21.89


212,546


26.05Total transaction accounts


415,544


49.60


430,987


54.95


452,490


55.46In-Market Certificates of Deposit:0.00 - 1.99%


91,971


10.98


1,069


0.14


11


0.002.00 - 2.99%


87,130


10.40


64,598


8.23


3,699


0.453.00 - 3.99%


109,339


13.05


58,781


7.50


41,677


5.114.00 - 4.99%


81,817


9.76


106,627


13.60


78,457


9.625.00 - 5.99%


30,922


3.69


94,727


12.08


167,710


20.566.00 - 6.99%


112


0.01


193


0.02


304


0.04Total in-market certificates of deposit


401,291


47.89


325,995


41.57


291,858


35.78Out-of-market certificates of deposit weighted average rate of 1.32%, 2.98% and 5.10% at June 30, 2009, 2008 and 2007


21,033


2.51


27,255


3.48


71,516


8.76Total certificates of deposit


422,324


50.40


353,250


45.05


363,374


44.54Total deposits

$
837,868


100.00
%
$
784,237


100.00
%
$
815,864


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, 2009.

MaturityLess Than
3 Months

3 to 6
Months

6 to 12
Months

Over
12 Months

TotalCertificates of deposit less than $100,000(1)

$
44,815

$
32,252

$
64,096

$
63,558

$
204,721Certificates of deposit of $100,000 or more


17,497


42,600


61,465


22,274


143,836Out-of-market certificates of deposit(2)


3,072


1,724


5,746


10,491


21,033Public funds(3)(4)


9,661


21,501


20,392


1,180


52,734Total certificates of deposit

$
75,045

$
98,077

$
151,699

$
97,503

$
422,324


---

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, 2009, and 2008 included $78.1 million and $76.5 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, 2009, the Bank's FHLB advances totaled $207.2 million, representing 18.7% of total liabilities.

The
Company has a line of credit for $6.0 million with First Tennessee Bank, NA for liquidity needs. Outstanding advances were $5.5 million and $0 at June 30, 2009
and 2008, respectively. The Company pledged 25% of the stock of the Bank as collateral upon drawing on the line of credit. The line of credit matures 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.

19

---



Table of Contents

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 30,2009

2008

2007(Dollars in Thousands)Maximum Month-End Balance:FHLB and FRB advances

$
307,562

$
244,040

$
131,975Other borrowings


5,719


180


100Average Balance:FHLB and FRB advances

$
231,587

$
152,140

$
106,150Other borrowings


619


149


2


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 30,2009

2008

2007(Dollars in Thousands)Overnight federal funds purchased

$
26,495

$
29,920

$
Fixed-rate FHLB advances


180,655


168,355


68,500Other borrowings


5,719


179


100Total borrowings

$
212,869

$
198,454

$
68,600Weighted average interest rate of borrowings


3.63
%

3.88
%

4.78
%


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 our 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, 2009, the Bank had a total of 323 full-time equivalent employees ("FTEs") including 7 FTEs 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.

20

---



Table of Contents

Regulation

General

The Bank is a federally chartered thrift institution, the deposits of which are federally insured by the FDIC under the Deposit
Insurance Fund (the "DIF"). Accordingly, the Bank is subject to broad federal regulation and oversight extending to all its operations by its primary federal regulator, the OTS, and by its deposit
insurer, the FDIC. 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. 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.

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 of 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.

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, 2009, was approximately $240,000.

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 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.

21

---



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

22

---



Table of Contents

range
of regulatory requirements and restrictions. Under the OTS regulations, generally, a federally chartered savings bank is 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, 2009, the Bank met the criteria for being considered "well-capitalized."

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.

Loan and Investment Powers

The Bank derives its lending and investment powers from the Home Owners' Loan Act ("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, 2009, the Bank met the 10% leasing limitation with 1.36% 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, 2009, the Bank met the 20% limitation on commercial and agricultural loans and leases with such loans and leases equal to 15.58% 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,
2009, the Bank's lending limit under this restriction was $15.5 million.

23

---



Table of Contents

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. All other deposits are presently insured up to $250,000 per depositor until December 31, 2013. This federal deposit insurance coverage limit was temporarily raised from
$100,000 to its current level under the Emergency Economic Stabilization Act of 2008, and on May 20, 2009, this temporary insurance limit was extended from an original termination date of
December 31, 2009 to December 31, 2013. FDIC insurance of deposits is backed by the full faith and credit of the U.S. government. As 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. In its regulations implementing the Deposit Insurance Fund Act, the FDIC set the current annual
designated reserve ratio for the DIF at 1.25%.

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 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 is implementing a
final rule that sets assessment rates and makes adjustments based on risk. Under the final rule, banks in the lowest risk category will 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); but this may be further adjusted to
between 7 and 24 basis points of assessable deposits for banks holding unsecured debt, certain secured liabilities and brokered deposits beyond a certain amount. Banks in the highest risk category
will 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, certain secured liabilities and brokered deposits. The FDIC also has the ability 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 will be collected 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 during 2009. The FDIC has indicated that it is probable that an additional special assessment will be necessary in the fourth calendar quarter of 2009.

24

---



Table of Contents

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, 2009, was 0.1248% and the premium paid for Fiscal 2009 was $563,000. In addition, the Bank accrued $266,000 for the
fourth quarter assessment and accrued $536,000 for a special assessment payable September 30, 2009. 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.

25

---



Table of Contents

At June 30, 2009, 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

$
100,074


8.50
%Tier 1 (core) capital

$
99,067


8.45
%Required


46,910


4.00Excess over requirement

$
52,157


4.45
%Total risk-based capital

$
107,252


11.05
%Required


77,666


8.00Excess over requirement

$
29,586


3.05
%






The
Federal Deposit Insurance Corporation Improvement Act, or the 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 the expected
future cash flows of an entity's assets and liabilities 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 banks. 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 Bank must file an
application for prior approval 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:



26

---



Table of Contents



During
the fiscal year ended June 30, 2009, the Bank paid cash dividends to the Company totaling $2.4 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) in states that expressly authorize branches of savings associations located in another state or
(ii) to an association that 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." This 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, or CRA, as implemented by the 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,
ATMs and other offices.

Qualified Thrift Lender Test

Under the HOLA, the Bank must comply with the qualified thrift lender test, or the 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

27

---



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, 2009, the Bank held 75.20% 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, 2009, and thus qualified under the QTL test. The Bank has met the QTL test since its inception.

A
savings bank 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

The Bank's authority to engage in transactions with its "affiliates" is limited by the OTS regulations, Sections 22(g), 22(h),
23A and 23B of the Federal Reserve Act, or the FRA, and Regulation W issued by the Federal Reserve, 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 bank from extending credit to, or
entering into certain transactions with, its affiliates and principal stockholders, directors and executive officers.

In
addition, the OTS regulations include additional restrictions on savings banks under Section 11 of the HOLA, including provisions prohibiting a savings bank from making a loan
to an affiliate that is engaged in non-bank holding company activities 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 Federal Reserve 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.

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 the insider lending restrictions of
Section 22(h) of the FRA.

The
aggregate amount of covered transactions with any individual affiliate is limited to 10% of the unimpaired capital and surplus of the savings institution. The aggregate amount of
covered transactions with all affiliates is limited to 20% of the savings institution'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.

28

---



Table of Contents

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 recently 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 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

29

---



Table of Contents

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:



Identity Theft Prevention

The federal banking agencies, including the OTS, finalized 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

30

---



Table of Contents

identity
theft in connection with the opening of certain accounts or certain existing accounts. The rule became effective January 1, 2008 and mandatory compliance commenced on
November 1, 2008.

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, 2009, the trust department of the Bank maintained approximately $77.5 million in assets under management.

Federal Reserve System

Under Federal Reserve regulations, the Bank is required to maintain noninterest-earning reserves against its transaction accounts.
Federal Reserve regulations generally require that (i) reserves of 3% must be maintained against aggregate transaction account balances of $44.4 million or less, subject to adjustment by
the Federal Reserve, and (ii) a reserve of 10% must be maintained against that portion of total transaction accounts in excess of $44.4 million. The first $10.3 million of
otherwise reservable balances are exempted from the reserve requirements. The Bank was in compliance with these reserve requirements at June 30, 2009. 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 Federal Reserve, the effect of this
reserve
requirement is to reduce the Bank's interest-earning assets to the extent that the requirement exceeds vault cash.

31

---





Table of Contents

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, 2009, the Bank had $12.5 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, 2009, dividends paid by the FHLB of Des Moines to the Bank totaled approximately $269,000, which constitutes a $35,000 decrease in the
amount of dividends received in fiscal 2008.

Anti-Money Laundering / 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. Further, certain provisions of Title III of the USA PATRIOT Act impose affirmative obligations on a broad range of financial institutions, 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:



32

---



Table of Contents



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 bank. Unlike bank holding companies, a savings and loan holding company is not subject to any regulatory capital requirements of, or to supervision by, the Federal Reserve.

"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:



33

---



Table of Contents



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

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.

Developments in Regulation of the Financial Sector

In response to the ongoing 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 U.S. financial institutions.

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, which include residential or commercial
mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008. The term
"troubled assets" also included any other financial instrument that the Secretary, after consultation with the Chairman of the Federal Reserve determines the purchase of which is necessary to promote
financial market stability, upon transmittal of such determination in writing, to the appropriate committees of the U.S. Congress.

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"), which is a new capital program under the Treasury's Financial Stability Plan. The purpose of
the CAP is to

34

---



Table of Contents

restore
confidence throughout the financial system by ensuring that the nation's largest banking institutions 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 does not replace the CPP and is open to qualifying institutions regardless of whether they
participated in the CPP. The deadline to apply for the CAP has been extended to November 9, 2009. We have not applied for the CAP. Recipients of CAP funding issue mandatory convertible
preferred stock to the Treasury and are subject to requirements governing executive compensation and corporate governance for the entire period during which the Treasury holds equity issued under the
CAP.

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 ("TLG") 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 non-interest bearing transaction accounts through December 31, 2009, which was extended to June 30, 2010.

The
Debt Guarantee Program ("DGP") component of the TLG program provides liquidity to the inter-bank lending market and promotes stability in the unsecured funding market.
Under the DGP, the FDIC temporarily guarantees all newly issued senior unsecured debt up to prescribed limits. In general, the maximum amount of outstanding debt that is guaranteed under the DGP for
each participating entity at any time is limited to 125 percent of the par value of the participating entity's senior unsecured debt. The DGP ensures that such debt would be fully protected in
the event the issuing institution subsequently fails or its holding company files for bankruptcy. Entities that did not wish to participate in the DGP had to opt out by December 5, 2008. We did
not opt out of the DGP. On June 3, 2009, the FDIC issued a final rule providing a limited four-month extension for the issuance of debt under the DGP until October 31, 2009.
For debt issued on or after April 1, 2009, FDIC-guarantee of senior unsecured debt expires on the earliest of the mandatory conversion date for mandatory convertible debt, the
stated date of maturity, or December 31, 2012. Proposed alternatives for phasing out the DGP is currently the subject of a notice of proposed rulemaking issued by the FDIC.

Under
the Transaction Account Guarantee Program ("TAGP") component of the TLG program, non-interest bearing transaction accounts are fully insured through December 31,
2009. On August 26, 2009, the FDIC adopted a final rule extending the TAGP for six months, through June 30, 2010. For institutions choosing to remain in the program for the extended
period, the annual assessment rate that will apply to such institutions during the extension period will be 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. Any institution currently participating in
the TAGP that wishes to opt out of the TAGP extension must submit its opt-out election to the FDIC on or before November 2, 2009.

Non-interest
bearing transaction accounts are any deposit accounts with respect to which interest is neither accrued nor paid and on which the insured depository institution
does not reserve the right to require advance notice of an intended withdrawal, including traditional demand deposit checking accounts that allow for an unlimited number of deposits and withdrawals at
any time. Transaction accounts do not include interest-bearing money market deposit accounts or sweep arrangements that

35

---



Table of Contents

result
in funds being placed in an interest-bearing account as the result of the sweep. The unlimited guarantee under the TAGP is in addition to, and separate from, the general deposit insurance
coverage provided for under the DIF, currently at $250,000 per depositor, per institution until December 31, 2013. We have opted to participate in the TAGP and as such are bound by the
requirements of the program, including the quarterly payment of an annualized 10 basis point 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."

Term Asset-Backed Securities Loan Facility

Under the Term Asset-Backed Securities Loan Facility ("TALF"), the Federal Reserve Bank of New York will 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 TALF has the potential to generate up to $1 trillion of lending for businesses and households. Any U.S. company that owns eligible collateral may borrow from the TALF, provided the
company maintains an account relationship with a primary dealer. The facility will cease 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, unless the Federal Reserve Board extends the
facility.

Unfair and Deceptive Practices

On January 29, 2009, the OTS, along with other federal banking agencies ("the Agencies") issued a joint final rule under
Section 5 of the Federal Trade Commission Act, or the
FTC Act, that provides clarification to the body of law surrounding unfair or deceptive acts or practices. In adopting the rule, the Agencies drew on the statutory definition of what constitutes an
"unfair" act or practice under the FTC Act, and also drew on the definition of what constitutes a "deceptive" act or practice under applicable FTC guidance. The Agencies identified five credit card
practices that they conclusively determined to be unfair, and therefore unlawful under the FTC Act. Furthermore, the Agencies reserved the right to regulate all other unfair or deceptive acts or
practices of depository institutions on a case-by-case basis. The effective date of the final rule is July 1, 2010. As discussed below, however, recently enacted
legislation overrides any provisions of the final rule that are inconsistent with the legislation, including effective dates. Therefore, to the extent that any provision of the final rule does not
conform to the enacted legislation or the applicable deadlines, such provisions are no longer applicable.

Truth-in-Lending Act Amendments

On January 29, 2009, the Federal Reserve also issued a final rule amending Regulation Z (which implements the
Truth-in-Lending Act) to revise the disclosures that consumers receive in connection with credit card accounts and other revolving credit plans. The final rule requires changes
to the format, timing, and content requirements for credit card applications and solicitations and for the disclosures that consumers receive with regard to open-end accounts. Under the
final rule, affected institutions have until July 1, 2010 to comply with the new rules. However, as discussed in the next paragraph, recently enacted legislation amends the
Truth-in-Lending Act. Therefore, to the extent that the Federal Reserve's regulatory amendments to Regulation Z do not conform to the legislative amendments to the
Truth-in-Lending Act or the applicable deadlines, such provisions are no longer applicable.

On
May 22, 2009, President Obama signed into law the Credit Card Accountability Responsibility and Disclosure Act of 2009, or the Credit CARD Act. The Credit CARD Act amends
various acts,

36

---



Table of Contents

including
the Fair Credit Reporting Act, the Electronic Fund Transfer Act and the Truth-in-Lending Act. The Credit CARD Act also covers many of the practices addressed in the
joint final rule issued by the Agencies relating to unfair and deceptive acts or practices, as well as the Federal Reserve's final rule relating to Regulation Z amendments. The Credit CARD Act
overrides any inconsistent provisions of the final rules promulgated by the Agencies, including the Federal Reserve.

Truth in Savings Act Regulatory Amendments

In conjunction with issuing the joint, final rule regarding unfair or deceptive acts or practices, the Federal Reserve also 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, 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 Bank has until January 1, 2010 to comply with the amendments.

Proposed Legislative and Regulatory Actions

On June 17, 2009, the Treasury issued a white paper detailing the Obama Administration's plans for reorganizing the regulatory
system for financial institutions and their holding companies. The proposal raises many issues for banks and savings associations. The five key objectives articulated under the proposal are to:
(i) promote robust supervision and regulation of financial firms; (ii) establish comprehensive supervision of financial markets; (iii) protect consumers and investors from
financial abuse; (iv) provide the government with the tools it needs to manage financial crises; and (v) raise international regulatory standards and improve international cooperation.
Among the ideas proposed to accomplish the objective of promoting robust supervision and regulation of financial firms is the creation of a new federal government agency, the National Bank Supervisor
(NBS), to conduct prudential supervision and regulation of all federally chartered depository institutions, and all federal branches and agencies of foreign banks. As proposed, the NBS would take over
the prudential responsibilities of the Office of the Comptroller of the Currency, which currently charters and supervises nationally chartered banks and federal branches and agencies of foreign banks,
and responsibility for the institutions currently supervised by the OTS, which supervises federally chartered thrifts and thrift holding companies. Under the proposal, the thrift charter would be
eliminated, which directly impacts all federal savings associations and their holding companies subject to the supervision of the OTS, including the Company and the Bank. Legislation to implement the
objectives of the proposal is expected.

New
statutes, regulations and guidance are regularly proposed that contain wide-ranging potential changes to the statutes, regulations and competitive relationships of
financial institutions operating and doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our
business may be affected by any new regulation or statute.

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

37

---



Table of Contents

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.

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 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, 2009, the Bank's Excess for tax purposes totaled approximately $7.6 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.

38

---



Table of Contents

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, 2009 were not material to the operation of the Company.

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 shares of our common
stock involves various risks. Before deciding to make an investment decision regarding our common stock, you should carefully consider the risks described 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. Our business, financial condition and results of operations
could be harmed by any of the following risks or by other risks that have not been identified or that the Company may believe are immaterial or unlikely. 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:



39

---



Table of Contents



There can be no assurance that recently enacted legislation will help stabilize the U.S. financial system.

Recent legislative and regulatory initiatives to address difficult market and economic conditions may not stabilize the U.S. banking
system. On October 3, 2008, the President signed into law the Emergency Economic Stabilization Act of 2008, or the Emergency Economic Stabilization Act, in response to the current crisis in the
financial sector. The Treasury and various banking regulators have implemented a number of programs under this legislation to address capital and liquidity issues in the banking system. On
February 17, 2009, the President signed into law the American Recovery and Reinvestment Act of 2009, or the American Recovery and Reinvestment Act. There can be no assurance, however, as to the
actual impact that the Emergency Economic Stabilization Act or the American Recovery and Reinvestment Act, and the various programs implemented in association with these legislative efforts, will have
on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced. The failure of the Emergency Economic Stabilization Act or American
Recovery and Reinvestment Act and the associated programs to help stabilize the financial markets and a continuation or worsening of current financial market conditions could have a material, adverse
effect on our business, financial condition, results of operations, access to credit or the value of our securities. Moreover, the Treasury recently issued a white paper detailing the Obama
Administration's plans for reorganizing the regulatory system for financial institutions, which could impact our operations significantly.

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

40

---





Table of Contents

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.

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.

At June 30, 2009, the Bank's nonperforming loans (which consist of non-accrual loans and loans still accruing but
past due greater than 90 days) totaled $11.5 million, or 1.32% of its loan portfolio. At June 30, 2009, the Bank's nonperforming assets (which include foreclosed real estate) were
$12.6 million, or 1.07% of assets. In addition, the Bank had $3.9 million in accruing loans that were 30 to 89 days delinquent at June 30, 2009. At June 30, 2009,
the Bank held $8.5 million of loan and lease loss reserves, or 0.98% of total loans, and 73.83% of non-performing loans.

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.

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

41

---



Table of Contents

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.

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

42

---



Table of Contents

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 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, including the OTS and the
FDIC, and to a limited extent, the Federal Reserve. 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.

Federal
bank regulatory agencies, as well as the U.S. Congress and the President, are in the process of evaluating the regulation of banks, other financial institutions and the financial
markets and such changes, if any, could require us to maintain more capital, liquidity and risk management that could adversely affect our growth, profitability and financial condition, as well as
change our charter, regulator and/or subject us to new or additional regulations and regulators. Furthermore, various proposals to eliminate the federal thrift charter, create a uniform financial
institutions charter and abolish the OTS have been introduced in past sessions of the U.S. Congress. We are unable to predict whether such legislation would be enacted or the extent to which the
legislation would restrict or disrupt our or the Bank's operations.

Liquidity risks could affect operations and jeopardize our financial condition.

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

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

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

On
May 15, 2009, we entered into a Commitment Letter/Letter Agreement with First Tennessee Bank National Association ("FTB"), which renewed our existing $6.0 million line
of credit. Borrowings under the line of credit accrue interest at the FTB base rate minus one-quarter percent, with a

43

---



Table of Contents

minimum
interest rate of 4.0% per annum. As of June 30, 2009, the FTB base rate was 3.25% and we had aggregate borrowings of $5.5 million outstanding under our line of credit with FTB.
The line of credit matures on September 30, 2009. To the extent we have to borrow funds from other institutional lenders to repay the line of credit, our costs of funds, profitability and
liquidity may be adversely affected.

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

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

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

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

The
Bank participates in the FDIC's Temporary Liquidity Guarantee Program, or TLG, for noninterest-bearing transaction deposit accounts. Banks that participate in the TLG's noninterest-
bearing transaction account guarantee will pay the FDIC an annual assessment of 10 basis points on the amounts in such accounts above the amounts covered by FDIC deposit insurance. To the extent that
these TLG assessments are insufficient to cover any loss or expenses arising from the TLG program, the FDIC is authorized to impose an emergency special assessment on all FDIC-insured
depository institutions. The FDIC has authority to impose charges for the
TLG program upon depository institution holding companies as well. These changes, along with the full utilization of the Bank's FDIC insurance assessment credit in the first and second quarters of
2009, have caused the premiums and TLG assessments charged by the FDIC to increase. Continued actions by the FDIC could significantly increase the Bank's noninterest expense in fiscal 2010 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 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 Federal Reserve 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. Interest rates were at historically low levels until June 2004 at which time the
Federal Reserve began increasing

44

---



Table of Contents

short-term
interest rates 17 times or 425 basis points through June 29, 2006. Beginning September 18, 2007, the Federal Reserve began an interest rate easing of 325 basis
points through April 30, 2008. During this period, a flattening and slight inversion of the treasury yield curve caused by increasing short-term rates and lagging
long-term rates had a negative impact on our net interest margin. As the yield curve assumed a more normalized slope after short-term interest rates decreased in fiscal 2008
and 2009, we experienced a positive effect to our net interest margin. In the second quarter of fiscal 2009, the Federal Reserve decreased the Fed Funds Target Rate by a total of 175 basis points on
three separate occasions. This was the first decrease in short-term interest rates since April 30, 2008. 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.

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.

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

Agricultural loans comprised 27.2% of our total loan and lease portfolio at June 30, 2009. 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.

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.

45

---



Table of Contents

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:



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.

46

---



Table of Contents

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. Messrs. Hage's and Posegate's employment agreements have a term of one year, which automatically
renew on July 1 for an additional year unless, no later than December 31 of the previous year in the case of Mr. Hage, or March 31 of the previous year in the case of
Mr. Posegate, either the Bank or the executive gives notice that the employment agreement shall not be extended.

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.

47

---



Table of Contents

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, 2009.
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 Related 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 "Forward-Looking Statements" and as follows:



48

---



Table of Contents



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.

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. For example, we may issue additional shares of common stock in public or private transactions in order to, among other things, 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.

49

---



Table of Contents

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. 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 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:



50

---



Table of Contents



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, 2009 was
$16.9 million. The Company previously announced a new facility in Watertown, South Dakota constructed in fiscal 2009, which replaces an existing branch office. Management believes there is 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.Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of stockholders, through the solicitation of proxies or otherwise, during the quarterly period ended
June 30, 2009.

51

---





Table of Contents

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 of the fiscal quarters of the two years ended June 30, 2009 and 2008.
Quotations for such periods are as reported by the NASDAQ Global Market.

FISCAL 2009

HIGH

LOW1st Quarter

$
16.30

$
12.152nd Quarter

$
14.06

$
9.003rd Quarter

$
13.50

$
10.024th Quarter

$
13.37

$
10.75




FISCAL 2008

HIGH

LOW1st Quarter

$
18.15

$
15.722nd Quarter

$
16.75

$
14.143rd Quarter

$
16.55

$
14.924th Quarter

$
18.03

$
16.00


As
of September 17, 2009, the Company had 478 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 2009. The
Company paid cash dividends on a quarterly basis of $0.1050, $0.1075, $0.1075 and $0.1075 per share in fiscal 2008. On July 27, 2009, 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 14, 2009 to stockholders of record on August 7, 2009.

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:



52

---



Table of Contents



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 First Tennessee Bank, NA, with $5.5 million outstanding at June 30, 2009. The line of credit
matures on September 30, 2009. In case of default on the line of credit, the Company's ability to pay cash dividends may be restricted.

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, 2004, $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, 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

53

---



Table of Contents

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, 2009, 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 Plan. Additionally, no
common stock remains available for future awards under the 1996 Director Restricted Stock Plan

Plan Category

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

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

Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))(1)(a)

(b)

(c)Equity plan compensation plans approved by stockholders


227,569

$
13.84


494,246Equity plan compensation plans not approved by stockholders


N/A


N/A


N/ATotal


227,569

$
13.84


494,246


---

Sales of Unregistered Stock

Except for the Company's participation in the Capital Purchase Program (the "CPP") during the second quarter of fiscal 2009, the
Company had no sales of unregistered stock during the fiscal year ended June 30, 2009. For further discussion of the Company's participation in the CPP, see Part II, Item 7
"Management's Discussion and Analysis of Financial Condition and Results of OperationsExecutive Summary" of this Form 10-K.

Issuer Purchases of Equity Securities

Period

Total
Number
of Securities
Purchased

Average
Price Paid
per Share

Total Number of
Securities Purchased
as Part of Publicly
Announced Programs

Maximum Number of
Securities that May Yet
Be Purchased Under
the Current ProgramApril 1 - 30, 2009




$
0.00





May 1 - 31, 2009




$
0.00





June 1 - 30, 2009




$
0.00





4th Quarter Total




$
0.00





The
Company had in effect a stock buy back program which was publicly announced on April 28, 2008, in which the Company was permitted to repurchase up to 10% of the common stock
of the Company that was outstanding on May 1, 2008, which equaled 395,321 shares. In conjunction with the Company's participation in the CPP, the Company's Board of Directors terminated the
stock buyback program in the second quarter of fiscal year 2009. A total of 6,527 shares were purchased under this

54

---



Table of Contents

program
during fiscal year 2008. The Company did not repurchase any shares of its common stock through the stock buyback program or otherwise during fiscal year 2009.

During
the fourth quarter of the 2009 fiscal year, the Company discontinued its participation in the CPP and entered into a Repurchase Letter Agreement with the Treasury pursuant to
which we completed the repurchase of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the "Preferred Stock") from the Treasury. The repurchase price of our Preferred Stock was
$25.0 million, plus a final accrued dividend of $62,500. Also during the fourth quarter of fiscal year 2009, the Company entered into a Warrant Repurchase Letter Agreement with the Treasury
pursuant to which we repurchased the related warrant from the Treasury for a purchase price of $650,000. For further discussion of the Company discontinuing its participation in the CPP, see
Part II, Item 7 "Management Discussion and AnalysisExecutive Summary" of this Form 10-K.

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 2005 through 2009 have been derived from audited consolidated financial statements, which have been audited by
Eide Bailly, LLP, independent public accountants.

At June 30,2009

2008

2007

2006

2005(Dollars in Thousands)Selected Statement of Financial Condition Data:Total assets

$
1,176,796

$
1,103,494

$
1,001,454

$
961,294

$
897,874Securities available for sale


222,910


225,004


142,223


145,518


142,429FHLB stock


12,476


11,245


5,058


5,647


7,699Loans and leases receivable


842,812


777,777


761,599


721,603


670,581Loans held for sale


14,881


8,796


8,776


7,623


10,238Deposits


837,868


784,237


815,864


769,002


681,216Advances from FHLB and other borrowings


212,869


198,454


68,600


91,620


119,664Subordinated debentures payable to trusts


27,837


27,837


27,837


27,837


27,837Stockholders' equity


68,675


64,203


62,270


56,058


53,635


55

---



Table of Contents



Years Ended June 30,2009

2008

2007

2006

2005(Dollars in Thousands, Except Per Share Data)Selected Statement of Income Data:Interest and dividend income

$
60,688

$
63,174

$
61,874

$
53,411

$
44,946Interest expense


25,359


33,298


36,240


27,762


18,747Net interest income


35,329


29,876


25,634


25,649


26,199Provision for losses on loans and leases


1,679


1,994


1,198


5,279


2,681Net interest income after provision for losses on loans and leases


33,650


27,882


24,436


20,370


23,518Loan servicing income


2,301


2,211


1,803


1,123


1,248Gain on sale of land, net











3,557


Gain on sale of branches, net








2,763





Gain on sale of loans, net


1,906


1,197


923


969


924Gain on sale of securities, net


904


3





3


20Net impairment losses recognized in earnings


(405
)










Other noninterest income


7,896


7,922


7,707


7,199


6,822Noninterest expense


(34,566
)

(30,606
)

(29,605
)

(26,499
)

(24,936
)Income before income taxes


11,686


8,609


8,027


6,722


7,596Income tax expense


3,870


2,766


2,644


2,214


2,431Net income


7,816


5,843


5,383


4,508


5,165Preferred stock dividends and accretion


1,316











Net income available to common stockholders

$
6,500

$
5,843

$
5,383

$
4,508

$
5,165Basic earnings per common share:(1)Net income

$
1.62

$
1.47

$
1.35

$
1.15

$
1.33Diluted earnings per common share:(1)Net income


1.61


1.45


1.33


1.13


1.29Dividends declared per share(1)


0.45


0.43


0.42


0.41


0.40Dividend payout ratio(2)


27.78
%

29.25
%

30.93
%

35.20
%

30.03Interest rate spread (average during period)


2.95


2.70


2.36


2.60


3.02Net interest margin(3)


3.26


3.11


2.80


2.98


3.29Net interest margin, TE(4)


3.32


3.16


2.85


3.01


3.32Average interest-earning assets to average interest-bearing liabilities


1.13


1.12


1.11


1.12


1.12Equity to total assets (end of period)


5.84


5.82


6.22


5.83


5.97Equity-to-assets ratio (ratio of average equity to average total assets)


6.98


6.21


6.06


5.94


6.25Nonperforming assets to total assets (end of period)


1.07


0.34


0.40


0.40


0.78Allowance for loan and lease losses to nonperforming loans and leases (end of period)(5)


73.83


191.08


167.87


168.11


73.24Allowance for loan and lease losses to total loans and leases (end of period)


0.98


0.75


0.76


0.77


0.74Nonperforming loans and leases to total loans and leases (end of period)(5)


1.32


0.39


0.45


0.46


1.01Noninterest expense to average total assets


3.00


2.97


3.00


2.87


2.91Net interest income after provision for losses for loans and leases to noninterest expense (end of period)


97.35


91.10


82.54


76.87


94.31Return on assets (ratio of net income to average total assets)


0.68


0.57


0.55


0.49


0.60Return on equity (ratio of net income to average equity)


9.73


9.12


9.01


8.23


9.66Operating Efficiency Ratio(6)


69.83


70.75


76.56


71.41


67.68Efficiency Ratio(7)


72.12


74.27


76.24


68.83


70.81Number of full-service offices


33


33


33


35


34


---

56

---



Table of Contents

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 for fiscal 2009 was $7.8 million and net income available to common stockholders was
$6.5 million, or $1.61 per diluted share, compared to $5.8 million, or $1.45 per diluted share for fiscal 2008. Preferred share dividends, amortization and warrant repurchase related to
the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued to the U.S. Department of the Treasury under the CPP accounted for the $1.3 million, or $0.33 per diluted share,
difference between reported net income and net income available to common stockholders. Return on average equity was 9.73% at June 30, 2009, compared to 9.12% at June 30, 2008.

Net
interest income for fiscal 2009 was $35.3 million, an increase of $5.5 million or 18.3% over the same period a year ago. The net interest margin was 3.26%, compared to
3.11% for the same period a year ago, an increase of 15 basis points. On a fully taxable equivalent basis, the net interest margin for fiscal 2009 was 3.32%, compared to 3.16% in fiscal 2008. The cost
of funds rate on interest-bearing liabilities decreased from 3.87% in fiscal 2008 to 2.65% in fiscal 2009, a change of 122 basis points. For the same period, yields on earning assets decreased from
6.58% to 5.60%, a decrease of 98 basis points. Increases in volume from fiscal 2008 to fiscal 2009 of average earning assets and interest-bearing liabilities were 12.7% and 11.1% respectively. The
Company was positioned to benefit from a steeper, more positive yield curve slope, and as such the net interest margin ratio benefitted as the Federal Funds Rate decreased 175 basis points in fiscal
2009.

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.

Agricultural
loans accounted for the majority of the loan growth between fiscal 2009 and 2008. Agricultural real estate loans were $102.2 million at the end of 2009, up
$30.1 million or 41.7% since fiscal year 2008, and comprised 11.8% of total loans outstanding, up from 9.1% at the end of 2008. Agricultural business loans were $129.1 million at the end
of 2009, up $41.0 million or 46.5% since fiscal year 2008, and comprised 14.9% of total loans outstanding, up from 11.1% at the end of 2008. 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.

57

---



Table of Contents

The allowance for loan and lease losses increased $2.5 million to $8.5 million at June 30, 2009, an increase of 42.8%. The ratio of allowance
for loan and lease losses to total loans and leases was 0.98% as of June 30, 2009 compared to 0.75% at June 30, 2008. Total nonperforming assets at June 30, 2009 were
$12.6 million as compared to $3.7 million at June 30, 2008. The increase in non-performing assets was primarily attributable to one credit relationship. The ratio of
nonperforming assets to total assets was 1.07% for June 30, 2009, compared to 0.34% at June 30, 2008. 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.

On
June 26, 2006, the Company filed a $3.8 million lawsuit against MetaBank for their role in certain loan participation interests, alleging fraud, breach of fiduciary
duty, conspiracy, and negligent misrepresentation. In October 2008, the Company settled for $2.8 million inclusive of the remaining amount of receivables from certain loan participation
interests in the amount of $223,000. The settlement amount, less attorney fees of $292,000, was recorded as a recovery of loan and leases losses in the second quarter of fiscal 2009.

During
the second quarter of fiscal year 2009, an increase in equity occurred with participation in the CPP. As referenced in the 8-K filed November 24, 2008, the
Company entered into an agreement with the Treasury pursuant to which the Company agreed to issue and sell to the Treasury
(i) 25,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share (the "Preferred Stock") and having a liquidation preference of $1,000 per
share, and (ii) a 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 (the "Warrant"), for an
aggregate purchase price of $25.0 million 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% per annum for the first five years, and at a rate of 9% per annum thereafter, only
to be paid if, as and when declared by the Company's Board of Directors.

In
conjunction with the Company's participation in the CPP, the Company's Board of Directors terminated the stock buyback program in the second quarter which had been in place through
November 21, 2008, in which up to 10% of the common stock of the Company outstanding on May 1, 2008 could be acquired through April 30, 2009.

The
Company repurchased all of its outstanding shares of the Preferred Stock on June 3, 2009 and completed its repurchase of the Warrant on June 30, 2009. The repurchase
price of the Preferred Stock was $25.0 million plus a final accrued dividend of $62,500, while the Warrant was repurchased at a price of $650,000.

The
Company held $11.9 million in trust preferred securities at June 30, 2009 that are currently impaired under applicable accounting rules. These are comprised of pooled
securities issued primarily by banks throughout the United States, and were downgraded below investment grade by Moody's during the 2009 fiscal year. The Company performed analysis to determine if any
of the securities had a credit loss by estimating if any of the cash flows are not expected to be received as contracted. Based upon the analysis, 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.

Total
deposits at June 30, 2009, were $837.9 million, an increase of $53.6 million, or 6.8%, from June 30, 2008. Due to a historically low interest rate
environment and a steeper yield curve, the Company experienced a preference of customers favoring in-market certificates of deposit, which

58

---



Table of Contents

increased
$75.3 million or 23.1% from June 30, 2008, while lower yielding money market accounts decreased $26.5 million or 15.4% from June 30, 2008. Interest expense on
deposits was $15.7 million for fiscal 2009, a decrease of $9.0 million, or 36.5%, over the same period a year ago. A primary factor affecting interest expense was a decrease in money
market rates and certificate of deposit rates.

The
Company has a line of credit for $6.0 million with First Tennessee Bank, NA for liquidity needs in the Company. The note is short-term in duration and is subject
to annual review. In case of default on the notes, the Company's ability to pay cash dividends may be restricted. At June 30, 2009, $5.5 million was advanced on the line of credit. 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 10.11 of this Form 10-K for additional information.

The
total risk-based capital ratio was 11.05% at June 30, 2009, compared to 10.83% at June 30, 2008. This continues to place the Bank in the
"well-capitalized" category within OTS regulation at June 30, 2009, 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 2009 was $12.6 million, compared to $11.3 million for the same period a year ago, an increase of $1.3 million or 11.2%. The increases
in fees on deposits, net gain on sale of loans and net gain on sale of securities of $372,000, $709,000, and $901,000, respectively, primarily contributed to the noninterest income increase from
fiscal 2008 to fiscal 2009. Increased mortgage loan originations arising from reduced interest rates contributed to the increase in the net gain on sale of loans. The net gain on sale of securities
increased primarily due to the sales of longer term fixed rate residential mortgage-backed securities. Trust income decreased $290,000 and net impairment losses recognized in earnings increased
$405,000, which combined to somewhat offset the previously mentioned increases from fiscal 2008 to fiscal 2009.

Noninterest
expense for fiscal 2009 was $34.6 million, compared to $30.6 million a year ago, an increase of $4.0 million or 12.9%. Employee compensation and
benefits, FDIC insurance, and professional fees increased $1.3 million, $1.3 million, and $634,000, respectively, as compared to fiscal 2008. Employee compensation increased $887,000 or
7.2%, variable pay related 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 compared to the prior year.
Net healthcare costs, inclusive of self-funded health claims, administration fees and fully-insured dental premiums offset by stop loss insurance receivable and employee reimbursements for
fiscal 2009 were $2.6 million, compared to $1.5 million for the same period a year ago. This change is primarily due to higher claim activity in the second and third quarters of fiscal
2009. Management continues to believe the current structure is a reasonable alternative to traditional healthcare plans over the long term. Since the plan is a self-insured plan, the costs
will vary from year to year. FDIC insurance costs increased due to the exhaustion of previously earned credits in the second quarter of fiscal 2009, increased assessment rates in the third quarter of
fiscal 2009, and a special assessment of $536,000 accrued on June 30, 2009.

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., non-interest expense divided by total revenue
adjusted for interest expense of trust preferred debt securities) for fiscal 2009 was 69.83%, compared to 70.75% for the same period a year ago, a decrease of 92 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

59

---



Table of Contents

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 decreased to
$1.8 million for fiscal 2009, compared to $2.1 million for the same period a year ago, a decrease of $299,000 or 14.0%. The average rate paid on these securities decreased 107 basis
points, from 7.68% in fiscal 2008 to 6.61% in fiscal 2009. The total efficiency ratio (i.e., non-interest expense divided by total revenue) was 72.12% at June 30, 2009,
compared to 74.27% for the same period a year ago, a decrease of 215 basis points. Contributing to this improvement in the efficiency ratio from a year ago includes an increase in Company revenue to
$47.9 million for fiscal 2009, or a 16.3% increase compared to the same period a year ago. It is the Company's continuing goal to move the operating efficiency ratio towards the 50% level over
the long term. Management believes that this can be accomplished through steady growth of the balance sheet and the containment of incremental operating expenses.

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.

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 comes
from the net interest margin, which represents the difference between income on interest-earning assets (i.e. loans and investment securities) and expense on interest-bearing liabilities
(i.e. deposits and borrowed funding). The net interest margin is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. Fees
earned include charges for deposit services, trust services and loan services. Personnel costs are the primary expenses required to deliver the services to customers. Other costs include occupancy and
equipment and general and administrative expenses.

Financial Condition Data

At June 30, 2009, the Company had total assets of $1,176.8 million, an increase of $73.3 million from the level at
June 30, 2008. The increase in assets was due primarily to increases in net loans and leases receivable of $65.0 million and loans held for sale of $6.1 million offset by a
decrease in cash and cash equivalents of $2.7 million. The increase in liabilities of $68.8 million was primarily due to increases in deposits of $53.6 million and advances from
the FHLB and other borrowings of $14.4 million. In addition, stockholders' equity increased to $68.7 million at June 30, 2009, from $64.2 million at June 30, 2008,
primarily due to net income of $7.8 million offset by cash dividends paid of $2.5 million.

The
increase in net loans and leases receivable of $65.0 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 $22.9 million during the fiscal year
to $21.4 million at June 30, 2009. In addition, deferred fees and discounts decreased by $269,000 primarily due to a decrease of $390,000 for deferred fees and discounts on indirect
automobile loans that include prepaid dealer reserves.

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

60

---



Table of Contents

Deposits
and advances from the FHLB and other borrowings increased $53.6 million and $14.4 million, respectively, at June 30, 2009 as compared to June 30,
2008. The increase in advances from FHLB and other borrowings were utilized to offset the net increases in outflows for net loans and leases receivable which were greater than the overall increase in
deposits.

The
$53.6 million increase in deposits was due primarily to the in-market certificates of deposit increase in the amount of $75.3 million, inclusive of an
increase of $16.1 million in the Certificate of Deposit Account Registry Service program. Public funds have increased to $182.5 million at June 30, 2009 from $156.3 million
at June 30, 2008, which are categorized in multiple deposit categories. The noninterest bearing and interest bearing checking accounts increased $8.2 million, while the savings increased
$2.8 million. These increases were offset by decreases in money market accounts and out-of-market deposits of $26.5 million and $6.2 million, respectively,
when compared to the totals at June 30, 2008.

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

61

---



Table of Contents

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 30,2009

2008

2007Average
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)

$
829,486

$
49,460


5.96
%
$
775,558

$
53,972


6.96
%
$
758,455

$
54,344


7.17
%Investment securities(2)(3)


241,294


11,060


4.58


176,652


8,844


5.01


152,132


7,209


4.74FHLB stock


12,274


168


1.37


8,511


358


4.21


6,406


321


5.01Total interest-earning assets


1,083,054

$
60,688


5.60
%

960,721

$
63,174


6.58
%

916,993

$
61,874


6.75
%Noninterest-earning assets


67,454








70,371








68,832Total assets

$
1,150,508







$
1,031,092







$
985,825Interest-bearing liabilities:Deposits:Checking and money market

$
231,362

$
1,956


0.85
%
$
268,264

$
6,979


2.60
%
$
282,312

$
10,436


3.70
%Savings


71,004


542


0.76


56,005


1,152


2.06


46,207


1,240


2.68Certificates of deposit


392,775


13,181


3.36


355,401


16,562


4.66


362,321


16,829


4.64Total interest-bearing deposits


695,141


15,679


2.26


679,670


24,693


3.63


690,840


28,505


4.13FHLB advances and other borrowings


232,206


7,841


3.38


152,289


6,467


4.25


106,151


5,061


4.77Subordinated debentures payable to trusts(4)


27,837


1,839


6.61


27,837


2,138


7.68


27,837


2,674


9.61Total interest-bearing liabilities


955,184

$
25,359


2.65
%

859,796

$
33,298


3.87
%

824,828

$
36,240


4.39
%Noninterest-bearing deposits


76,838








79,313








76,698Other liabilities


38,152








27,914








24,558Total liabilities


1,070,174








967,023








926,084Equity


80,334








64,069








59,741Total liabilities and equity

$
1,150,508







$
1,031,092







$
985,825Net interest income; interest rate spread




$
35,329


2.95
%



$
29,876


2.70
%



$
25,634


2.36
%Net interest margin(5)








3.26
%







3.11
%







2.80
%Net interest margin, TE(6)








3.32
%







3.16
%







2.85
%


---

62

---



Table of Contents

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,
2009 vs. 2008

Years Ended June 30,
2008 vs. 2007(Dollars in Thousands)Increase
(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)Interest-earning assets:Loans and leases receivable(1)

$
3,762

$
(8,274
)
$
(4,512
)
$
1,226

$
(1,598
)
$
(372
)Investment securities(2)


3,250


(1,034
)

2,216


1,162


473


1,635FHLB stock


158


(348
)

(190
)

97


(60
)

37Total interest-earning assets

$
7,170

$
(9,656
)
$
(2,486
)
$
2,485

$
(1,185
)
$
1,300Interest-bearing liabilities:Deposits:Checking and money market

$
(962
)
$
(4,060
)
$
(5,022
)
$
(520
)
$
(2,938
)
$
(3,458
)Savings


310


(920
)

(610
)

263


(351
)

(88
)Certificates of deposit


1,738


(5,119
)

(3,381
)

(322
)

55


(267
)Total interest-bearing deposits


1,086


(10,099
)

(9,013
)

(579
)

(3,234
)

(3,813
)FHLB advances and other borrowings


3,395


(2,021
)

1,374


2,200


(820
)

1,380Subordinated debentures payable to trusts





(299
)

(299
)




(536
)

(536
)Total interest-bearing liabilities

$
4,481

$
(12,419
)
$
(7,938
)
$
1,621

$
(4,590
)
$
(2,969
)Net interest income increase







$
5,452







$
4,269


---

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.

63

---



Table of Contents

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, 2009.

Security Impairment.Management continually monitors the investment security portfolio for impairment on a security by security basis.
During the
third quarter of Fiscal 2009, the Company early adopted FASB Staff Position ("FSP") No. FAS 115-2,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

64

---



Table of Contents

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.

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

65

---



Table of Contents

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) increased $8.8 million to
$12.6 million at June 30, 2009. The increase in non-performing assets was primarily attributable to one credit relationship. The ratio of
nonperforming assets to total assets, which is one indicator of credit risk exposure, increased to 1.07% at June 30, 2009, from 0.34% at June 30, 2008.

Nonaccruing
loans and leases increased $7.1 million to $9.4 million at June 30, 2009 compared to $2.3 million at June 30, 2008. Included in nonaccruing
loans and leases at June 30, 2009 were 13 loans totaling $977,000 secured by one- to four-family real estate, two commercial real estate loans totaling $177,000, one
agricultural real estate loan totaling $740,000, nine commercial business loans totaling $405,000, three agricultural business loans totaling $6.5 million, 20 equipment finance leases totaling
$272,000 and 24 consumer loans totaling $355,000.

The
Company's nonperforming loans and leases, which represent nonaccrual and past due 90 days and still accruing, have increased $8.4 million from the levels at
June 30, 2008. The risk rating system in place is designed to identify and manage the nonperforming loans and leases. Commercial and agricultural loans and equipment finance leases will have
specific reserve allocations based on collateral values or based on the present value of expected cash flows if the loans or leases are deemed impaired. Loans and leases that are not performing do not
necessarily result in a loss.

As
of June 30, 2009 the Company had $1.1 million of foreclosed assets. The balance of foreclosed assets at June 30, 2009 consisted of $406,000 in single-family
residences, $105,000 in equipment finance leases, $92,000 in consumer collateral and $482,000 in agricultural collateral.

At
June 30, 2009, the Company had designated $21.0 million of its assets as special mention and classified $30.0 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, 2009, the Company had
$13.6 million in multi-family, commercial real estate and agricultural participation loans purchased, of which none of the amounts were classified at June 30, 2009. 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

66

---



Table of Contents

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, 2009, 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, 2009 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. The following table sets forth the amounts and categories of the Company's nonperforming assets from continuing operations for the periods indicated.

At June 30,2009

2008

2007

2006

2005(Dollars in Thousands)Nonaccruing loans and leases:One- to four-family

$
977

$
503

$
228

$
371

$
263Commercial real estate


177


429


25





70Commercial business


405


555


1,441


341


4,518Equipment finance leases


272


27


118


36


130Consumer


355


566


378


287


341Agricultural


7,195


244








Total


9,381


2,324


2,190


1,035


5,322Accruing loans and leases delinquent more than 90 days:One- to four-family





306


470


358


98Commercial real estate


277


24


178


308


292Commercial business


349


71


213


814


1,052Equipment finance leases


264


9


88


302


71Consumer


8


119


1


7


Agricultural


1,194


252


358


541


96Total


2,092


781


1,308


2,330


1,609Foreclosed assets:One- to four-family


406


76


158


96


39Equipment finance leases


105


443


180


254


Consumer


92


124


170


177


50Agricultural


482











Total(1)


1,085


643


508


527


89Total nonperforming assets(2)

$
12,558

$
3,748

$
4,006

$
3,892

$
7,020Ratio of nonperforming assets to total assets(3)


1.07
%

0.34
%

0.40
%

0.40
%

0.78
%Ratio of nonperforming loans and leases to total loans and leases(4)(5)


1.32
%

0.39
%

0.45
%

0.46
%

1.01
%


---

67

---



Table of Contents

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 30,2009

2008

2007

2006

2005(Dollars in Thousands)Balance at beginning of period

$
5,933

$
5,872

$
5,657

$
5,076

$
3,605Charge-offs:One- to four-family


(140
)

(3
)

(12
)

(1
)

Commercial real estate


(112
)










(31
)Commercial business


(36
)

(894
)

(386
)

(3,389
)

(187
)Equipment finance leases


(121
)

(475
)

(162
)

(165
)

(269
)Consumer


(1,080
)

(853
)

(701
)

(1,066
)

(1,044
)Agricultural


(80
)

(20
)

(31
)

(502
)

(14
)Total charge-offs


(1,569
)

(2,245
)

(1,292
)

(5,123
)

(1,545
)Recoveries:One- to four-family


4


2


3


1


9Commercial real estate








1


6


Commercial business


2,217


8


9


15


31Equipment finance leases





34





40


2Consumer


201


263


216


237


215Agricultural


5


5


80


126


78Total recoveries


2,427


312


309


425


335Net recoveries (charge-offs)


858


(1,933
)

(983
)

(4,698
)

(1,210
)Additions charged to operations


1,679


1,994


1,198


5,279


2,681Allowance related to assets acquired (sold), net














Balance at end of period

$
8,470

$
5,933

$
5,872

$
5,657

$
5,076Ratio of net recoveries (charge-offs) during the period to average loans and leases outstanding during the period


0.10
%

(0.25
)%

(0.13
)%

(0.67
)%

(0.18
)%Ratio of allowance for loan and lease losses to total loans and leases at end of period(1)


0.98
%

0.75
%

0.76
%

0.77
%

0.74
%Ratio of allowance for loan and lease losses to nonperforming loans and leases at end of period(2)


73.83
%

191.08
%

167.87
%

168.11
%

73.24
%


---

68

---





Table of Contents

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

At June 30,2009

2008

2007

2006

2005Amount

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)

$
416


4.91
%
$
294


4.95
%
$
342


5.82
%
$
193


3.41
%
$
186


3.66
%Commercial and multi-family real estate(1)


1,302


15.37


875


14.75


647


11.02


396


7.00


261


5.14Commercial business(2)


2,698


31.86


2,174


36.64


2,795


47.60


3,133


55.38


2,953


58.18Consumer


1,280


15.11


1,190


20.06


1,178


20.06


1,432


25.32


1,343


26.46Agricultural


2,774


32.75


1,400


23.60


910


15.50


503


8.89


333


6.56Total

$
8,470


100.00
%
$
5,933


100.00
%
$
5,872


100.00
%
$
5,657


100.00
%
$
5,076


100.00
%


---

69

---





Table of Contents

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, 2009

At June 30, 2008(Dollars in Thousands)One- to four-family

$
416

$


$
294

$
Commercial real estate


1,110





740


Multi-family real estate


192





135


Commercial business


2,136


153


1,678


Equipment finance leases


409





496


Consumer


1,280





1,190


Agricultural


2,724


50


1,270


130Total

$
8,267

$
203

$
5,803

$
130


FAS 114 Impaired Loan Summary

Number
of Loan
Customers

Loan
Balance

Impaired
Loan
Valuation
Allowance

Number
of Loan
Customers

Loan
Balance

Impaired
Loan
Valuation
AllowanceLoan Type

At June 30, 2009

At June 30, 2008(Dollars in Thousands)Commercial real estate


3

$
177

$





$


$
Commercial business


4


453


153


9


471


Agricultural


2


7,997


50


2


359


130Total


9

$
8,627

$
203


11

$
830

$
130


The
allowance for loan and lease losses was $8.5 million at June 30, 2009, as compared to $5.9 million at June 30, 2008. The ratio of the allowance for loan
and lease losses to total loans and leases was 0.98% at June 30, 2009, compared to 0.75% at June 30, 2008. The Company's management has considered nonperforming assets and other assets
of concern in establishing the allowance for loan and lease losses. The Company continues to monitor its allowance for possible loan and lease losses and make future additions or reductions in light
of the level of loans and leases in its portfolio and as economic conditions dictate. The current level of the allowance for loan and lease losses is a result of management's assessment of the risks
within the portfolio based on the information revealed in credit reporting processes. The Company utilizes a risk-rating system on commercial business, agricultural, construction,
multi-family and commercial real estate loans, including purchased loans. A periodic credit review is performed on all types of loans and leases to establish the necessary reserve based on the
estimated risk within the portfolio. This assessment of risk takes into account the composition of the loan and lease portfolio, historical loss experience for each loan and lease category, previous
loan and lease experience, concentrations of credit, current economic conditions and other factors that in management's judgment deserve recognition. 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, 2009.

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.

70

---



Table of Contents

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, 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 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

71

---



Table of Contents

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 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.

72

---



Table of Contents

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.

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.

Comparison of the Years Ended June 30, 2008 and June 30, 2007

General.The Company's income was $5.8 million or $1.47 and $1.45 for basic and diluted earnings per share, respectively, for the
year ended
June 30, 2008, a $460,000 increase in earnings compared to $5.4 million or $1.35 and $1.33 for basic and diluted earnings per share, respectively, for the prior year. Fiscal year 2007
second quarter net income included a non-recurring after-tax gain on

73

---



Table of Contents

sale
of branches of $1.7 million or $0.42 diluted earnings per share. For the year ended June 30, 2008, the return on average equity was 9.12%, a 1.2% increase compared to 9.01% in the
prior year. For the year ended June 30, 2008, the return on average assets was 0.57%, a 3.6% increase compared to 0.55% 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 $4.2 million, offset by increases in provision for losses on loans and leases of $796,000 and increases in
noninterest expense of $1.0 million.

Interest and Dividend Income.Interest and dividend income was $63.2 million for the year ended June 30, 2008, as compared to
$61.9 million for the prior year, an increase of $1.3 million or 2.1%. A $1.2 million decrease in interest and dividend income was the result of a 2.5% decrease in the average
yield on interest-earning assets and a $2.5 million increase in interest and dividend income was the result of a 4.8% increase in the average volume of total interest-earning assets. The
average yield on interest-earning assets was 6.58% for the year ended June 30, 2008, as compared to 6.75% for the prior year. The average volume of loans and leases receivable increased from
$758.5 million for the year ended June 30, 2007, to $775.6 million for the year ended June 30, 2008. For the year ended June 30, 2008, the average yield on loans and
leases receivable was 6.96%, a decrease of 2.9% from 7.17% 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 $33.3 million for the year ended June 30, 2008, as compared to $36.2 million for
the
prior year, a decrease of $2.9 million or 8.12%. A $3.2 million decrease was the result of an 12.1% decrease in the average rate paid on interest-bearing deposits. The average rate on
interest-bearing deposits was 3.63% for the year ended June 30, 2008, as compared to 4.13% for the prior year. A $766,000 decrease in interest expense was the result of a 10.6% decrease in the
average yield on FHLB advances and other borrowings to 4.26% for the year ended June 30, 2008, compared to
4.77% for the prior fiscal year, and a $2.2 million increase in interest expense was the result of a 43.5% increase in the average balance of FHLB advances and other borrowings. In addition,
interest expense decreased $563,000 due to the average yield on subordinated debentures payable to trust decreasing to 7.58% for the year ended June 30, 2008, compared to 9.61% for the prior
fiscal year.

Net Interest Income.The Company's net interest income for the year ended June 30, 2008, increased $4.2 million or 16.55%, to
$29.8 million compared to $25.6 million for the prior year. The Company's net interest margin increased to 3.11% for the year ended June 30, 2008, as compared to 2.80% 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 $796,000 or 66.4%, to $2.0 million for the year ended June 30, 2008, as compared to $1.2 million in the prior
year. Net charge-offs increased from $1.0 million during fiscal 2007 to $1.9 million during fiscal 2008. Nonperforming assets decreased $258,000 for the year ended
June 30, 2008.

74

---



Table of Contents

The
allowance for losses on loans and leases at June 30, 2008 was $5.9 million. The allowance remained from the June 30, 2007, balance of $5.9 million
primarily as a result of charge-offs exceeding recoveries by $1.9 million offset by the provision for losses on loans and leases of $2.0 million. The ratio of allowance for
loan and lease losses to nonperforming loans and leases at June 30, 2008, was 191.08% compared to 167.87% at June 30, 2007. The allowance for loan and lease losses to total loans and
leases at June 30, 2008, was 0.75% compared to 0.76% at June 30, 2007. The Bank's management believes that the June 30, 2008, 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 $11.3 million for the year ended June 30, 2008, as compared to $13.2 million
for the
year ended June 30, 2007, a decrease of $1.9 million or 14.12%. The decrease in noninterest income was due primarily to a one-time gain on sale of branches of
$2.8 million in fiscal 2007. During fiscal 2008 the Company experienced increases in loan servicing income of $408,000, gain on sale of loans of $274,000, fees on deposits of $256,000, and
trust income of $30,000, offset by decreases in other noninterest income of $68,000.

The
net gain on sale of branches of $2.8 million in fiscal 2007 was due to the sale of three branches and their associated book of business, as well as one physical location. The
sale was completed during the second quarter of fiscal 2007 and produced the one-time gain on sale. The proceeds of the sale were invested in new market locations and new marketing
initiatives.

Loan
servicing income increased by $408,000 to $2.2 million for the year ended June 30, 2008, as compared to $1.8 million for the prior year, primarily due to
increased originated and purchased servicing rights for SDHDA mortgage loans. At June 30, 2008, the Bank serviced $932.9 million of mortgage loans for the SDHDA.

Fees
on deposits increased by $256,000 to $5.4 million during the year ended June 30, 2008, as compared to $5.1 million for the prior year, primarily due to a
$278,000 net increase in income from point-of-sale purchases by customers and ATM service fees, and a $21,000 increase in net NSF/OD fees.

Trust
income increased by $30,000 to $966,000 during the year ended June 30, 2008, as compared to the prior year primarily due to further diversification of trust activities.
Assets under management decreased from $126.4 million to $95.4 million.

Other
noninterest income for the year ended June 30, 2008, was $1.6 million and represented a decrease of $68,000 as compared to the prior fiscal year.

Noninterest Expense.Noninterest expense was $30.6 million for the year ended June 30, 2008, as compared to
$29.6 million for
the prior year, an increase of $1.0 million. The increase in noninterest expense was due primarily to increases in compensation and employee benefits of $1.2 million, and occupancy and
equipment of $35,000, offset by a decrease in advertising costs of $464,000.

Compensation
and employee benefits increased $1.2 million during the year ended June 30, 2008, as compared to the prior fiscal year primarily due to increases in employee
variable pay compensation of $1.2 million related to performance incentives and offset by a decrease in net healthcare costs of $667,000. Net healthcare costs, inclusive of health claims and
administration fees offset by stop loss and employee reimbursement under the Company's self-insured health plan, was $1.5 million for the fiscal year ended June 30, 2007, a
decrease of 31.0% compared to the prior fiscal year. 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 reduction in net healthcare costs for
the fiscal year ending June 30, 2008, does not necessarily indicate a trend. The Company

75

---



Table of Contents

continues
to monitor its healthcare plans in an effort to provide its employees with affordable health care.

Advertising
costs decreased $464,000 to $1.1 million for the year ended June 30, 2008 as compared to $1.5 million for the prior year, primarily due to new deposit
package programs marketed during the prior year.

Occupancy
and equipment costs increased $35,000 during the year ended June 30, 2008, as compared to the prior fiscal year. This increase was primarily the result of $21,000 of
increased rent expense, and $11,000 of increased furniture and fixture depreciation expense.

Income Tax Expense.The Company's income tax expense increased $122,000, or 4.61%, for the year ended June 30, 2008 to
$2.8 million
compared to $2.6 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, 2008, and
June 30, 2007, was 32.13% and 32.94%, 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 provided by operating activities was $2.4 million for the fiscal year ended June 30, 2009. For the fiscal year ended
June 30, 2008, net cash provided by operating activities was $14.3 million.
Net cash used in investing activities was $71.6 million for the fiscal year ended June 30, 2009. For the fiscal year ended June 30, 2008, net cash used in investing activities was
$111.5 million. Net cash provided by financing activities for the fiscal year ended June 30, 2009, was $66.6 million primarily due to a net increase in deposit accounts. This
compares to net cash provided by financing activities in the prior fiscal year of $95.9 million primarily due to an increase in FHLB borrowing.

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, 2009, the Bank increased its borrowings with the FHLB and other borrowings by $14.4 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, 2009, the Bank had the following sources of additional
borrowings:



76

---



Table of Contents



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, NA at June 30, 2009. The Bank, as a member of the FHLB of Des Moines, is required
to acquire and hold shares of capital stock in the FHLB of Des Moines equal to 0.12% of the total assets of the Bank at December 31 annually. The Bank is also required to own activity-based
stock, which is based on 4.45% of the Bank's outstanding advances. These percentages are subject to change at the discretion of the FHLB Board of Directors. 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
August 2009, the Bank executed an additional uncommitted, unsecured line of federal funds with Zions Bank. Currently, there are no funds drawn on this line of federal funds.

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, 2009, the Bank had $21.0 million in out-of-market certificates of deposit.

The
Company has a line of credit for $6.0 million with First Tennessee Bank, NA ("FTB") for liquidity needs in the Company. At June 30, 2009, $5.5 million was
advanced on the line of credit. The FTB line of credit contains customary events of default and affirmative covenants with which the Company and Bank were in compliance at June 30, 2009. Under
the terms of the FTB line of credit, the Company and the Bank must remain "well-capitalized" in full compliance with all state and federal regulatory authorities, including a ratio of
qualifying total capital to weighted risk assets as required by all state and federal regulatory authorities; provided further, however, with respect to the financial statements of the Bank, in no
event shall the ratio of Tier 1 capital to the difference between total assets less goodwill be less than six percent (6%) at the end of each calendar quarter. Additionally, it shall be an
event of default under the FTB line of credit if, among other things, (i) the Company, on a consolidated basis, fails to maintain an annualized return on total average assets of at least sixty
one hundredths of one percent (0.60%) as reported on a quarterly basis, or (ii) the Bank's non-performing loans, on a consolidated basis, exceed two and one-half
percent (2.50%) of the Bank's gross loans. In case of default on the line of credit, the Company's ability to pay cash dividends may be restricted. Upon the Company's initial draw on the FTB line of
credit, the Company was required to pledge 25% of the Bank's stock as collateral. The FTB line of credit matures on September 30, 2009. The Company expects to repay and replace the FTB line of
credit before it matures on September 30, 2009, but an inability to do so on favorable terms could have a material negative impact on our results of operations and financial position. 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 10.11 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, 2009, the Bank had outstanding commitments to originate and
purchase mortgage and commercial loans of $30.8 million and to sell mortgage loans of $21.2 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, 2009, the Bank had one outstanding commitment to purchase $2.6 million
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 Board of Directors' approved stock buy back program, to

77

---



Table of Contents

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 buy back 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, which equaled 395,321 shares. 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 the fiscal year ended June 30, 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, 2009, 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% of total adjusted assets. The Bank had Tier 1 (core) capital of 8.45% at June 30, 2009. The minimum OTS risk-based capital
requirement for well-capitalized institutions is 10% of risk-weighted assets. The Bank had risk-based capital of 11.05% at June 30, 2009.

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. At
June 30, 2009, the total notional amount of interest rate swap contracts was $17.0 million with a fair value loss of $952,000. 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. 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.

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 2009. 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.

78

---





Table of Contents

In December 2007, FASB issued Statement of Financial Accounting Standards No. 141R (SFAS 141R), "Business Combinations." SFAS 141R improves
reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other
users of financial statements. For the Company, SFAS 141R is effective for business combinations on or after July 1, 2009. Management has reviewed SFAS 141R and does not expect
the adoption of this statement to have a material impact on the Company's consolidated financial condition, results of operations or cash flow.

In
December 2007, FASB issued Statement of Financial Accounting Standards No. 160 (SFAS 160), "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
the consolidated financial statements. The Company does not currently have any non-controlling interest in the consolidated financial statements.

In
May 2008, the FASB issued Statement of Financial Accounting Standards No. 163 (SFAS 163), "Accounting for Financial Guarantee Insurance ContractsAn
Interpretation of FASB Statement No. 60." This statement requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit
deterioration has occurred in an insured financial obligation. SFAS 163 also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and
measurement to be used to account for premium revenue and
claim liabilities. Expanded disclosures about financial guarantee insurance contracts are also required by this statement. SFAS 163 is effective July 1, 2009. The Company is in the
process of assessing the impact on its results of operations, financial position, and cash flow.

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. FAS 132(R)-1 is effective for annual reporting for the fiscal
year beginning July 1, 2009. The Company is in the process of assessing the impact on its results of operations, financial position, and 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. Management
has reviewed FAS 141R-1 and does not expect the adoption of this statement to have a material impact on the Company's consolidated financial condition, results of operations or cash
flow.

On
June 9, 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 nonauthoritative. SFAS 168 is effective July 1, 2009. Management has reviewed FAS 168 and

79

---



Table of Contents

does
not expect the adoption of this statement to have a material impact on the Company's consolidated financial condition, results of operations or cash flow.

On
June 12, 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 interim and annual reporting periods beginning after November 15, 2009. Management is currently evaluating the impact of SFAS 166 on
the Company's consolidated financial condition, results of operations and cash flow.

On
June 12, 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.

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
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

80

---



Table of Contents

and
the present value of expected cash flows from assets and off-balance sheet contracts. The following table sets forth, at June 30, 2009 and June 30, 2008, 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, 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, 2009Estimated Increase
(Decrease) in NPVEstimated
NPV
AmountChange in Interest Rates

Amount

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
)




June 30, 2008Estimated Increase
(Decrease) in NPVEstimated
NPV
AmountChange in Interest Rates

Amount

Percent(Dollars in Thousands)Basis Points+300

$
110,881

$
(1,943
)

(2
)%+200


113,956


1,132


1+100


115,324


2,500


2


112,824





-100


105,084


(7,740
)

(7
)


Contractual Obligations

The following table sets forth information with respect to the Company's contractual obligations as of June 30, 2009. Operating
lease obligations are primarily related to the lease of certain branch offices, which the Company has committed to as of June 30, 2009.

Payments due by periodTotal

Less Than
1 Year

1 to 3 Years

3 to 5 Years

Greater Than
5 YearsDeposits without a stated maturity

$
415,544

$
415,544

$


$


$
Certificates of Deposit


422,324


324,822


84,043


13,453


6Advances from FHLB and other borrowings


212,869


66,850


35,000


45,300


65,719Long-Term Debt Obligations


27,837











27,837Operating Lease Obligations


4,587


930


984


557


2,116Total Contractual Obligations

$
1,083,161

$
808,146

$
120,027

$
59,310

$
95,678


81

---



Table of Contents

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 change 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. 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, 2009, the Company had investment securities available for sale of $8.7 million with contractual maturities of five years or less.
Adjustable-rate residential mortgage-backed securities totaled $137.3 million at June 30, 2009. 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 $71.5 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, 2009, the Company had $81.4 million of savings accounts, $145.2 million of money market accounts and $188.9 million of checking accounts, representing 49.6% 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

82

---



Table of Contents

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.

83

---





Table of Contents



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, 2009 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, 2009.

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 temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management's report in this Annual Report on Form 10-K.

/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


84

---





Table of Contents

TABLE OF CONTENTS



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

86CONSOLIDATED FINANCIAL STATEMENTSStatements of Financial Condition

87Statements of Income

88Statements of Stockholders' Equity

89Statements of Cash Flows

90Notes to Consolidated Financial Statements

91


85

---





Table of Contents

GRAPHIC



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, 2009 and 2008, 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, 2009. 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, 2009
and 2008, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2009, 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, 2009, 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 18, 2009 expressed an unqualified opinion.

GRAPHIC

Sioux
Falls, South Dakota
September 18, 2009

PEOPLE. PRINCIPLES. POSSIBILITIES.www.eidebailly.com200 E. 10th St., Ste. 500        P.O. Box 5125        Sioux Falls, SD 57117-5125
         Phone 605.339.1999        Fax 605.339.1306        EOE

86

---





Table of Contents



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

2009

2008ASSETSCash and cash equivalents

$
18,511

$
21,170Securities available for sale (Note 2)


222,910


225,004Federal Home Loan Bank stock (Note 7)


12,476


11,245Loans held for sale (Note 3)


14,881


8,796Loans and leases receivable (Note 3)


842,812


777,777Accrued interest receivable


7,598


7,540Office properties and equipment, net of accumulated depreciation (Note 5)


16,917


14,849Foreclosed real estate and other properties


1,085


643Cash value of life insurance


14,594


14,050Servicing rights (Note 4)


11,768


11,189Goodwill, net


4,951


4,951Other assets (Note 10)


8,293


6,280$
1,176,796

$
1,103,494LIABILITIES AND STOCKHOLDERS' EQUITYLiabilitiesDeposits (Note 6)

$
837,868

$
784,237Advances from Federal Home Loan Bank and other borrowings (Note 7)


212,869


198,454Subordinated debentures payable to trusts (Note 8)


27,837


27,837Advances by borrowers for taxes and insurance


11,899


10,795Accrued expenses and other liabilities (Note 14)


17,648


17,968Total liabilities


1,108,121


1,039,291Stockholders' 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, 6,109,437 and 6,035,447 shares issued at June 30, 2009 and June 30, 2008,
respectively


61


60Common stock subscribed for but not issued


224


95Additional paid-in capital


22,911


21,905Retained earnings, substantially restricted


80,735


76,041Accumulated other comprehensive (loss), net of related deferred tax effect (Note 17)


(4,359
)

(3,001
)Less cost of treasury stock, 2,083,455 and 2,083,455 shares at June 30, 2009 and June 30, 2008, respectively


(30,897
)

(30,897
)68,675


64,203$
1,176,796

$
1,103,494


87

---





Table of Contents



HF FINANCIAL CORP.        CONSOLIDATED STATEMENTS OF INCOME        YEARS ENDED JUNE 30, 2009, 2008 AND 2007        (DOLLARS IN THOUSANDS, except share
data)

2009

2008

2007Interest, dividend and loan fee income:Loans and leases receivable

$
49,460

$
53,972

$
54,344Investment securities and interest-bearing deposits


11,228


9,202


7,53060,688


63,174


61,874Interest expense:Deposits


15,679


24,693


28,505Advances from Federal Home Loan Bank and other borrowings


9,680


8,605


7,73525,359


33,298


36,240Net interest income


35,329


29,876


25,634Provision for losses on loans and leases


1,679


1,994


1,198Net interest income after provision for losses on loans and leases


33,650


27,882


24,436Noninterest income:Gain on sale of branches, net








2,763Fees on deposits


5,761


5,389


5,133Loan servicing income


2,301


2,211


1,803Gain on sale of loans, net


1,906


1,197


923Earnings on cash value of life insurance


641


626


597Trust income


676


966


936Commission and insurance income


519


447


500Gain on sale of securities, net


904


3


Total other-than-temporary impairment losses


(3,905
)




Portion of loss recognized in other comprehensive income


3,500





Net impairment losses recognized in earnings


(405
)




Other


299


494


54112,602


11,333


13,196Noninterest expense:Compensation and employee benefits


20,942


19,616


18,379Occupancy and equipment


3,981


3,832


3,797FDIC insurance


1,376


92


93Check and data processing expense


2,577


2,416


2,299Professional fees


1,800


1,166


1,027Marketing and community investment


1,384


1,292


1,682Foreclosed real estate and other properties, net


292


181


101Other


2,214


2,011


2,22734,566


30,606


29,605Income before income taxes


11,686


8,609


8,027Income tax expense (Note 10)


3,870


2,766


2,644Net income


7,816


5,843


5,383Preferred stock dividends and accretion


1,316





Net income available to common stockholders

$
6,500

$
5,843

$
5,383Basic earnings per common share (Note 13):

$
1.62

$
1.47

$
1.35Diluted earnings per common share (Note 13):


1.61


1.45


1.33Dividend declared per common share


0.45


0.43


0.42


88

---



Table of Contents



HF FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2009, 2008 AND 2007
(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, 2006

$
59

$
65

$


$
19,384

$
68,179

$
(2,462
)
$
(29,167
)
$
56,058Comprehensive incomeNet income














5,383








5,383Net changes in unrealized gain (loss) on securities available for sale, net of deferred taxes

















1,058





1,058Comprehensive income























6,441Adjustment to initially apply FASB Statement No. 158, net of tax

















(98
)




(98
)Issuance of common stock and exercise of stock options (Note 16)


1


(65
)




1,079











1,015Common stock subscribed for but not issued





81





(81
)










Cash dividends paid on common stock














(1,662
)







(1,662
)Amortization of stock-based compensation











516











516Balance, 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
)
$
68,675


89

---





Table of Contents

HF FINANCIAL CORP.        CONSOLIDATED STATEMENTS OF CASH FLOWS         YEARS ENDED JUNE 30, 2009, 2008 AND 2007        (DOLLARS IN THOUSANDS, except share data)

2009

2008

2007Cash Flows From Operating ActivitiesNet income

$
7,816

$
5,843

$
5,383Adjustments to reconcile net income to net cash provided by operating activitiesProvision for losses on loans and leases


1,679


1,994


1,198Depreciation


1,737


1,633


1,623Amortization of discounts and premiums on securities and other


2,430


1,710


1,817Stock based compensation


589


472


628Deferred income taxes (credits)


(340
)

11


(485
)Net change in loans held for resale


(4,179
)

1,177


(230
)(Gain) on sale of loans, net


(1,906
)

(1,197
)

(923
)Realized (gain) on sale of securities, net


(904
)

(3
)

Other-than-temporary impairments recognized in non-interest income


405





(Gain) on sale of branches








(2,763
)Losses and provision-for-losses on sales of foreclosed real estate and other properties, net


44


58


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





(1
)

(9
)Change in other assets and liabilities (Note 20)


(5,008
)

2,588


4,017Net cash provided by operating activities


2,363


14,285


10,308Cash Flows From Investing ActivitiesNet change in loans outstanding


(68,271
)

(19,842
)

(46,699
)Proceeds from sale of loans associated with branch sales








4,256Securities available for saleSales, maturities and repayments


110,432


67,302


35,666Purchases


(108,502
)

(151,405
)

(31,048
)Purchase of Federal Home Loan Bank stock


(5,565
)

(9,846
)

(4,172
)Redemption of Federal Home Loan Bank stock


4,334


3,659


4,762Proceeds from sale of office properties and equipment





1,283


17Proceeds from sale of office properties and equipment associated with branch sales








340Purchase of office properties and equipment


(3,805
)

(1,934
)

(3,342
)Purchase of servicing rights


(930
)

(1,392
)

(6,140
)Proceeds from sale of foreclosed real estate and other properties


710


701


2,277Net cash (used in) investment activities


(71,597
)

(111,474
)

(44,083
)Cash Flows From Financing ActivitiesNet increase (decrease) in deposit accounts


53,631


(31,627
)

80,425Proceeds of advances from Federal Home Loan Bank and other borrowings


6,471,132


1,926,299


722,111Payments on advances from Federal Home Loan Bank and other borrowings


(6,456,717
)

(1,796,445
)

(745,131
)Proceeds from issuance of subordinated debentures





5,000


10,000Deposit account disbursements associated with branch sales








(33,563
)Proceeds on core deposit premium








2,763Redemption of subordinated debentures





(5,000
)

(10,000
)Increase in advances by borrowers


1,104


458


3,368Purchases 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


547


630


903Cash dividends paid


(2,472
)

(1,702
)

(1,662
)Net cash provided by financing activities


66,575


95,883


29,214(Decrease) in cash and cash equivalents


(2,659
)

(1,306
)

(4,561
)Cash and Cash EquivalentsBeginning


21,170


22,476


27,037Ending

$
18,511

$
21,170

$
22,476


90

---





Table of Contents



HF FINANCIAL CORP.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        JUNE 30, 2009 AND 2008        (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

91

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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 18, 2009, 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

92

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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 intends 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.

93

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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

94

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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, 2009, and 2008, 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. As of June 30, 2009, and 2008, there is no impairment with respect to intangible assets.

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 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.

95

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

96

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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

97

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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

Total2009Net 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

$
1,103,4942007Net interest income

$
29,057

$
(3,423
)
$
25,634Intersegment interest income


(878
)

878


Provision for losses on loans and leases


(1,198
)




(1,198
)Noninterest income


13,355


(159
)

13,196Intersegment noninterest income


(348
)

348


Noninterest expense


(28,828
)

(777
)

(29,605
)Intersegment noninterest expense


8


(8
)

Income (loss) before income taxes

$
11,168

$
(3,141
)
$
8,027Total assets

$
999,871

$
1,583

$
1,001,454


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.

98

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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.

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 2009, 2008 and 2007.

2009

2008

2007Quarter ended September 30

$
358

$
221

$
436Quarter ended December 31


945


409


357Quarter ended March 31


704


328


760Quarter ended June 30


555


524


596Net healthcare costs

$
2,562

$
1,482

$
2,149


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 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

99

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(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. 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

In September 2006, FASB issued Statement of Financial Accounting Standards No. 157 (SFAS 157), "Fair Value Measurements."
SFAS 157 provides a common definition of fair value and a framework for measuring assets and liabilities at fair values when a particular standard prescribes it. In addition, the Statement
expands disclosures about fair value measurements. The Company adopted SFAS 157 effective July 1, 2008, and the adoption did not have a material impact on its results of operations,
financial position, and liquidity.

In
December 2007, FASB issued Statement of Financial Accounting Standards No. 141R (SFAS 141R), "Business Combinations." SFAS 141R improves reporting by creating
greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial
statements. For the Company, SFAS 141R is effective for business combinations on or after July 1, 2009. Management has reviewed SFAS 141R and does not expect the adoption of this
statement to have a material impact on the Company's consolidated financial condition, results of operations or cash flow.

In
March 2008, FASB issued Statement of Financial Accounting Standards No. 161 (SFAS 161), "Disclosures about Derivative Instruments and Hedging Activities."
SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects
on an entity's financial position, financial performance, and cash flows. The Company adopted SFAS 161 effective January 1, 2009, and the adoption did not have a material impact on its
results of operations, financial position, and liquidity.

In
December 2008, the FASB issued Staff Position No. FAS 132(R)-1, amending the disclosure guidance in FASB Statement No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". The FSP 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

100

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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. FSP FAS 132(R)-1 is effective for annual reporting for the fiscal
year beginning July 1, 2009. The Company is in the process of assessing the impact on its results of operations, financial position, and cash flow.

In
December 2008, the FASB issued Staff Position No. FAS 140-4, amending FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". It also amends FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" to require public enterprises to provide additional disclosures about
their involvement with variable interest entities. FAS 140-4 is effective immediately and did not have a material impact on the Company's consolidated financial condition, results
of operations or cash flow.

In
January 2009, the FASB issued Staff Position No. EITF 99-20-1, amending the impairment guidance in EITF Issue No. 99-20, "Recognition
of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets." For debt securities that are not
within the scope of Issue 99-20, SFAS 115 applies. SFAS 115 does not require exclusive reliance on market participant assumptions about future cash flows. Rather,
SFAS 115 permits the use of reasonable management judgment of the probability that the holder will be unable to collect all amounts due. The FSP is effective immediately and the application of
the FSP did not have a material impact on our financial results or fair value determinations.

In
April 2009, FASB issued Staff Position No. 157-4 (FAS 157-4), "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." FAS 157-4 provides additional guidance for estimating fair value in accordance with
SFAS 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances
that indicate a transaction is not orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the
valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The Company early adopted
FAS 157-4 effective January 1, 2009, and the adoption did have a material impact on results of operations, financial position, and liquidity. See Note 18 "Fair Value
Measurement" for additional disclosures required by the early adoption of FAS 157-4.

In
April 2009, FASB issued Staff Position No. 107-1 (FAS 107-1) and APB 28-1, "Interim Disclosures about Fair Value of Financial
Instruments." FAS 107-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as well as in annual

101

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

financial
statements. APB 28-1 amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting
periods. FAS 107-1 is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The
Company adopted FAS 107-1 for the quarter ended June 30, 2009, and the adoption did not have a material impact on the Company's consolidated financial condition, results of
operations or cash flow.

In
April 2009, FASB issued Staff Position No. 115-2 (FAS 115-2) and 124-2 (FAS 124-2), "Recognition and Presentation
of Other-Than-Temporary Impairments." FAS 115-2 and FAS 124-2 amend the other-than-temporary impairment guidance
in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. It does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.
The Company early adopted FAS 115-2 and FAS 124-2 effective January 1, 2009, and the adoption did have a material impact on results of operations,
financial position, and liquidity. See Note 2 "Investment In Securities" for additional disclosures required by the early adoption of FAS 115-2. The early adoption provided
the basis to segregate the credit loss on an impaired security from unrealized loss attributable to other factors. The unrealized losses associated with impaired debt securities that were not
attributed to credit impairment was $3.4 million at June 30, 2009. See Note 2 "Investment In Securities" for additional disclosures required by the early adoption of
FAS 115-2.

In
May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events, which requires entities to evaluate subsequent events through the date
financial statements are issued. Existing guidance on subsequent events was part of the AICPA Auditing Standards. This Statement is not intended to change existing practice. The Statement requires
entities to recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including
estimates inherent in the process of preparing financial statements ("recognizable subsequent events"). This Statement also requires entities to disclose the date through which subsequent events have
been evaluated and the nature and estimated financial effects of certain subsequent events. SFAS 165 is effective for interim and annual periods ending after June 15, 2009.

In
June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principlesa replacement of FASB Statement No. 162 , which replaces the Generally
Accepted Accounting Principles ("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 Securities Exchange Commission. All other non-grandfathered accounting literature became
nonauthoritative. FAS 168 is effective July 1, 2009. Management has reviewed FAS 168 and does not expect the adoption of this statement to have a material impact on the Company's
consolidated financial condition, results of operations or cash flow.

102

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In
June 2009, the FASB issued Statement of Financial Accounting Standards No. 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. This Statement is effective for interim and annual reporting periods beginning after November 15, 2009. Management is currently evaluating the impact of this FSP
on the Company's consolidated financial condition, results of operations and cash flow.

In
June 2009, the FASB issued Statement of Financial Accounting Standards No. 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. This Statement clarifies, but does not significantly change, the characteristics that identify a variable interest entity. This Statement 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). This Statement is
effective for interim and annual reporting periods beginning after November 15, 2009. The adoption of this Statement is not expected to impact the Company's consolidated financial statements.

103

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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, 2009Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
(Losses)

Fair
ValueDebt securities:U.S. government agencies

$
2,632

$
43

$
(4
)
$
2,671Municipal bonds


14,356


163


(218
)

14,301Trust preferred securities


11,879





(5,828
)

6,05128,867


206


(6,050
)

23,023Equity securities:Federal Ag Mortgage


7





(5
)

2Other Investments


253








253260





(5
)

255Residential mortgage-backed securities


196,704


3,827


(899
)

199,632$
225,831

$
4,033

$
(6,954
)
$
222,910




June 30, 2008Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
(Losses)

Fair
ValueDebt securities:U.S. government agencies

$
8,490

$
173

$


$
8,663Federal Home Loan Bank


3,944


87





4,031Municipal bonds


12,319


51


(189
)

12,181Trust preferred securities


12,372





(2,080
)

10,29237,125


311


(2,269
)

35,167Equity securities:FNMA


8








8Federal Ag Mortgage


7


2





9Other Investments


253








253268


2





270Residential mortgage-backed securities


190,947


558


(1,938
)

189,567$
228,340

$
871

$
(4,207
)
$
225,004


104

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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, 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
)




June 30, 2008Less 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

$
5,195

$
(127
)
$
1,250

$
(62
)
$
6,445

$
(189
)Trust preferred securities


8,627


(1,727
)

1,665


(353
)

10,292


(2,080
)13,822


(1,854
)

2,915


(415
)

16,737


(2,269
)Residential mortgage-backedsecurities


112,929


(1,208
)

24,758


(730
)

137,687


(1,938
)$
126,751

$
(3,062
)
$
27,673

$
(1,145
)
$
154,424

$
(4,207
)


The
unrealized losses reported for municipal bonds relate to 34 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, 2009, represent an other-than-temporary impairment for these investments. The Company does not have the intent to sell these securities (has not made a decision
to sell) and has assessed that it is not more likely than not that the Company will be required to sell these securities before anticipated recovery of fair value.

The
unrealized losses reported for residential mortgage-backed securities relate to 64 securities issued by the Federal National Mortgage Association ("FNMA"), the Government National
Mortgage Association ("GNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC"). These

105

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 2INVESTMENTS IN SECURITIES (Continued)

unrealized
losses are primarily attributable to changes in interest rates and the contractual cash flows of those investments which are guaranteed by an agency of the U.S. government. Residential
mortgage-backed securities also include one "private-label" collateralized mortgage obligation with an amortized cost amount of $2,060, which has maintained its AAA rating as of June 30, 2009.
Management does not believe any of these unrealized losses as of June 30, 2009, represent an other-than-temporary impairment for those investments. The Company does not
have the intent to sell these securities (has not made a decision to sell) and has assessed that it is not more likely than not that the Company will be required to sell these securities before
anticipated recovery of fair value.

The
unrealized losses reported for trust preferred securities are attributable to six rated pooled securities. Rating downgrades regarding these investments have occurred during fiscal
year 2009 placing each in a below investment grade rating. The securities have an amortized cost of $3,728 rated B3, $2,514 rated Caa1, and $5,637 rated Ca. The market for these securities is
currently inactive. The CUSIPs of the trust preferred securities are 74041EAC9 and 74042TAE1 rated B3, 740417AB6 and 74042CAE8 rated Caa1, and 74041RAB2 and 55312HAE9 rated Ca. The Company performed
assessments of available information for each security during fiscal year 2009, and also considered factors such as overall deal structure and its position within the structure, quality of underlying
issuers within each pool, defaults and recoveries, loss severities and prepayments. Based upon scenarios developed in regard to this information, management compared the present value of best
estimates of cash flows expected to be collected from each security at the security's effective interest rate to the amortized cost basis of each security. Management determined that three trust
preferred securities exhibited an other-than-temporary impairment. The difference between the present value of cash flows and the amortized cost basis for each of the three
securities was
recorded as credit loss impairment and recognized in earnings in the amount of $397. The amortized cost basis of the four securities was reduced by the amount of credit loss. The remaining impairment
amount related to other factors of $3,500 was recognized in other comprehensive income, net of applicable taxes. The unrealized losses on these trust preferred securities can primarily be attributed
to changes in credit spreads since the securities were acquired. See Note 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 $9,901 are quarterly variable-rate securities tied to 3-month LIBOR.

106

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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:

Twelve Months Ended
June 30, 2009Beginning balance of credit losses on securities held as of July 1, 2008 for which a portion of other-than-temporary impairment was recognized in
other comprehensive income

$
Credit losses for which an other-than-temporary impairment was not previously recognized(1)


405Ending balance of credit losses on securities held as of June 30, 2009 for which a portion of other-than-temporary impairment was
recognized in other comprehensive income(1)

$
405


---

The
amortized cost and fair value of debt securities as of June 30, 2009, 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

$
2,324

$
2,369Due after one year through five years


4,914


4,979Due after five years through ten years


7,033


7,071Due after ten years


14,596


8,60428,867


23,023Residential mortgage-backed securities


196,704


199,632$
225,571

$
222,655


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 2009 were $57,246 and resulted in gross gains of $904. Proceeds from the sale of securities available for sale in fiscal
2008 were $5,511 and resulted in gross gains of $3. Proceeds from the sale of securities available for sale in fiscal 2007 were $3,542 and resulted in gross gains of $0.

At
June 30, 2009, and 2008, securities with a fair value of $209,114 and $208,715, respectively, were pledged as collateral for public deposits, borrowing and other purposes.

107

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 3LOANS AND LEASES RECEIVABLE

Loans and leases receivable at June 30, 2009, and 2008, consist of the following:

2009

2008Loans secured by real estateResidentialOne-to-four family

$
85,349

$
100,589Multi-family


49,054


46,118Commercial


221,246


185,038Agriculture


102,676


78,043Construction


12,827


8,286Business, consumer and otherCommercial business


116,231


125,118Automobile


36,359


58,807Junior liens on real estate


91,570


81,250Agriculture


134,331


91,934Equipment financing leases


15,880


19,250Other loans


8,367


7,724Loans on savings accounts


1,645


1,580875,535


803,737Add (less)Undisbursed portion of loans in process


(23,791
)

(19,834
)Deferred loan fees and unamortized discounts and premiums, net


(462
)

(193
)Allowance for loan and lease losses


(8,470
)

(5,933
)$
842,812

$
777,777


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.
Loans held for sale totaling $8,796 at June 30, 2008, consist of $7,959 of one-to-four family fixed-rate loans, $223 of commercial loans and $614 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:

2009

2008

2007Balance, beginning

$
5,933

$
5,872

$
5,657Provision charged to income


1,679


1,994


1,198Charge-offs


(1,569
)

(2,245
)

(1,292
)Recoveries


2,427


312


309Balance, ending

$
8,470

$
5,933

$
5,872


108

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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, 2009, 2008, and 2007:

2009

2008

2007Impaired loans without a valuation allowance

$
7,927

$
514

$
962Impaired loans with a valuation allowance


700


316


519Total impaired loans

$
8,627

$
830

$
1,481Valuation allowance related to impaired loans

$
203

$
130

$
385Nonaccruing loans and leases

$
9,381

$
2,324

$
2,190Accruing loans and leases delinquent more than 90 days


2,092


781


1,308Average investment in impaired loans


2,902


885


966Interest income recognized on impaired loans


11


17


6


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 $3,651 and $4,765 at June 30, 2009, and 2008.

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 $1,046,600 and $994,065, at June 30, 2009, and 2008, respectively.

Custodial
balances maintained in connection with mortgage loan servicing, and included in advances by borrowers for taxes and insurance, were approximately $10,911 and $9,758, at
June 30, 2009, and 2008, respectively.

The
carrying values of mortgage rights were $11,768 and $11,189, at June 30, 2009, and 2008, respectively. The fair values of these rights were $15,055 and $16,629, at
June 30, 2009, and 2008, 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 10%. During fiscal
years 2009 and 2008, servicing rights approximating $1,920 and $1,634, respectively, were capitalized. The Company recognized expense for amortization of the cost of servicing rights in the amount of
$1,341, $1,317 and $1,117 for the fiscal years ended June 30, 2009, 2008, and 2007, respectively.

No
valuation allowances were provided for servicing rights capitalized during the fiscal years ended June 30, 2009, and 2008.

109

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 5OFFICE PROPERTIES AND EQUIPMENT

2009

2008Land

$
2,136

$
1,734Buildings and improvements


20,249


18,304Leasehold improvements


2,408


2,201Furniture, fixtures, equipment and automobile


18,134


16,88742,927


39,126Less accumulated depreciation and amortization


(26,010
)

(24,277
)$
16,917

$
14,849


The
Company leases numerous telephone and office equipment, which require minimum rentals totaling $251 through September 15, 2010. In addition, the Company has leased property
under various operating lease agreements, which expire at various times. The total rental commitments at June 30, 2009, under the leases are as follows:

2010

$
9302011


6092012


3752013


2802014


277Thereafter


2,116$
4,587


NOTE 6DEPOSITS

Deposits at June 30, 2009, and 2008 consist of the following:

2009

2008Noninterest bearing checking accounts

$
94,067

$
90,598Interest bearing accounts


94,846


90,125Money market accounts


145,214


171,689Savings accounts


81,417


78,575In-market certificates of deposit


401,291


325,995Out-of-market certificates of deposit


21,033


27,255$
837,868

$
784,237


110

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 6DEPOSITS (Continued)

Scheduled
maturities of certificates of deposit are as follows:

2010

$
324,8222011


60,1732012


23,8692013


7,1262014


6,328Thereafter


6$
422,324


Non-IRA
deposit accounts are insured up to $250 by the Deposit Insurance Fund (DIF) under management of the Federal Deposit Insurance Corporation (FDIC). On October 3,
2008, the FDIC temporarily increased the insured amount from $100. This insured amount is guaranteed to remain at $250 until December 31, 2013 at which time it is scheduled to be reduced to the
original amount of $100. IRA deposit accounts are 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 $214,930 and $151,517 at June 30, 2009, and 2008, respectively. Deposits at June 30, 2009, and 2008 include $78,087 and $76,507, respectively, of deposits from one
local governmental entity, the majority of which are savings accounts.

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, 2009, and 2008, are summarized as follows:

2009

2008Overnight federal funds purchased (with a rate of 0.96%)

$
26,495

$
29,920Fixed-rate advances (with rates ranging from 2.02% to 6.36%)


180,655


168,355Other borrowings(1)(2)


5,719


179$
212,869

$
198,454


---

111

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

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

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

2010(1)

$
66,8502011


25,0002012


10,0002013


36,5002014


8,800Thereafter


65,719$
212,869






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, 2009, and 2008, the Bank held $1,407 and $1,223,
respectively, in membership stock. The activity-based stock requirement is based on 4.45% of advances outstanding. At June 30, 2009, and 2008, the Bank held $11,069 and $10,022, 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, 2009, the Bank had total collateral with the FHLB of $217,820 of which $10,670 was available for additional borrowing. At June 30,
2008, the Bank had total collateral with FHLB of $260,765 of which $62,490 was available for additional borrowing.

Advances
with the Federal Reserve Bank are secured by commercial business loans. At June 30, 2009, the Bank had total collateral with the Federal Reserve Bank of $69,410 of which
$69,410 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, 2009 and 2008.

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

112

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 8SUBORDINATED DEBENTURES PAYABLE TO TRUSTS (Continued)

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, 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

113

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 8SUBORDINATED DEBENTURES PAYABLE TO TRUSTS (Continued)

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.

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 a $494
unrealized loss and a $218 unrealized loss at June 30, 2009, and 2008, respectively.

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 a $235
unrealized loss and a $97 unrealized gain at June 30, 2009, and 2008, respectively.

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

114

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 9INTEREST RATE CONTRACTS (Continued)

rate
of 6.91%. The fair value of the $3,000 notional amount derivative was a $129 unrealized loss, while the fair value of the $2,000 notional amount derivative was a $94 unrealized loss at
June 30, 2009.

No
gain or loss was recognized in earnings for the fiscal years 2009 and 2008 related to interest rate swaps. No deferred net losses on interest rate swaps in other comprehensive loss as
of June 30, 2009, 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 $1,154 in cash under collateral arrangements as of June 30, 2009, to satisfy collateral requirements associated with our interest rate swap contracts.

The
following table summarizes the derivative financial instruments utilized as of June 30, 2009:

Estimated
Fair ValueBalance
Sheet Location

Notional
AmountCash flow hedge

Gain

LossInterest rate swap contracts


Accumulated other comprehensive loss

$
17,000

$


$
(952
)


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,
2009:

Weighted
Average RateNotional
Value

Average
Maturity
(years)

Fair
ValueLiability conversion swaps

Receive

PayInterest rate swap contracts

$
17,000


2.4

$
(952
)

3.92
%

6.51
%


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 2005. 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:

2009

2008

2007CurrentFederal

$
3,560

$
2,163

$
2,516State


650


592


613Deferred expense


(340
)

11


(485
)$
3,870

$
2,766

$
2,644


115

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 10INCOME TAX MATTERS (Continued)

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:

2009

2008

2007Computed "expected" tax expense

$
4,090

$
3,013

$
2,810Increase (decrease) in income taxes resulting fromTax exempt income


(439
)

(385
)

(353
)State taxes, net of federal benefit


482


369


392Increase in cash surrender value of life insurance


(190
)

(186
)

(177
)Stock options


(13
)

8


32Benefit of income taxed at lower rates


(92
)

(64
)

(58
)Change in valuation allowance


(1
)




(1
)Other, net


33


11


(1
)$
3,870

$
2,766

$
2,644


The
components of the net deferred tax asset as of June 30, 2009, and 2008 are as follows:

2009

2008Deferred tax assetsAllowance for loan and lease losses

$
3,026

$
2,008Accrued expenses


434


253Net unrealized loss on securities available for sale


1,110


1,268Pension cost


1,177


523Other


676


2576,423


4,309Less valuation allowance





(1
)6,423


4,308Deferred tax liabilitiesDefined benefit pension plan


775


64Property and equipment


601


718Mortgage servicing rights


669


501Other assets


344


176Other


71


512,460


1,510$
3,963

$
2,798


116

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 10INCOME TAX MATTERS (Continued)

Retained earnings at June 30, 2009, and 2008, 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 adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48") effective July 1, 2007. Implementation
resulted in no cumulative effect adjustment to retained earnings as of the date of adoption. The Company had no unrecognized tax benefits as of June 30, 2009 and 2008. The Company recognized no
interest and penalties on the underpayment of income taxes during fiscal years June 30, 2009 and 2008, and had no accrued interest and penalties on the balance sheet as of June 30, 2009
and 2008. 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.

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, 2009, and 2008, that the Bank meets all capital adequacy requirements to which it is subject.

As
of June 30, 2009, 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.

117

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 11REGULATORY CAPITAL (Continued)

The
following table summarizes the Bank's compliance with its regulatory capital requirements at June 30, 2009, and 2008:

Actual

Requirement

To Be Well
Capitalized
Under Prompt
Corrective
Action ProvisionsAmount

Percent

Amount

Percent

Amount

PercentAs 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
%As of June 30, 2008Tier I (core) capital (to adjusted total assets)

$
85,623


7.78
%
$
44,027


4.00
%
$
55,034


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


91,417


10.83
%

67,519


8.00
%

84,398


10.00
%Tangible capital (to tangible assets)


85,623


7.78
%

16,510


1.50
%

N/A


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


85,623


10.15
%

N/A


N/A


50,639


6.00
%


NOTE 12STOCKHOLDERS' EQUITY

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 May 1, 2008, may
be acquired through April 30, 2009. In conjunction with the Company's participation in the CPP, the Company's Board of Directors terminated the stock buyback program in the second quarter of
fiscal 2009 which had been in place through November 21, 2008. As of November 21, 2008, the Company had repurchased 6,527 shares of common stock pursuant to the program. Pursuant
to a series of stock buy-back programs initiated by the Company since 1996, the Company has purchased an aggregate of 2,083,455 shares of common stock through June 30, 2009.

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

118

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 12STOCKHOLDERS' EQUITY (Continued)

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, 2009, the Bank sent written notification to the OTS of its intention to pay
dividends for each quarter in the year ending June 30, 2010, 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.

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 27, 2009, the Board of Directors declared a $0.1125 per share dividend payable on August 14, 2009, to shareholders of record as of August 7, 2009. This cash
dividend has not been reflected in the consolidated financial statements.

119

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

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,
2009, 2008, and 2007, follow:

2009

2008

2007Net income

$
7,816

$
5,843

$
5,383Preferred stock dividends and accretion


1,316





Net income available to common shareholders

$
6,500

$
5,843

$
5,383Basic EPS:Weighted average number of common shares outstanding


4,006,820


3,969,988


3,978,571Earnings per common share

$
1.62

$
1.47

$
1.35Diluted EPS:Weighted average number of common shares outstanding


4,006,820


3,969,988


3,978,571Common share equivalentsstock options / Stock Appreciation Rights (SARs) under employee compensation plans/warrant


20,683


53,486


78,155Weighted average number of common shares and common share equivalents


4,027,503


4,023,474


4,056,726Earnings per common share

$
1.61

$
1.45

$
1.33


Options
and SARs 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. All options outstanding were included in the computation for the year ended June 30, 2007.

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.

120

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 14DEFINED BENEFIT PLAN (Continued)

Statement
of Financial Accounting Standards No. 158 (SFAS 158) was issued in September 2006 entitled"Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106 and 132R."SFAS 158 requires recognition of the overfunded or
underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits and any remaining transition amounts
under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until
they are amortized as a component of net periodic cost. Also, the measurement datethe date at which the benefit obligation and plan assets are measuredis required to be the
company's fiscal year-end. As required by SFAS 158, the Company adopted the balance sheet recognition provisions at June 30, 2007, and adopted the year-end
measurement date at June 30, 2008.

Information
relative to the components of net periodic benefit cost measured as of June 30, 2009, and June 30, 2008, for the Company's defined benefit plan is presented
below.

2009

2008Changes in benefit obligationsBenefit obligations, beginning

$
6,294

$
5,606Service cost


474


447Interest cost


480


437Benefits paid


(191
)

(504
)Assumption changes


887


365Actuarial (gain) loss


(108
)

(57
)Benefit obligations, ending

$
7,836

$
6,294Changes in plan assetsFair value of plan assets, beginning

$
5,504

$
5,899Actual return (loss) on plan assets


(472
)

(423
)Company contributions


2,350


532Benefits paid


(191
)

(504
)Fair value of plan assets, ending

$
7,191

$
5,504Funded status at end of year

$
(645
)
$
(790
)Amounts recognized in accumulated other comprehensive loss consists of net loss

$
3,097

$
1,376Accumulated benefit obligation

$
5,469

$
5,295


121

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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:

2009

2008

2007Net periodic benefit costService cost

$
474

$
447

$
466Interest cost


480


437


391Expected return on plan assets


(532
)

(487
)

(436
)Amortization of net loss


62





Net periodic benefit cost


484


397


421Other changes in plan assets and benefit obligations recognized in other comprehensive loss:Net loss


1,783


1,218


158Amortization of net loss


(62
)




Total recognized in other comprehensive loss


1,721


1,218


158Total recognized in net periodic benefit cost and other comprehensive loss

$
2,205

$
1,615

$
579


The
estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is $182.

The
weighted-average assumptions used to determine benefit obligations at June 30 are as follows:

2009

2008Discount ratepre-retirement


7.50
%

7.50
%Discount ratepost-retirement


3.59
%

4.52
%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:

2009

2008

2007Discount ratepre-retirement


7.50
%

7.50
%

7.50
%Discount ratepost-retirement


3.59
%

4.82
%

4.58
%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.

122

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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:

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
%Fixed


2,326


98


32.3
%

30.0
%Other


557


(17
)

7.8
%

10.0
%Cash and cash equivalents


262





3.6
%

5.0
%Total pension plan assets

$
7,191

$
194


100.0
%

100.0
%




2008Investment Category

Market
Value

Unrealized
Gain/(Loss)

Actual Asset
Mix as a % of
Market Value

Target Asset
Mix as a % of
Market ValueEquities

$
3,512

$
90


63.8
%

65.0
%Fixed


1,991


7


36.2
%

30.0
%Cash and cash equivalents


1





0.0
%

5.0
%Total pension plan assets

$
5,504

$
97


100.0
%

100.0
%


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 $425 to its pension plan in fiscal 2010. 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:

2010

$
5412011


1,7042012


5192013


8862014


436Years 2015 - 2019


3,873


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

123

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 15RETIREMENT SAVINGS PLAN (Continued)

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 $282, $335 and $286 for 2009, 2008, and 2007, 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, 2008, and 2007, the Company met a performance level in the plan and, accordingly, for fiscal 2009 nonvested stock
with a value of $224 and SARs with a value of $224 will be issued in fiscal 2010. During fiscal years 2009 and 2008, 6,584 and 5,146 shares, respectively of nonvested stock were issued and 47,051 and
29,204 SARs were issued in fiscal 2009 and 2008 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 $97 and $83 for 2009 and 2008, 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 2009, 2008, and 2007, $336, $391 and $388, respectively, were recorded as amortization expense.
The issuance value of the 2009 and 2008 SARs was $97 and $83 and each issuance is being amortized over the vesting period of four years. During fiscal years 2009, 2008, and 2007, $38, $30 and $11,
respectively, were recorded as amortization expense.

In
connection with meeting a performance level of the long-term incentive plan, 16,232 shares of nonvested stock and 115,747 SARs will be issued in fiscal 2010 under the
plan. Both the nonvested shares and SARs issued in fiscal 2010 will have a four-year vesting period in which 25% of the stock vests in each of the first through fourth anniversaries of the
date of grant.

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 2009 and 2008, 2,507 and 2,718 nonvested shares, respectively, were awarded under the Pool. The issuance value of these nonvested shares was
$37 and $42 in 2009 and 2008, respectively, and is being amortized over their vesting periods with the unamortized balance included in additional paid in capital in the consolidated balance sheet.
During fiscal years 2009, 2008, and 2007, $38, $28 and $30, respectively, were recorded as amortization expense.

124

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 16STOCK-BASED COMPENSATION PLANS (Continued)

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 2009 and 2008, shares of nonvested stock awarded were 14,511 and 11,301, respectively. The nonvested shares vest on the first
anniversary of the date of grant. During fiscal years 2009, 2008, and 2007, amortization expenses recorded was $177, $138 and $101, 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 2009, 2008, and 2007:

2009

2008

2007Expected volatility


19.00
%

22.00
%

23.00
%Expected dividend yield


3.06
%

2.61
%

2.63
%Risk-free interest rate


2.87
%

3.94
%

4.61
%Expected term (in years)


5


4


4


Stock
option activity for the fiscal year ended June 30, are as follows:

2009Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
ValueBeginning Balance


203,554

$
12.48Granted





Forfeited


(11,696
)

16.37Exercised


(51,939
)

10.37Ending Balance


139,919

$
12.89


4.02

$
119Vested and exercisable at June 30


139,919

$
12.89


4.02

$
119


125

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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:

2009SARs

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
ValueBeginning Balance


44,622

$
16.06Granted


47,051


14.71Forfeited


(4,023
)

15.76Exercised





Ending Balance


87,650

$
15.35


8.55

$
Vested and exercisable at June 30


14,448

$
16.04


7.64

$



The
Company applied a forfeiture rate of 22.00% when calculating the amount of options and stock appreciation rights expected to vest at June 30, 2009. 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 2009, 2008, and 2007 was $2.06, $2.84 and $3.11. The total intrinsic value of options exercised during the fiscal years 2009, 2008, and 2007, was $188, $155 and $269,
respectively. During fiscal years 2009, 2008, and 2007, $38, $53 and $101, respectively, were recorded as amortization expense. As of June 30, 2009, there was $162 of total unrecognized
compensation cost related to nonvested SARs awards. The cost is expected to be recognized over a weighted-average period of 28 months for SARs awards. Cash received from the exercise of options
and SARs for the fiscal years 2009, 2008, and 2007, was $526, $432 and $787, respectively. The tax benefit realized for the tax deductions from cashless option exercises totaled $1, $7, and $61 for
the fiscal years 2009, 2008, and 2007, respectively. The company generally uses treasury shares to satisfy stock option exercises.

Nonvested
share activity for the fiscal years ended June 30 follows:

2009

2008

2007Shares

Weighted
Average
Grant Date
Fair Value

Shares

Weighted
Average
Grant Date
Fair Value

Shares

Weighted
Average
Grant Date
Fair ValueNonvested Balance, beginning


121,746

$
16.57


144,711

$
16.11


158,177

$
15.75Granted


23,602


13.33


19,165


16.62


11,866


16.78Vested


(53,089
)

16.42


(31,236
)

14.51


(17,890
)

13.83Forfeited


(1,551
)

16.70


(10,894
)

16.44


(7,442
)

15.11Nonvested Balance, ending


90,708

$
15.81


121,746

$
16.57


144,711

$
16.11


Pretax
compensation expense recognized for nonvested shares for the fiscal years 2009, 2008, and 2007, was $373, $419 and $418, respectively. The tax benefit for the fiscal years 2009,
2008, and 2007

126

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 16STOCK-BASED COMPENSATION PLANS (Continued)

was
$142, $159 and $159, respectively. As of June 30, 2009, there was $905 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 15 months. The total fair value of shares vested during the fiscal years 2009, 2008, and 2007 was $872, $453 and $247, respectively.

The
Company had a Director Restricted Stock Plan which provided that awards of nonvested shares of the Company's common stock be made to outside directors of the Company. The plan was
designed to allow for payment of the annual retainer fee in shares of the Company's common stock. Each outside director is entitled to all voting, dividend and distribution rights during the
restriction period. The effective date of the plan was July 1, 1997. The plan had 90,750 shares allocated to it and was in effect for a period of ten years. During fiscal year 2007, 6,041
shares were awarded and $103 of expense was incurred under the plan as the annual retainer for the Company's Board of Directors. The Director Restricted Stock Plan expired on December 31, 2006.
At June 30, 2009, there was no unrecognized compensation expense related to this plan.

127

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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:

2009

2008

2007Net income

$
7,816

$
5,843

$
5,383Other comprehensive income (loss), net of tax:Securities available for sale:Net unrealized gains (losses) that are included in accumulated other comprehensive income (loss)


4,819


(1,069
)

1,707Reclassification adjustment for net gains realized in net income


(904
)

(3
)

Noncredit component of impairment losses on other-than-temporary impaired securities, net


(3,500
)




Income tax benefit (expense)


(158
)

408


(649
)Other comprehensive income (loss) on securities available for sale


257


(664
)

1,058Defined benefit plan:Net unrealized (loss)


(1,721
)

(1,218
)

Income tax benefit


654


463


Other comprehensive (loss) on defined benefit plan


(1,067
)

(755
)

Cash flow hedging activities-interest rate swap contracts:Net unrealized (losses)


(831
)

(121
)

Income tax benefit


283


41


Other comprehensive (loss) on cash flow hedging activities-interest rate swap contracts


(548
)

(80
)

Total other comprehensive income (loss)


(1,358
)

(1,499
)

1,058Comprehensive income

$
6,458

$
4,344

$
6,441


Cumulative
other comprehensive (loss) balances were:

2009

2008

2007Unrealized loss on securities available for sale net of related tax effect of $1,110, $1,268 and $860

$
(1,811
)
$
(2,068
)
$
(1,404
)Unrealized loss on defined benefit plan net of related tax effect of $1,177, $523 and $60


(1,920
)

(853
)

(98
)Unrealized loss on cash flow hedging activities net of related tax effect of $324 and $41


(628
)

(80
)

$
(4,359
)
$
(3,001
)
$
(1,502
)


128

---





Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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:



129

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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:

2009

2008Carrying
Amount

Fair
Value

Carrying
Amount

Fair
ValueFinancial assetsCash and cash equivalents

$
18,511

$
18,511

$
21,170

$
21,170Securities


222,910


222,910


225,004


225,004Federal Home Loan Bank stock


12,476


12,476


11,245


11,245Loans and leases


857,693


863,453


786,573


790,420Accrued interest receivable


7,598


7,598


7,540


7,540Servicing rights


11,768


15,055


11,189


16,629Interest rate swap contracts


(952
)

(952
)

(121
)

(121
)Financial liabilitiesDeposits


837,868


844,243


784,237


786,170Borrowed funds


212,869


219,249


198,454


199,886Subordinated debentures payable to trusts


27,837


9,990


27,837


27,837Accrued interest payable and advances by borrowers for taxes and insurance


17,421


17,421


16,804


16,804


Fair Value Measurement

Effective July 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements.
In accordance with the FASB Staff Position 157-2,Effective Date of SFAS
No. 157, the Company has not applied the provisions of this statement to non-financial assets and liabilities, which will be effective July 1, 2009
and is not expected to 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

130

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 18FINANCIAL INSTRUMENTS (Continued)

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:

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

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

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

The
table below presents the Company's balances of financial instruments measured at fair value on a recurring basis by level within the hierarchy at June 30, 2009:

Quoted Prices
In Active
Markets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total at
Fair ValueSecurities available for sale

$
2

$
216,857

$
6,051

$
222,910Interest rate swaps





(952
)




(952
)Total assets

$
2

$
215,905

$
6,051

$
221,958


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

131

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 18FINANCIAL INSTRUMENTS (Continued)

model
and capital markets trading staff. This proprietary valuation model is used for valuing municipal securities. This model includes a separate curve structure for Bank-Qualified
municipal securities. The grouping of municipal securities is further broken down according to insurer, credit support, state of issuance, and rating to incorporate additional spreads and municipal
curves.

The
securities shown in Level 3 relate to trust preferred securities which are currently part of an inactive market. The inactivity was evidenced first by a significant widening
of the bid-ask spread in the brokered markets in which these securities trade, and then by a significant decrease in the volume of trades relative to historical levels. 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.

132

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(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 twelve months ended June 30, 2009:

Fair Value Measurements Using Significant  Unobservable Inputs (Level 3)

Securities
Available
for SaleBeginning balance, 6/30/2008

$
Total realized/unrealized gains (losses)Included in earnings


(397
)Included in other comprehensive loss


(2,956
)Purchases, issuances, (paydowns) and (sales)


(94
)Transfers into or (out) of Level 3


9,498Ending balance, 6/30/2009

$
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, 2009:

Quoted Prices
In Active
Markets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Fiscal 2009
incurred
lossesLoans held for sale

$


$
14,881

$


$
Impaired loans





7,964





Mortgage servicing rights








11,768


Foreclosed assets





11





7


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

Impaired
loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value. Market value is measured based on the value of the
collateral securing these loans. Collateral is primarily real estate and its fair value is generally determined based on real estate appraisals or other evaluations by qualified professionals.
Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. Impaired loans that are
collateral dependent are written down to their fair value, less costs to sell, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeds
the fair value. Valuation techniques consistent with the market approach, income approach, and/or cost approach were used to measure fair value and primarily

133

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 18FINANCIAL INSTRUMENTS (Continued)

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.

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 $129,627 and $83,254 at June 30, 2009, and 2008, respectively. Unused letters of credit amounted to $2,055 and $3,318 at June 30, 2009, and 2008,
respectively. The lines of credit and letters of credit are collateralized in substantially the same manner as loans receivable.

The
Bank had outstanding commitments to originate or purchase loans of $30,804 and to sell loans of approximately $21,218 at June 30, 2009. The portion of commitments to originate
or purchase fixed rate loans totaled $20,333 with a range in interest rates of 4.25% to 7.00%. 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.

134

---





Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 20CASH FLOW INFORMATION

Changes in other assets and liabilities for the years ended June 30, consist of:

2009

2008

2007(Increase) decrease in accrued interest receivable

$
(58
)
$
955

$
(1,615
)Earnings on cash value of life insurance


(544
)

(531
)

(506
)Increase (decrease) in net deferred loan fees and other assets


(4,086
)

742


(600
)Increase (decrease) in accrued expenses and other liabilities


(320
)

1,422


6,738$
(5,008
)
$
2,588

$
4,017Supplemental Disclosure of Cash Flows InformationCash payments for interest

$
25,846

$
32,940

$
34,848Cash payments for income and franchise taxes


4,273


3,836


1,914Supplemental Disclosure of Noncash Investing and Financing ActivitiesForeclosed real estate and other properties acquired in settlement of loans

$
442

$
135

$
481


NOTE 21FINANCIAL INFORMATION OF HF FINANCIAL CORP. (PARENT ONLY)

The Company's condensed balance sheets as of June 30, 2009, and 2008, and related condensed statements of income and cash flows for each of the years in the three-year
period ended June 30, 2009, are as follows:

Condensed Statements of Financial Condition

2009

2008AssetsCash primarily with the Bank

$
1,325

$
3,295Investments in subsidiaries


100,076


87,672Investment securities


250


250Other


825


1,300$
102,476

$
92,517LiabilitiesOther borrowings

$
27,837

$
27,837Other liabilities


5,965


477Stockholders' equity


68,674


64,203$
102,476

$
92,517


135

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 21FINANCIAL INFORMATION OF HF FINANCIAL CORP. (PARENT ONLY) (Continued)

Condensed Statements of Income

2009

2008

2007Dividends from subsidiaries

$
2,350

$
5,206

$
2,950Interest and other income


96


109


129Expenses


(2,799
)

(2,628
)

(3,245
)Income tax benefit


1,109


819


1,034Equity in undistributed income of subsidiaries


7,060


2,337


4,515Net income

$
7,816

$
5,843

$
5,383


136

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 21FINANCIAL INFORMATION OF HF FINANCIAL CORP. (PARENT ONLY) (Continued)

Condensed Cash Flows

2009

2008

2007Cash Flows From Operating ActivitiesNet income

$
7,816

$
5,843

$
5,383Adjustments to reconcile net income to net cash provided by operating activitiesAmortization


10


141


317Equity in (earnings) of subsidiaries


(9,410
)

(7,543
)

(7,465
)Cash dividends received from subsidiaries


2,350


5,206


2,950Increase (decrease) in liabilities


(12
)

(99
)

362Other, net


351


(109
)

(21
)Net cash provided by operating activities


1,105


3,439


1,526Cash Flows From Investing ActivitiesPurchase of investment securities





(69
)

(116
)Capital contribution to the Bank


(6,000
)




Net cash used in investment activities


(6,000
)

(69
)

(116
)Cash Flows From Financing ActivitiesPurchase of treasury stock





(1,730
)

Cash dividends paid


(2,472
)

(1,702
)

(1,662
)Purchase 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


547


630


904Proceeds from issuance of subordinated debentures





5,000


10,000Redemption of subordinated debentures





(5,000
)

(10,000
)Proceeds from other borrowings


5,500





Payments of debt issue costs








(6
)Net cash provided by (used in) financing activities


2,925


(2,802
)

(764
)Increase (decrease) in cash


(1,970
)

568


646Cash at beginning of period


3,295


2,727


2,081Cash at end of period

$
1,325

$
3,295

$
2,727


137

---



Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2009 AND 2008

(DOLLARS IN THOUSANDS, except share data)

NOTE 22QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
QuarterFiscal 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


0.21Fiscal Year 2008Total interest income

$
15,985

$
16,085

$
15,542

$
15,562Net interest income


6,668


6,996


7,695


8,517Provision for losses on loans and leases


325


295


551


823Net income


1,348


1,251


1,623


1,621Basic earnings per share

$
0.34

$
0.32

$
0.41

$
0.41Diluted earnings per share


0.33


0.31


0.40


0.40


138

---





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

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, 2009, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Item 9B.Other Information

None.

139

---





Table of Contents

PART III

Item 10.Directors, Executive Officers and Corporate Governance

Directors

The Company's Board of Directors currently consists of seven members. The Board of Directors is divided into three classes, with one
class of directors elected annually. Directors of the Company are generally elected to serve for a three-year term and until their respective successors are elected and qualified.

The
following table lists, as of September 17, 2009, the name and principal occupation of each current director of the Company and the year in which each such person was first
elected as a director.

Name

Class of
Director

Principal Occupation

Served as
Director SinceCurtis J. Bernard

I

Owner and founder of Bernard Properties


2004William G. Pederson

I

Chief Executive Officer of Mesa Corp.


1996Charles T. Day

II

Vice Chairman of Twelve-Step Living Corporation


2007Robert L. Hanson

II

Chief Executive Officer of Harold's Photo Centers


1992Curtis L. Hage

III

Chairman, President and Chief Executive Officer of the Company


1992Christine E. Hamilton

III

Managing Principal of a large diversified farming and ranching operation


2005Thomas L. Van Wyhe

III

District Manager of Trane Company


1996


The
Class I director nominees for the upcoming 2009 Annual Meeting of Stockholders will be William G. Pederson and David J. Horadovsky, both of which were nominated by the
Nominating and Corporate Governance Committee of the Board of Directors. Both Class I director nominees have consented to act as a director if elected. Class I directors will be elected
to serve for a three-year term ending at the 2012 Annual Meeting of Stockholders and until their successors are duly elected and qualified (except in the case of earlier death, resignation
or removal). The continuing directors, Class II and Class III directors, will serve until the 2010 Annual Meeting of Stockholders and 2011 Annual Meeting of Stockholders, respectively,
and until their successors are duly elected and qualified (except in the case of earlier death, resignation or removal).

Business Experience of each Current Director and Director Nominee

The information set forth below concerning the current directors and director nominees has been furnished by them to the Company.

CURTIS J. BERNARD, age 56, a Class I Director, is the owner and founder of Bernard Properties, a company engaged in local and
regional economic development in southeast South Dakota and northeast Nebraska. Prior to founding Bernard Properties, from July 2001 to May 2002, Mr. Bernard was a Senior Credit Risk Consultant
for TXU Energy, an electric power retailer located in Dallas, Texas. From September 1998 through July 2000, he served as Senior Vice President and Chief Operating Officer for 1st Financial
Bank, N. Sioux City, South Dakota. Mr. Bernard was also previously employed with Citibank, serving in various capacities between 1981 and 1998. Mr. Bernard has served as a director for
both the Company and the Bank since 2004.

140

---



Table of Contents

WILLIAM G. PEDERSON, age 53, a Class I Director, is Chief Executive Officer of Mesa Corp., Watertown, South Dakota, a wholesale
distributor of automotive products. He has held his current position with Mesa Corp. since 1994. Mr. Pederson also previously held the position of Chairman and CEO of PAM Oil, Inc. from
1978 through 2008 at which time Mesa Corp. and PAM Oil, Inc. were combined. He has served as a director of both the Company and the Bank since 1996. Mr. Pederson will be a Class I
director nominee at the upcoming 2009 Annual Meeting of Stockholders.

DAVID J. HORADOVSKY, age 53, will be a Class I director nominee at the upcoming 2009 Annual Meeting of Stockholders.
Mr. Horazdovsky is the President and Chief Executive Officer of The Evangelical Lutheran Good Samaritan Society, where he has been employed in various capacities since 1978 and held his present
position since 2004. He has served as a director of the Bank since 2007.

CHARLES T. DAY, age 61, a Class II Director, is the Vice Chairman of Twelve-Step Living Corporation, ("TLC") a an
organization providing non-medical chemical dependency recovery services. Prior to joining TLC in 2007, Mr. Day was employed as Senior Vice President/Finance and Treasurer for
Sanford Health Systems from 2004 through 2007. From 1997 through 2004, Mr. Day was a national consulting partner for tax-exempt health care institutions and also focused on
strategic finance, mergers and acquisitions, valuations and other capital formation transactions across a broad spectrum of industries. Mr. Day is also a Certified Public Accountant and was
previously employed with Coopers & Lybrand as a tax partner. Mr. Day was elected to the Company's Board of Directors in November 2007, and has served as a director for the Bank since
September 2007.

ROBERT L. HANSON, age 63, a Class II Director, is the Chief Executive Officer of Harold's Photo Centers, Sioux Falls, South Dakota,
a retail photography and equipment company. He has held such position since 1980. He has served as a director of both the Company and the Bank since 1992.

CURTIS L. HAGE, age 63, a Class III Director, is the Chairman, President and Chief Executive Officer of the Company and Chairman
and Chief Executive Officer of the Bank. Mr. Hage was elected Chairman of the Company in September 1996 and has held the position of President and Chief Executive Officer of the Company since
February 1991. Mr. Hage joined the Bank in 1968 and served in various capacities prior to being elected its Chairman and Chief Executive Officer in 1991. Mr. Hage has served as a
director of the Corporation since 1992 and the Bank since 1986.

CHRISTINE E. HAMILTON,age 53, a Class III Director, has served as the Managing Principal of a large diversified farming and
ranching operation in central South Dakota since November 2000. She
formed the MHCH Foundation, a non profit family foundation established to promote South Dakota and its future in the changing global economy. Ms. Hamilton serves on the boards of directors of a
number of other entities, including the SDSU Foundation's governing board, the South Dakota Chamber of Commerce, South Dakota Rural Enterprise, Inc., Northern Great Plains, Inc., SDBio,
and represents Hematech on a joint venture board. Ms. Hamilton has served as a director of the Company since June 2005 and the Bank since January 2003.

THOMAS L. VAN WYHE, age 59, a Class III Director, is a District Manager for Trane Company, Omaha, Nebraska and Sioux Falls, South
Dakota, an air conditioning and heating sales and service company. He has been employed in various capacities by that organization since 1973 and has held his present position since 1994.
Mr. Van Wyhe has served as a director of both the Company and the Bank since 1996.

141

---



Table of Contents

Executive Officers

The following table lists the executive officers of the Company and Bank as of September 17, 2009.

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/Business Banking of the BankJon 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/Retail Banking of the BankBruce E. Hanson

Vice President, Controller of the Bank


Business Experience of each Executive Officer

CURTIS L. HAGE, age 63, 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 51, 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 47, has served as the Senior Vice President/Business Banking of the Bank from November 1999 until May 2008 at which
time he was promoted to the position of Senior Vice President/Community Banking. Prior to joining the Bank, Mr. Brown served as Vice President/Manager Commercial Banking of Firstar Bank, Sioux
City, Iowa, a national banking institution, a position he held since December 1998. Mr. Brown received his M.B.A. and a B.S. in Business Administration from the University of South Dakota.

JON M. GADBERRY, age 49, 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 57, 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 38, 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

142

---



Table of Contents

Vice President/Asset
Strategies. Mr. Olthoff received his B.B.A degree in Finance from Iowa State University.

NATALIE A. SUNDVOLD, age 46, 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 42, has served as the Senior Vice President/Retail Banking of the Bank from July 2006 to May 2008 at which time he
was promoted to the position of Senior Vice President/Corporate Strategy. 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 46, 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.

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 Proxy Statement for the Annual Meeting of Stockholders to be held in 2009, a copy of which will be filed not later
than 120 days after June 30, 2009 (the "2009 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 2009 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 2009 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 2009 Proxy Statement.

143

---



Table of Contents

Item 11.Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

Executive Compensation Overview

The Company has no full time employees, relying upon employees of the Bank for the limited services required by the Company. All
compensation paid to officers and employees is paid by the Bank. This Compensation Discussion and Analysis explains our compensation philosophy, policies and practices with respect to (i) the
Company's Chairman, President and Chief Executive Officer, (ii) the Company's Executive Vice President, Chief Financial Officer and Treasurer, (iii) the Bank's Senior Vice
President/Community Banking, (iv) the Bank's Senior Vice President/Wealth Management and (v) the Bank's Senior Vice President/Chief Financial Officer and Treasurer, which are
collectively referred to as our "Named Executive Officers."

The
Personnel, Compensation and Benefits Committee (the "Compensation Committee") is responsible for our executive compensation program. In approving executive compensation, the
Compensation Committee is guided by the following philosophy:



As
pay and performance levels of our peers are not known at the time executive compensation decisions are made, actual executive compensation of the Named Executive Officers may be
greater than or less than target compensation levels. It is the Compensation Committee's intent to address variances between performance and compensation with future compensation decisions.
Additionally, in order for the Compensation Committee to be responsive to our specific performance and the dynamics of the Banking industry, from time to time, the above philosophies may be changed or
not strictly followed.

Our
executive compensation program is designed to accomplish the following objectives:



144

---



Table of Contents



Our
executive compensation program consists of elements that are generally constant (fixed pay) and that vary based on corporate performance (variable pay). Accordingly, as our financial
performance increases, so does executive compensation. Conversely, if financial performance decreases, executive compensation should also decrease. In 2009, the variable pay component of each Named
Executive Officers' total compensation was 29% to 43%, which is consistent with our pay-for-performance objective.

Role of the Personnel, Compensation and Benefits Committee in Setting Executive Compensation

The Compensation Committee reviews and approves all compensation decisions for the Named Executive Officers, including their annual
salaries, incentive awards and any other benefits and perquisites. The Compensation Committee aims to structure executive compensation in a manner that achieves the compensation objectives described
above. In approving executive compensation, the Compensation Committee reviews and considers, among other things:



Role of Management in Setting Executive Compensation

Our Chairman, President and Chief Executive Officer, Curtis L. Hage, regularly attends Compensation Committee meetings, but not
executive sessions. In 2009, Mr. Hage advised the Compensation Committee regarding, among other things, (i) the general competitiveness of our executive compensation program,
(ii) information on our business strategies and risks, financial results and other measures of operational performance, (iii) the findings of a benchmark analysis of our independent
compensation consultant, Amalfi Consulting, LLC and (iv) his recommendations on the Named Executive Officers' annual salaries, incentive awards and other benefits and perquisites, other
than himself. Mr. Hage did not make any recommendations to the Compensation Committee regarding the form or amount of his compensation in 2009.

Mr. Posegate,
our Executive Vice President, Chief Financial Officer and Treasurer, together with other members of management, also occasionally attend Compensation Committee
meetings, but not executive sessions, for informational purposes upon the request of the Compensation Committee.

Role of the Independent Compensation Consultant

In March 2009, the Compensation Committee engaged Amalfi Consulting, LLC, an independent consulting firm ("Amalfi"), to
(i) review our executive compensation program, including to perform a benchmark analysis of the Named Executive Officers' annual base salaries, cash compensation, direct compensation, and total
compensation, and (ii) review the 2009 incentive plan goals to ensure they are aligned with the marketplace. The benchmark analysis was performed utilizing the most recent compensation data of
20 publicly traded financial institutions as further described below.

145

---



Table of Contents

Benchmarking of Executive Compensation

Amalfi compared our 2009 executive compensation program against the executive compensation program of the following 20 publicly traded
financial institutions (our "Peer Group"):



Firstbank Corporation



First Citizens Banc Corp.

First Defiance Financial Corp.



First Mid-Illinois Bancshares, Inc.

BankFinancial Corporation



HopFed Bancorp, Inc.

Horizon Bancorp



Isabella Bank Corporation

Bank of Kentucky Financial Corp.



First Business Financial Services, Inc.

Hawthorn Bancshares, Inc.



Ames National Corporation

German American Bancorp, Inc.



Pulaski Financial Corp.

MutualFirst Financial, Inc.



NorthWest Indiana Bancorp

Centrue Financial Corporation



Indiana Community Bancorp

Princeton National Bancorp, Inc.



Meta Financial Group, Inc.


The
above Peer Group was selected jointly by Amalfi and the Compensation Committee, primarily based upon the following criteria: assets under management, geographical location and
commercial loan portfolio. The Compensation Committee elected not to use the peer group utilized in the Company's performance graph for purposes of benchmarking executive compensation, because the
Compensation Committee believed the above companies better reflect the competition we face for executive talent.

Elements of Executive Compensation

Our 2009 executive compensation program was primarily comprised of the following elements:



Generally,
the Compensation Committee annually reviews each element of compensation individually and considers it collectively with the other elements to ensure each Named Executive
Officer's total compensation is consistent with our executive compensation program's objectives.

Each
of the Named Executive Officers has entered into an employment agreement and change-in-control agreement with the Bank as further described below in this
Form 10-K.

146

---



Table of Contents

Base Salary

Our Named Executive Officers receive a base level of monthly income for the individual expertise, skills, knowledge and experience they
offer to our management team. In July 2008, each of the Named Executive Officer's base salary was increased, as follows:

Base Salary as of
June 30, 2008

Base Salary as of
July 1, 2008

Percentage
increase in
Base SalaryCurtis L. Hage
Chairman, President and Chief Executive Officer of the Company

$
345,690

$
359,600


4
%Darrel L. Posegate
Executive Vice President, Chief Financial Officer and Treasurer of the Company

$
230,000

$
239,200


4
%David A. Brown
Senior Vice President/Community Banking of the Bank

$
149,000

$
155,000


4
%Jon M. Gadberry(1)
Senior Vice President/Wealth Management of the Bank

$
130,000

$
135,200


4
%Brent R. Olthoff
Senior Vice President/Chief Financial Officer and Treasurer of the Bank

$
120,000

$
132,000


10
%


---

Except
for Mr. Olthoff, each of the Named Executive Officers' received a 4% merit increase in base salary. Mr. Olthoff's base salary was increased 10% based upon market
competitiveness and a subjective evaluation of his general performance.

Annual Cash Incentive Awards

Annual cash incentive awards are made pursuant to the Bank's Short-Term Incentive Plan. The purpose of the
Short-Term Incentive Plan is to motivate, reward and retain key executives, including the Named Executive Officers, by providing them competitive compensation opportunities based upon the
Company's achievement of pre-established financial goals.

At
the beginning of each fiscal year, the Compensation Committee establishes the financial goals pursuant to which cash incentive awards are made under the Short-Term
Incentive Plan, together with the payout ranges for each Named Executive Officer upon the Company's achievement of such financial goals. For 2009, cash incentive awards were based upon the Company's
diluted earnings per share and the payout ranges were stated as a percentage of the Named Executive Officer's respective base salary. No cash incentive awards are paid unless the Company achieves a
threshold level of performance, which in 2009 was 4% growth in diluted earnings per share. Generally, the cash incentive awards are paid promptly following the Audit Committee's acceptance of the
Company's audited financial statements for the applicable fiscal year.

In
calculating diluted earnings per share, the Compensation Committee has discretion to adjust the Company's diluted earnings per share to (i) exclude from the calculation thereof
any single, nonrecurring event that resulted in either a 10% increase or decrease on the earnings component of such calculation, and (ii) adjust the calculation thereof as the result of
significant or material events. During 2009, the Compensation Committee did not exercise the above discretion.

147

---



Table of Contents

The Compensation Committee established the following 2009 payout ranges based upon the Company achieving growth in diluted earnings per share beyond a baseline of
$1.45, which was the Company's diluted earnings per share in 2008 (referred to herein as "Diluted EPS"):

Each
of Curtis L. Hage and Darrel L. Posegate could have earned an award of:



Each
of David A. Brown, Jon M. Gadberry and Brent R. Olthoff could have earned an award of:



Under
the Short-Term Incentive Plan, cash incentive awards are interpolated to the extent that actual growth in Diluted EPS falls between designated target levels.

To
the extent the Company's growth in Diluted EPS exceeds 13% for 2009, the Named Executive Officers are further entitled to a portion of a pool of funds equal to 30% of such excess
Diluted EPS over 13% (the "Capstone Pool"). For 2009, Messrs. Hage, Posegate, Brown, Gadberry and Olthoff were each eligible to receive 24%, 16%, 11%, 9% and 9%, respectively, of any Capstone
Pool. As the Company's growth in Diluted EPS did not exceed 13% in 2009, no Capstone Pool was established.

"Diluted
EPS" was a focus of the Board of Directors and management during 2009, bears a direct relationship to our business plan and is a direct measurement of our underlying
profitability. Paying
annual cash incentive awards based upon Diluted EPS is meant to align our executives' interests with our stockholders, as well as foster a pay-for-performance culture.

In
setting the above payout ranges and Diluted EPS growth levels, the Compensation Committee considered (i) standards of its Peer Group, and (ii) the capacity to reward
favorable performance, when and if achieved. Amalfi advised the Company that the Diluted EPS growth levels were aligned with the marketplace. Additionally, Messrs. Hage and Posegate were
eligible to earn a greater cash incentive award than the other Named Executive Officers as a result of their greater roles and responsibilities within the Company and the Bank.

For
2009, the Company's Diluted EPS was $1.61. The Company's 2009 Diluted EPS of $1.61 is an 11% increase over its 2008 Diluted EPS of $1.45. Accordingly, Messrs. Hage, Posegate,
Brown, Gadberry and Olthoff were entitled to a cash incentive award under the Short-Term Incentive Plan equal to 75%, 75%, 37.5%, 37.5% and 37.5%, respectively, of their respective base
salary. See the "Summary Compensation Table" set forth below for actual cash incentive awards paid to the Named Executive Officers in 2009 under the Short-Term Incentive Plan.

In
connection with Mr. Gadberry joining the Bank in December 2007, Mr. Gadberry was entitled to, among other things, participate in a cash incentive arrangement based upon
achieving certain defined personal performance metrics for fiscal year 2008. Mr. Gadberry's cash incentive arrangement was effective only for fiscal year 2008 and was not effective for fiscal
year 2009. Under the terms of Mr. Gadberry's cash incentive arrangement, he received a payment of $18,492 in fiscal year 2009 relating to his performance in fiscal year 2008. As indicated
above, for fiscal year 2009, Mr. Gadberry participated in the Short-Term Incentive Plan like the other Named Executive Officers.

148

---



Table of Contents

Annual Long-Term Incentive Awards

Annual long-term incentive awards are made pursuant to the Bank's Long-Term Incentive Plan. The purpose of the
Long-Term Incentive Plan is to reward key employees, including the Named Executive Officers, for the attainment of long-term goals of the Company. Generally, awards are payable
in the form of cash, stock appreciation rights and/or restricted stock. Equity awards granted under the Long-Term Incentive Plan are issued from the pool of shares reserved for issuance
under the Company's 2002 Stock Option and Incentive Plan and are governed by the terms of such plan.

At
the beginning of each fiscal year, the Compensation Committee establishes the financial goals pursuant to which incentive awards are made under the Long-Term Incentive
Plan, together with the payout ranges for each Named Executive Officer upon the Company's achievement of such financial goals. For 2009, payment of long-term incentive awards was based
upon the Company's return on equity and the payout ranges were stated as a percentage of each Named Executive Officer's respective base salary. No long-term incentive awards are paid
unless the Company achieves a threshold level of performance, which in 2009 was an 8.5% return on equity. Generally, the long-term incentive awards are awarded promptly following the Audit
Committee's acceptance of the Company's audited financial statements for the applicable fiscal year.

In
calculating return on equity, the Compensation Committee may exercise discretion to (i) exclude from the calculation thereof any single, non recurring event that results in
either a 10% increase or decrease on the earnings component of such calculation, and (ii) adjust the calculation thereof as the result of significant or material events. During 2009, the
Compensation Committee did not exercise the above discretion.

For
2009, the Compensation Committee determined that incentive awards under the Long-Term Incentive Plan would be allocated:



In
determining the allocation of awards between cash, restricted stock and/or SARs, the Compensation Committee considered (i) the appropriate balance between awards for past
performance and incentives for future performance, (ii) overall risk of the pay package, and (iii) award sizes in prior years. Except for Mr. Hage, the Named Executive Officer's
current holdings of our common stock were not considered. With respect to the Chairman, President and Chief Executive Officer, the Compensation Committee determined that cash awards, in lieu of equity
awards, would provide a more appropriate form of incentive compensation in light of Mr. Hage's level of tenure and level of ownership of the Company.

Generally,
restricted stock awards and SARs granted under the Long-Term Incentive Plan vest in one-fourth annual increments, beginning on the first anniversary of
their grant date. The vesting schedule was strategically chosen to be competitive and enhance our retention efforts. The exercise price of the stock appreciation rights is equal to the closing sale
price of our common stock on the date of grant. The restricted stock awards do not have an exercise price. Dividends are paid on restricted stock awards at the same rate as our common stock. Dividends
are not paid on stock appreciation rights.

149

---



Table of Contents

For
2009, the Compensation Committee established the following payout ranges based upon the Company achieving a minimum return on equity ("ROE") of 8.5%:

Each
of Curtis L. Hage and Darrel L. Posegate could have earned an award of:



Each
of David A. Brown, Jon M. Gadberry and Brent R. Olthoff could have earned an award of:



Under
the Long-Term Incentive Plan, incentive awards are interpolated to the extent that actual ROE falls between designated target levels.

"ROE"
was a focus of the Board of Directors and management during 2009, bears a direct relationship to our business plan and is a direct measurement of our underlying profitability.
Paying long-term incentive awards based upon ROE is meant to align our executives' interests with our stockholders, as well as foster a pay-for-performance culture.

In
setting the above payout ranges and the ROE performance levels, the Compensation Committee considered (i) standards of its Peer Group, and (ii) the capacity to reward
favorable performance, when and if achieved. Amalfi advised the Company that the ROE performance levels were aligned with the
marketplace. Additionally, Messrs. Hage and Posegate were eligible to earn a greater long-term incentive award than the other Named Executive Officers as a result of their greater
roles and responsibilities within the Company and the Bank.

For
2009, the Company's ROE was 9.73%. Accordingly, Messrs. Hage, Posegate, Brown, Gadberry and Olthoff were each entitled to a long-term incentive award equal to 27%,
27%, 18%, 18% and 18%, respectively, of their respective base salary. See the "Grants of Plan-Based Awards for 2009" table set forth below for actual long-term incentive awards
paid in cash to Mr. Hage and in restricted stock and SARs to the other Named Executive Officers in 2009.

Severance Arrangements

Each of the Named Executive Officers has previously entered into an employment agreement and change-in-control
agreement with the Bank. See "Employment Agreements" and "Potential Payments Upon Termination or a Change-in-Control" for a detail discussion of the terms and conditions of
these agreements.

150

---



Table of Contents

Retirement Benefits

The Bank provides retirement benefits to all of its employees, including the Named Executive Officers, through the following
plans:



In
addition to the above, Messrs. Hage and Posegate receive contributions under the HF Financial Corp. Excess Pension Plan, an unfunded non-qualified excess pension
plan (the "Excess Pension Plan"). The Bank and Mr. Hage have also previously entered into an Amended and Restated Deferred Compensation Agreement (the "Deferred Compensation Agreement"). As of
June 30, 2008, we are no longer granting shares of our common stock to any Bank employees under the ESOP.

The
above plans, as well as the Deferred Compensation Agreement, are designed in combination to provide an appropriate level of replacement income upon retirement. Further discussion of
these plans and the Deferred Compensation Agreement is set forth below in this Form 10-K.

Employee Welfare Benefits and Other Perquisites

The Named Executive Officers are eligible to participate in the Bank's flexible benefits plans, which are generally available to all
Bank employees. Under these plans, all employees are entitled to medical, dental, life insurance and long-term disability coverage. Additionally, all of the Bank employees are entitled to
vacation, sick leave and other paid holidays. The Compensation Committee believes that the Company's commitment to provide the employee benefits summarized above recognizes that the health and
well-being of our employees contribute directly to a productive and successful work life that enhances results for the Company and its stockholders.

In
addition to the employee welfare benefits discussed above, the Named Executive Officers receive the following perquisites:



The
Compensation Committee has determined to offer the above-described perquisites in order to attract and retain the Named Executive Officers by offering compensation opportunities that
are competitive with our Peer Group. The Compensation Committee believes these benefits and perquisites provide a more tangible incentive than an equivalent amount of cash compensation. In determining
total compensation payable to the Named Executive Officers in 2009, the Compensation Committee considered these benefits and perquisites. However, as these benefits and perquisites represent a
relatively insignificant portion of the Named Executive Officers' total compensation, they did not materially influence the Compensation Committee's decision in setting such executive's total
compensation.

See
the "Summary Compensation Table" set forth below for a description of the benefits and perquisites received by the Named Executive Officers in 2009.

151

---



Table of Contents

Impact of Participation in the U.S. Treasury's Capital Purchase Program

On November 21, 2008, we entered into a purchase agreement with the Treasury pursuant to the Capital Purchase Program (the
"CPP"), established under the Troubled Asset Relief Program authorized by the Emergency Economic Stabilization Act (the "EESA"), 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 million in cash.

As
a result of our participation in the CPP, we agreed to adopt certain standards for executive compensation and corporate governance for as long as the Treasury owns any of our equity
securities issued in connection with the CPP, including the Preferred Stock (the "TARP Assistance Period"). Specifically, we were required to, among other things:



As
a condition of the Company participating in the CPP, certain of our executive officers entered into a letter agreement and waiver agreeing to comply with certain restrictions on
executive compensation, including one or more of the restrictions summarized immediately above. Forms of the letter agreement and waiver are attached as Exhibits 10.2 and 10.3 to the Company's
Current Report on Form 8-K filed with the SEC on November 21, 2008.

In
accordance with the requirements of the CPP, the Compensation Committee conducted a risk review within 90 days of the Treasury's purchase of the Preferred Stock. This risk
review required the Compensation Committee to review all bonus and incentive compensation arrangements with the Named Executive Officers to ensure that such compensation arrangements do not encourage
the Named Executive Officers to take unnecessary and excessive risks that threaten the value of the Company. In addition, during the TARP Assistance Period, the EESA requires the Compensation
Committee to meet at least annually with the Company's senior risk officers, or other personnel that act in a similar capacity, to review the relationship between the Company's risk management
policies and the Named Executive Officers' incentive arrangements. Following each such review, the Compensation Committee must certify in the Company's annual proxy statement that it has completed
this annual review and state that it has made reasonable efforts to ensure that such compensation does
not encourage the Named Executive Officers to take unnecessary and excessive risks that threaten the value of the Company. The Compensation Committee has conducted such review and determined that the
Company's bonus and incentive compensation arrangements with the Named Executive Officers do not encourage the Named Executive Officers to engage in unnecessary or excessive risk-taking.
The Compensation Committee's certification is included in the Personnel, Compensation and Benefits Committee Report set forth below.

On
February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the "ARRA") was enacted as part of the economic stimulus or economic recovery package. The ARRA
retroactively amended the executive compensation and corporate governance standards of the EESA. The ARRA executive compensation and corporate governance standards are in effect during the period in
which

152

---



Table of Contents

any
obligation from financial assistance provided under TARP remains outstanding, but are not in effect during any period in which the Treasury only holds a warrant to purchase common stock.

On
June 3, 2009, we entered into a Repurchase Letter Agreement with the Treasury pursuant to which we completed the repurchase of our Preferred Stock from the Treasury. The
repurchase price of the Preferred Stock was $25 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 our Warrant from the Treasury for a purchase price of $650,000.

Tax Considerations

Generally, section 162(m) of the Internal Revenue Code places a limit of $1,000,000 on the amount of compensation the Company
may deduct for federal income tax purposes in any one year with respect to the Company's covered employees. However, compensation that is "performance-based," which is compensation that is paid
pursuant to pre-established objective performance goals that are based on criteria approved by the stockholders and is determined and administered by the Compensation Committee according
to related regulations, is excluded from this $1,000,000 limitation and is deductible by the Company.

Notwithstanding
the above, the deductibility of executive compensation paid by the Company is limited under the provisions of the CPP and the EESA described above. As part of its
participation in the CPP, the Company agreed to be subject to amendments to Section 162(m) that limit the deductibility of all compensation, including performance based compensation, to
$500,000 per executive with respect to any taxable year during which the Treasury retains its CPP investment in the Company. The application of the $500,000 limitation is allowed on a pro rata basis
with respect to calendar years during which the Treasury held its investment for less than the full year, as was the case in fiscal 2009 when the
investment was held by the Treasury from November 21, 2008 to June 3, 2009. Accordingly, all of the compensation paid to the Named Executive Officers in 2009 was deductible by the
Company, except for $67,800 paid to Curtis L. Hage.

Equity Grant Practices

The Compensation Committee has approved, or recommended to the Board of Directors for approval, all grants of equity compensation to
the Named Executive Officers. The Company does not have a formal policy on timing of equity grants in connection with the release of material non-public information to affect the value of
compensation. In the event that material non-public information becomes known to the Compensation Committee prior to granting equity awards, the Compensation Committee will take the
existence of such information under advisement and make an assessment in its business judgment whether to delay the grant of the equity award in order to avoid any impropriety.

Executive Compensation in 2009

In July 2009, one or more of the Named Executive Officer's base salary was adjusted as follows:

Base Salary as of
June 30, 2009

Base Salary as of
July 1, 2009Curtis L. Hage

$
359,600

$
359,600Darrel L. Posegate

$
239,200

$
239,200David A. Brown

$
155,000

$
160,000Jon M. Gadberry

$
135,200

$
140,000Brent R. Olthoff

$
132,000

$
140,000


153

---



Table of Contents

Personnel, Compensation and Benefits Committee Report

The Personnel, Compensation and Benefits Committee has reviewed and discussed the Compensation Discussion and Analysis required by
Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Personnel, Compensation and Benefits Committee recommended to the Board of
Directors that the Compensation Discussion and Analysis be included in this Form 10-K.

The
Personnel, Compensation and Benefits Committee certifies that it has reviewed with the Company's senior risk officer the Company's incentive compensation arrangements with the Named
Executive Officers and has made reasonable efforts to ensure that such incentive compensation arrangements do not encourage the Named Executive Officers to take unnecessary and excessive risks that
threaten the value of the Company.

HF
Financial Inc. Personnel, Compensation and Benefits Committee

2009 Members

William
G. Pederson (Chair)
Charles T. Day
Christine E. Hamilton
Thomas L. Van Wyhe

154

---





Table of Contents

EXECUTIVE COMPENSATION

The following table summarizes total compensation paid or earned by our Named Executive Officers who served in such capacities during
2009, 2008 and 2007.

Based
on the fair value of incentive equity awards granted to the Named Executive Officers in 2009, (i) the base salaries of our Named Executive Officers for 2009 accounted for
approximately 36%, 42%, 52%, 52%, and 63%, of the total compensation of Messrs. Hage, Posegate, Brown, Gadberry and Olthoff, respectively, and (ii) cash incentive awards paid to our
Named Executive Officers under the Short-Term Incentive Plan (and also paid to Mr. Hage under the Long-Term Incentive Plan) for 2009 accounted for approximately 37%,
32%, 20%, 27%, and 24%, of the total compensation of Messrs. Hage, Posegate, Brown, Gadberry and Olthoff, respectively.

Summary Compensation Table for 2009, 2008 and 2007

Name and Principal
Position

Year

Salary
($)

Bonus ($)
(1)

Stock
Awards
($)(2)

Option/SAR
Awards
($)(2)

Non-Equity
Incentive
Plan
Compensation
($)(3)

Change in
Pension
Value and
Non-
qualified
Deferred
Compensation
Earnings
($)(4)

All Other
Compensation
($)(5)

Total
($)(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)Curtis L. Hage,


2009


359,600


0


134,099


0


366,792


42,631


84,075


987,197Chairman, President and Chief


2008


345,690


0


151,230


0


542,171


127,436


55,539


1,222,066Executive Officer of the


2007


334,000


0


160,178


8,759


282,100


69,098


34,006


888,141CorporationDarrel L. Posegate,


2009


239,200


0


77,723


10,631


179,400


29,541


28,600


565,095Executive Vice President,


2008


230,000


0


81,891


6,033


394,336


16,485


22,368


751,113Chief Financial Officer


2007


204,230


0


81,383


6,588


178,544


14,429


21,222


506,396and Treasurer of theCorporationDavid A. Brown,


2009


155,000


0


42,944


4,384


58,125


17,739


17,077


295,269Senior Vice President/


2008


149,000


0


46,696


2,653


191,065


16,887


19,292


425,593Community Banking of


2007


144,000


0


49,210


3,465


76,300


11,339


17,457


301,771the BankJon M. Gadberry,


2009


135,200


20,000


2,188


0


69,192


13,768


18,433


258,781Senior Vice President/Wealth Management ofthe Bank(6)Brent R. Olthoff,


2009


132,000


0


1,731


1,731


49,500


14,160


8,770


207,892Senior Vice President/


2008


120,000


0


225


224


191,065


7,963


7,088


326,565Chief Financial Officer of


2007


23,077


0


0


0


12,717


0


415


36,209the Bank


---



155

---



Table of Contents



Increase in Actuarial Present
Value of Pension BenefitsAbove Market
Interest on
Deferred
Compensation
($)Name



Pension Plan
($)

Excess
Pension Plan
($)Curtis L. Hage


2009


37,668


4,963


02008


132,925


(7,748
)

2,2592007


49,172


18,350


1,576Darrel L. Posegate


2009


17,343


12,198


02008


16,485


0


02007


14,429


0


0David A. Brown


2009


17,739


0


02008


16,887


0


02007


11,339


0


0Jon M. Gadberry(6)


2009


13,768


0


0Brent R. Olthoff


2009


14,160


0


02008


7,963


0


02007


0


0


0


All Other Compensation for 2009(A)

Name

401k Plan
Matching
Contribution
($)

Pension Plan
Contribution
($)(B)

Country
Club Dues
($)

Travel
Reimbursement
($)(C)

Parking
($)

Tax Gross
Up ($)(D)

Total Other
Compensation
($)Curtis L. Hage


4,200


71,543


5,878


1,764


690


0


84,075Darrel L. Posegate


4,300


18,422


5,878


0


0


0


28,600David A. Brown


5,515


4,544


5,680


1,338


0


0


17,077Jon M. Gadberry


4,611


4,126


0


0


0


9,696


18,433Brent R. Olthoff


4,935


3,835


0


0


0


0


8,770






Employment Agreements

The Company, through its wholly owned subsidiary, the Bank, and each of the Named Executive Officers have previously entered into
Amended and Restated Employment Agreements and Amended and Restated Change-in-Control Agreements. Each of the employment agreements has a current term of one year, which
automatically renews on July 1 for an additional year unless, on or before December 31 of the previous year in the case of Mr. Hage, or March 31 of the previous year in the
case of the other Named Executive Officers, either the Bank or the executive officer elects to terminate the employment agreement. In the event an executive officer terminates his employment
agreement, his respective change-in-control agreement will also terminate.

156

---



Table of Contents

Under
the employment agreements, Messrs. Hage, Posegate, Brown, Gadberry and Olthoff are each guaranteed a base salary of no less than $359,600, $239,200, $155,000, $135,200 and
$132,000, respectively, which may be subsequently increased as determined appropriately by the Compensation Committee. In addition to the base salary, under the employment agreements each executive
officer is entitled to:



Under
the terms of the employment agreements, the Bank has the right to immediately terminate each Named Executive Officer for "cause" (as defined below). Additionally, the Bank may, in
its reasonable discretion, terminate each executive officer (without prior notice) if he is absent from work for a period of time or in a manner that materially affects the functioning of the Bank or
the executive officer's direct or indirect reports; provided, however, that the Bank may not terminate Mr. Hage for absence resulting from approved/excused extended vacation, leave of absence
or temporary relocation. Either the Bank or the executive officer may terminate his employment agreement at any time upon 60 days written notice. Additionally, each executive officer's
employment under his employment agreement automatically terminates upon his death. For a detailed description of the severance provisions contained in the Named Executive Officers' employment
agreement, please refer to "Potential Payments Upon Termination or a Change-In-Control" set forth below.

In
connection with Mr. Gadberry joining the Bank in December 2007, Mr. Gadberry received an offer letter for employment as Senior Vice President/Wealth Management of the
Bank. Pursuant to the terms of this offer letter, Mr. Gadberry was entitled to, among other things, (i) receive an annual base salary of $130,000, (ii) a signing bonus of $30,000
(grossed up for taxes due), payable in two installments with the first installment of $10,000 being paid in fiscal year 2008 and the second installment of $20,000 being paid in fiscal year 2009,
(iii) a grant of $10,500 of restricted stock, (iv) participate in a cash incentive arrangement for the remainder of fiscal year 2008, which is based upon meeting certain defined personal
performance metrics, (v) commence participating in the Short-Term Incentive Plan and Long-Term Incentive Plan in fiscal year 2009, (vi) reimbursement of annual
membership fees of one country club, as well as reimbursement for business expenses associated with
the use of the country club, (vii) participate in the Pension Plan and 401(k) Plan, and (viii) participate in the Bank's flexible benefit plans.

Mr. Gadberry's
offer letter was superseded by his Amended and Restated Employment Agreement and Amended and Restated Change-in-Control Agreement, the terms
of which are further described below.

157

---





Table of Contents

Grants of Plan-Based Awards for 2009

Estimated Possible
Payouts Under
Non-Equity Incentive
Plan Awards(2)

Estimated Possible
Payouts Under
Equity Incentive
Plan Awards(3)Grant Date
Fair Value of
Stock and
SAR Awards
($)(4)Name

Award
Type
(1)

Grant
Date

Threshold
($)

Target
($)

Maximum
($)

Threshold
(#)

Target
(#)

Maximum
(#)(a)



(b)

(c)

(d)

(e)

(f)

(g)

(h)

(l)Curtis L. HageS-T Incentive Plan

Cash


8/21/08


71,920


179,800


L-T Incentive Plan

Cash


8/21/08


53,940


107,880


269,700Darrel L. PosegateS-T Incentive Plan

Cash


8/21/08


47,840


119,600


L-T Incentive Plan

RS


8/21/08











1,438


2,875


7,188


89,706L-T Incentive Plan

SAR


8/21/08











10,251


20,503


51,257


89,700David A. BrownS-T Incentive Plan

Cash


8/21/08


15,500


38,750


L-T Incentive Plan

RS


8/21/08











621


1,242


3,105


38,750L-T Incentive Plan

SAR


8/21/08











4,429


8,857


22,143


38,750Jon M. GadberryS-T Incentive Plan

Cash


8/21/08


13,520


33,800


L-T Incentive Plan

RS


8/21/08











542


1,083


2,708


33,796L-T Incentive Plan

SAR


8/21/08











3,863


7,726


19,314


33,800Brent R. OlthoffS-T Incentive Plan

Cash


8/21/08


13,200


33,000


L-T Incentive Plan

RS


8/21/08











529


1,058


2,644


32,997L-T Incentive Plan

SAR


8/21/08











3,771


7,543


18,857


33,000


---



158

---



Table of Contents



Outstanding Equity Awards at Fiscal Year-End, June 30, 2009

Option/SAR Awards(1)

Stock AwardsName

Grant Date

Number of
Securities
Underlying
Unexercised
Options/SARs
(#)
Exercisable

Number of
Securities
Underlying
Unexercised
Options/SARs
(#)
Unexercisable

Option/SAR
Exercise Price
($)

Option/SAR
Expiration
Date

Number of
Shares or
Units of Stock
That Have Not
Vested
(#)

Market
Value of
Shares or
Units of Stock
That Have Not
Vested
($)(2)(a)



(b)

(c)

(e)

(f)

(g)

(h)Curtis L. Hage


9/11/01


12,355


0


10.33


9/11/20119/11/02


13,667


0


9.92


9/11/20129/10/03


6,354


0


14.75


9/10/20139/8/04


16,665


0


14.88


9/8/2014


5,556
(6)

65,6729/26/05


0


0








15,705
(7)

185,633Darrel L. Posegate


9/8/04


2,777


0


14.88


9/8/2014


2,778
(6)

32,8369/26/05


0


0








7,853
(7)

92,8229/13/06


1,704


1,706
(3)

16.00


9/13/2016


332
(3)

3,9249/12/07


1,428


4,287
(4)

16.10


9/12/2017


756
(4)

8,9369/10/08


0


9,139
(5)

14.71


9/10/2018


1,280
(5)

15,130David A. Brown


9/13/00


3,972


0


7.75


9/13/20109/11/01


3,539


0


10.33


9/11/20119/11/02


3,934


0


9.92


9/11/20129/10/03


1,849


0


14.75


9/10/20139/8/04


4,514


0


14.88


9/8/2014


1,505
(6)

17,7899/26/05


0


0








4,673
(7)

55,2359/13/06


842


844
(3)

16.00


9/13/2016


164
(3)

1,9389/12/07


567


1,701
(4)

16.10


9/12/2017


300
(4)

3,5469/10/08


0


3,409
(5)

14.71


9/10/2018


477
(5)

5,638Jon M. Gadberry


9/10/08


0


0








714
(5)

8,439Brent Olthoff


9/12/07


93


285
(4)

16.10


9/12/2017


51
(4)

6039/10/08


0


3,409
(5)

14.71


9/10/2018


477
(5)

5,638


---

159

---



Table of Contents

Option Exercises and Stock Vested in 2009

Option Awards(1)

Stock AwardsName

Number of Shares
Acquired
on Exercise
(#)

Value Realized
on Exercise
($)(2)

Number of Shares
Acquired
on Vesting
(#)

Value Realized
on Vesting
($)(3)(a)

(b)

(c)

(d)

(e)Curtis L. Hage


41,455


169,841


14,995


214,192Darrel L. Posegate


0


0


7,937


113,862David A. Brown


0


0


4,487


64,258Jon M. Gadberry


0


0


0


0Brent R. Olthoff


0


0


16


247


---

The
following table shows the actuarial present value of accumulated benefits payable to each of our Named Executive Officers under the Company's Pension Plan and Excess Pension Plan
determined in accordance with the valuation method and assumptions described in Note 14 of "Notes to Consolidated Financial Statements" of this Form 10-K.

2009 Pension Benefits

Name

Plan Name

Number of
Years
Credited Service
(#)

Present Value of
Accumulated
Benefit
($)

Payments During
Last Fiscal Year
($)(a)

(b)

(c)

(d)

(e)Curtis L. Hage

HF Financial Corp. Pension Plan


38


945,987


0HF Financial Corp. Excess Pension Plan


15


74,517


0Darrel L. Posegate

HF Financial Corp. Pension Plan


8


95,743


0HF Financial Corp. Excess Pension Plan


8


12,198David A. Brown

HF Financial Corp. Pension Plan


10


104,890


0Jon M. Gadberry

HF Financial Corp. Pension Plan


1


13,768


0Brent R. Olthoff

HF Financial Corp. Pension Plan


2


22,123


0


In order to attract and retain employees and to assist employees in preparing financially for retirement, the Compensation Committee believes that
it is important to provide the Bank's employees, including the Named Executive Officers, with the opportunity to maintain a portion of their respective incomes following retirement. Along with other
eligible employees, the Named Executive Officers participate in a defined benefit pension program and a retirement savings plan, which consists of an employee stock ownership plan and 401(k) plan.
Certain of the Named Executive Officers are also

160

---



Table of Contents

eligible
to participate in an unfunded non-qualified excess pension plan. The purpose of the excess pension plan is to restore benefits that otherwise would be payable under the pension
plan if not for Internal Revenue Service limits on compensation and benefits applicable to tax-qualified plans.

Defined Benefit Pension Plan.The Company sponsors a defined benefit pension plan for its employees. An employee is eligible to
participate in the
pension plan upon the completion of one year of service and upon reaching the age of 21. That participation is retroactive to the previous July 1. A participant must complete three years of
service before such participant earns a vested interest in accrued retirement benefits, at which time the participant is 100% vested. A participant will also be 100% vested if employment ends due to
death or disability. The pension plan is funded solely through contributions made by the Company. It is anticipated that this obligation will be funded through the Company's future earnings.

A
participant is eligible for an early retirement benefit upon the attainment of age 62, provided such participant has participated in the pension plan for a minimum of five years.
Currently, Mr. Hage is the only Named Executive Officer eligible for early retirement under the pension plan. The monthly benefit payable at early retirement is the actuarial equivalent of the
participant's accrued monthly benefit at age 65. If a participant continues to work beyond age 65, the participant is entitled to the greater of:



The
pension plan computes benefits using a cash balance pension formula with a hypothetical account maintained separately for each participant, with such account credited annually for
contributions and earnings. Each year an employer contribution equal to 6% of the participant's compensation for the plan year is allocated to that participant's account. Compensation includes, but is
not limited to, wages, commissions, bonuses, overtime, and any amount a participant elects to defer under a salary reduction agreement. Compensation does not include employer contributions to
employer-sponsored retirement plans or welfare plans such as life and health insurance plans, nor does it include vested stock options or SARs granted to the participant or stock awarded to the
participant in the course of the participant's employment. Investment returns are credited to account balances as of the first day of each plan year for the upcoming plan year in an amount equal to
the average daily rates of return for 30 year U.S. Treasury bond during the previous February. Normal retirement age is 65 with five years of service and early retirement age is 62 with five
years of service.

The
normal retirement benefit is a monthly annuity based on a participant's hypothetical account balance as of benefit commencement. A participant may elect, at the time of retirement,
several optional forms of benefits which are the actuarial equivalent of the normal form, such as the joint and survivor benefits for married participants or an actuarially equivalent lump sum
payment. A married participant must receive a joint and 50% survivor annuity unless the participants' spouse consents to a different form of benefit.

Excess Pension Plan for Executive Officers.The Company also sponsors an unfunded, non-qualified excess pension plan for certain
executive officers. Any executive officer of the Company or an affiliated organization selected by the Board of Directors is eligible to participate in the excess benefit plan effective as of the
first day of the plan year or calendar year following his initial year of selection by the Board. Executives remain eligible to participate in the excess pension plan with respect to each subsequent
plan year unless removed as an eligible executive with respect to a plan year by the Board of Directors. Currently, Messrs. Hage, Posegate, Brown and Olthoff are participants in the excess
pension plan.

161

---





Table of Contents

The Company contributes benefits to the excess pension plan on behalf of its participants on an annual basis as follows:



Currently,
only Messrs. Hage and Posegate have received contributions under the excess pension plan. The excess pension plan also allows participants to make contributions to the
excess pension plan in the form of deferred payments of up to 100% of the participant's base salary and up to 100% of the participant's cash incentive awards and bonuses based on the financial
performance of the Company. No such deferrals have been made to date.

A
participant is always 100% vested in his deferral contributions to the excess pension plan. With respect to the benefits contributed by the Company on behalf of the participant, the
participant must complete five years of service before such participant earns a vested interest in such benefits, at which time the participant is 100% vested. A participant will also be 100% vested
if such participant dies or if there is a change in control of the Company. Benefits under the excess pension plan will be paid on the first day of the month following the six-month
anniversary of the participant's termination of employment. Benefits payable by reason of a change in control will be paid on the thirtieth day following a change of control, and benefits payable by
reason of a participant's death will be paid to his beneficiary on the sixtieth day following the participant's death. Benefits will be paid in a single lump sum payment. However, a participant may
apply to receive distribution of any vested portion of his benefits prior to his termination of employment in the event of certain unforeseen emergencies.

For
information regarding the amounts contributed to the pension plan and excess pension plan accounts of the Named Executive Officers by the Company in fiscal 2009, see the "Summary
Compensation Table" set forth above.

Nonqualified Deferred Compensation for 2009

Name

Executive
Contributions
in Last FY
($)(1)

Registrant
Contributions in
Last FY
($)

Aggregate
Earnings
in Last
FY
($)(2)

Aggregate
Withdrawals/
Distributions
($)

Aggregate
Balance
at Last
FYE
($)(3)(a)

(b)

(c)

(d)

(e)

(f)Curtis L. Hage


34,616


0


35,911


0


586,747Darrel L. Posegate


0


0


0


0


0David A. Brown


0


0


0


0


0Jon M. Gadberry


0


0


0


0


0Brent R. Olthoff


0


0


0


0


0


---

162

---



Table of Contents

Deferred Compensation Agreement.The Bank and Mr. Hage have previously entered into an Amended and Restated Deferred Compensation
Agreement.
Pursuant to the Deferred Compensation Agreement, Mr. Hage may elect to defer an amount of his total annual base salary, which amount may be modified by his filing a subsequent signed election
form, which modification (subject to certain unforeseeable emergency exceptions) is not effective until the beginning of the following calendar year. Interest on the deferred compensation will be
credited and compounded on a monthly basis to a deferral account. The Deferred Compensation Agreement provides that the annual rate of interest becomes effective each plan year and equals The Wall Street
Journalprime rate plus one percent on the first business day of the plan year. Mr. Hage's deferral account balance accrued
interest at an average annual rate of 6.25% during 2009.

Pursuant
to the Deferred Compensation Agreement with Mr. Hage, the Bank will pay Mr. Hage the deferral account balance in a lump sum on the first day of the month following
the six month anniversary of Mr. Hage's termination if Mr. Hage terminates his employment under the following circumstances:



The
normal retirement date is when the executive attains age 65.

Upon
a change in control while Mr. Hage is in the active employ of the Bank, the Bank will pay to Mr. Hage the deferral account balance in a lump sum within 60 days
after the change in control. The Bank will also distribute all or a portion of the deferred account balance upon the Bank's determination that Mr. Hage has suffered an unforeseeable emergency.

If
Mr. Hage's employment is terminated due to death while he is in the active service of the Bank, the Bank will pay to Mr. Hage's beneficiary the greater
of:



The
Bank will pay the death benefit to Mr. Hage's beneficiary in a lump sum on the sixtieth day after Mr. Hage's death.

In
the event that Mr. Hage is terminated for "cause," as determined in accordance with his employment agreement, the Bank will not pay any benefit attributable to interest
credited to the deferral account.

163

---



Table of Contents

Potential Payments Upon Termination or a Change-in-Control

Employment Agreements.The Company, through its wholly owned subsidiary, the Bank, has previously entered into employment agreements
with each of the
Named Executive Officers. Under such agreements, executive officers are entitled to certain severance upon termination without "cause," disability and death.

If
the executive officer is terminated for "cause" by the Bank, the Bank will pay the executive officer his full salary through the date of termination and will have no further
obligations to the executive officer under his employment agreement.

If
the executive officer is terminated without "cause" by the Bank, other than by reason of disability or death, the Bank will pay the executive officer:



If
the executive officer is terminated by the Bank because of disability (as determined under the Bank's disability plan), the Bank will pay the executive officer through the last day of
the month in which he is terminated plus an amount equal to three months base salary.

If
the executive officer is terminated due to his death, the Bank will pay the executive officer's spouse, beneficiary, or estate (a) the executive officer's then current salary
through the last day of the month in which such death occurs, and (b) the executive officer's incentive awards under the Short-Term Incentive Plan and the Long-Term
Incentive Plan in accordance with the terms of such plans.

If
the executive officer terminates his employment and provides 60 days written notice (as required by the agreement), the Bank will pay the executive officer his current salary
through the month in which such termination occurs, plus one additional month's salary. If the executive officer fails to give the requisite 60-day notice, he will forfeit all accrued paid
personal time off and the Bank will pay the executive officer his current salary only through the date of termination.

If
the executive officer terminates his employment because he chose not to extend the term of his employment agreement, the Bank will pay the executive officer his full salary during the
period of time that the employee continues to work (but not beyond the end of the term of the employment agreement), at the rate then in effect, plus accrued paid personal time off. However, the Bank
may request the executive officer to terminate employment before the end of the term of the employment agreement, in which event the Bank will pay the executive officer his full salary through the end
of the term of the employment agreement at the rate then in effect, plus accrued paid personal time off. If the executive officer's employment is terminated because the Bank has chosen not to extend
the term of his employment agreement, the Bank will pay the executive officer his full salary through the end of the term of the employment agreement at the rate then in effect plus accrued paid
personal time off.

Under
the employment agreements, each Named Executive Officer covenants that during the term of his employment agreement and for a period of one year following termination of such
agreement by the Bank or by such executive officer for any reason, voluntarily or involuntarily, with or without "cause," he will not, directly or indirectly, engage in or assist others to engage in
any business competing with the business carried on by the Bank or solicit business from any customers of the Bank in the locations where the Bank conducts business. Generally, all severance payments
under the employment agreements are conditioned upon the executive officer's compliance with these non-compete provisions and any such severance payments must be returned by the executive
officer to the Bank if he violates these non-compete provisions. Additionally, the executive officers may not

164

---



Table of Contents

during
their employment and for one year thereafter induce or attempt to induce any person who is an employee of the Bank to leave the employ of the Bank or engage in any business that competes with
the Bank. The executive officers further agree not to disclose to anyone inside or outside the Bank or use for their own benefit or the benefit of others any confidential, trade secret and proprietary
information of the Bank.

Under
the employment agreements, "cause" means termination upon (a) material violation of a law or regulation that: (i) governs the executive officer's conduct as an
officer of the Bank, or (ii) in the reasonable opinion of the Bank affects the executive officer's fitness to serve in his position, (b) substantial neglect of the executive officer's
duties, (c) action or inaction, which materially and adversely impacts the Bank's safety, soundness, security, assets, customers or employees, (d) dishonesty of a material nature,
(e) failure to comply with material rules, regulations or policies of the Bank, (f) engaging in personal conduct which, when considering the executive officer's position with the Bank,
would materially detract from its business reputation in the community served, (g) material breach of any material covenant or condition of the employment agreement, and (h) willful and
material misconduct.

In
the event a Named Executive Officer is terminated in connection with a "change-in-control," as defined in his change-in-control
agreement, the executive officer will be entitled to the severance benefits set forth in the change-in-control agreement, in lieu of the severance benefits set forth in his
respective employment agreement.

Change-In-Control Agreements.The Company, through its wholly owned subsidiary, the Bank, has previously entered into
change-in-control agreements with each of the Named Executive Officers, which continues in effect while the executive officer is employed with the Bank; provided, however, that
if the executive officer of the Bank gives notice of non-extension of his employment agreement, his change-in-control agreement will terminate when his employment
agreement terminates. However, if such notice of non-extension is given by the Bank at a time when the Bank is actively negotiating a transaction with a third party that may result in a
change-in-control or at a time when the stockholders of the Company are being solicited to vote for directors who would not be continuing directors and the election of such
directors would effect a change-in-control, or at a time when the stockholders of the Company are being solicited to tender their shares in an offering that if successful would
result in a change-in-control, the change-in-control agreement shall not terminated until nine months following the termination of his employment
agreement.

The
Compensation Committee does not view the potential benefits conferred upon a change in control of the Company as additional elements of compensation due to the fact that a change in
control may never occur. The Compensation Committee believes that these arrangements allow the Named Executive Officers to focus their attention and energy on the Company's business without any
distractions regarding the effects of a change in control, and assists us in maximizing stockholder value by allowing the Named Executive Officers to participate in an objective review of any proposed
transaction and whether such transaction is in the best interest of the stockholders.

Following
a "change-in-control" and upon termination of the executive officer's employment within 24 months following a change in control (a) by the
Bank for any reason other than "cause," or (b) by the executive officer for "good reason," the executive officer will be entitled to the following benefits:



165

---



Table of Contents



In
addition to the above, the Bank will pay a lump sum severance payment equal to a multiple times the sum of (a) the executive officer's annual base salary in effect at the time
notice of termination is given or immediately prior to the date of the change-in-control, whichever is greater, and (b) the amount determined as follows: (i) the
amount that the executive officer had accrued during the plan year under the Short-Term Incentive Plan as of the first of the month following the month in which the
change-in-control occurred, annualized by dividing the amount accrued by the number of months from the start of the plan year to the first of the month following the month in
which the change-in-control occurred multiplied by twelve; plus, (ii) the amount of each of the short-term incentive awards, if any, awarded to the executive
officer in the three years immediately prior to the change-in-control divided by four. The multiple for Mr. Hage is 2.99, the multiple for Mr. Posegate is 2.0,
and the multiple for each of Messrs. Brown, Gadberry, and Olthoff is 1.5. Such severance payments are conditioned upon compliance with the non-compete provisions of the executive
officer's employment agreement and any payments made must be returned by the executive officer to the Bank if he violates such non-compete provisions.

In
addition to the above, Mr. Hage is entitled to payment in accordance with his Deferred Compensation Agreement and Messrs. Hage, Posegate and Brown are entitled to a lump
sum payment equal to 18 months of membership dues of the country club(s) to which the executive officer is a member on the date of termination.

No
benefits are payable under the change-in-control agreements following a change-in-control if the executive officer is terminated
because of his death, by the Bank for "cause," or by the executive officer other than for "good reason."

166

---





Table of Contents

The change-in-control agreement for Mr. Hage provides that if any amount or benefit to be paid or provided under such agreement
would be an "excess parachute payment," within the meaning of Section 280G of the Internal Revenue Code, then the Bank will make a tax gross up payment to or on behalf of Mr. Hage that
will be sufficient to pay in full any federal, state and local income taxes, social security and other employment taxes, and excise and additional excise taxes. The
change-in-control agreements for each of Messrs. Posegate, Brown and Gadberry and Olthoff provide that if any payment or distribution (or portion thereof) by the Bank to
or for the benefit of such executive officers would be nondeductible by the Bank for federal income tax purposes because of Section 280G of the Internal Revenue Code, then such payment or
benefit will be reduced to an amount, not less than zero, that maximizes the aggregate present value of such payments or benefits without causing such to be nondeductible by the Bank.

Under
the change-in-control agreements, "change-in-control" means (a) a change-in-control of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, whether or not the
Company is then subject to such reporting requirement, (b) the public announcement by the Company or any person that such person has become the beneficial owner, directly or indirectly, of
securities of the Company (i) representing 20% or more, but not more than 50%, of the combined voting power of the Company's then outstanding securities unless the transaction resulting in such
ownership has been approved in advance by the continuing directors, or (ii) representing more than 50% of the combined voting power of the Company's then outstanding securities (regardless of
any approval by the continuing directors); provided, however, that notwithstanding the foregoing, no change-in-control shall be deemed to
have occurred by reason of the ownership of 20% or more of the total voting capital stock of the Company's then issued and outstanding by the Company, any subsidiary of the Company or any employee
benefit plan of the Company or of any subsidiary of the Company or any entity holding shares of its common stock organized, appointed or established for, or pursuant to the terms of, any such plan,
(c) any acquisition of control as defined in 12 Code of Federal Regulations Section 574.4, or any successor regulation, of the Company which would require the filing of an application
for acquisition of control or notice of change-in-control in a manner which is set forth in 12 CFR Section 574.3, or any successor regulation, (d) the continuing
directors cease to constitute a majority of the Company's Board of Directors, or (e) the stockholders of the Company approve (i) any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to which shares of the Company stock would be converted into cash, securities or other property, other than a merger of the Company
in which shareholders immediately prior to the merger have the same proportionate ownership of stock of the surviving corporation immediately after the merger, (ii) any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company, or (iii) any plan of liquidation or dissolution of the Company.

Under
the change-in-control agreements, "cause" has the same meaning as set forth in the employment agreements, and as defined above in this
Form 10-K. However, under the change-in-control agreements, termination for "cause" will be proceeded by a fair and complete investigation, and for
Mr. Hage, by a vote of the Bank's Board of Directors that there is "cause" under his change-in-control agreement.

"Good
reason" means termination by the executive officer upon the occurrence, without his express written consent, of any one of the more of the following: (a) the assignment to
the executive officer of any duties inconsistent in any respect with the executive officer's position (including status, offices, titles, and reporting requirements), authorities, duties, or other
responsibilities as in effect immediately prior to the change-in-control or any other action of the Bank which results in a diminishment in such position, authority, duties, or
responsibilities, other than an insubstantial and inadvertent action which is remedied by the Bank promptly after receipt of notice thereof give by the

167

---



Table of Contents

executive
officer, (b) a reduction by the Bank in the executive officer's base salary as in effect on the date hereof or as the same shall be increased from
time-to-time, (c) the failure by the Bank to (i) continue in effect any material compensation or benefit plan, program, policy or practice in which the executive
officer was participating at the time of the change-in-control, or (ii) provide the executive officer with compensation and benefits at least equal (in terms of benefit
levels and/or reward opportunities) to those provided for under each employee benefit plan, program, policy and practice as in effect immediately prior to the change-in-control
(or as in effect following the change-in-control, if greater), (d) the failure of the Bank to obtain a satisfactory agreement from any successor to the Bank to assume
and agree to perform under the change-in-control agreement, and (e) any purported termination by the Bank of the executive officer's employment that is not effected
pursuant to a "Notice of Termination." "Notice of Termination" means a written notice that (1) indicates the specific termination provision in
the change-in-control agreement relied upon, (2) sets forth the date of termination, and (3) sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the executive officer's employment under the provision so indicated.

Short-Term Incentive Plan.Except as provided below, if during the fiscal year of the Bank, a participant terminates his employment or
if
the Bank terminates the employment of the participant during that same period, all rights to an award under the plan for that year are forfeited. If the employment of a participant terminates after
the end of the fiscal year, but before benefits earned during such year are paid, the rights to such benefits are not forfeited. If a participant dies, becomes disabled, retires, or is entitled to
benefits under a change-in-control agreement during a plan year, they or their designated beneficiary will receive an incentive payment for the partial year based on the number
of months from the start of the plan year to the first of the month following the month in which the death, disability, retirement, or the date of termination occurs, but only to the extent that an
incentive payment is otherwise earned for the plan year.

Long-Term Incentive Plan.Except as provided below, if the employment of a participant terminates during the fiscal year for which
performance is being measured and which might result in an award, all rights to an award under the plan are forfeited. If a participant dies during a plan year, they or their designated beneficiary
will receive, in cash, any incentive payment for the partial year otherwise payable in cash, based on the number of months from the start of the plan year to the first month following the month in
which the death occurred, but only to the extent that any incentive payment is otherwise earned for the plan year. If a participant is entitled to benefits under a
change-in-control agreement, the participant will receive, in cash, any incentive payment for the partial year otherwise payable in cash, based on the number of months from the
start of the plan year to the first day of the month following the month in which the date of termination occurs. Once stock appreciation rights, stock options and/or restricted stock have been
awarded, the terms of the 2002 Stock Plan will control.

2002 Stock Option and Incentive Plan and related Award Agreements.In years prior to 2009, Messrs. Posegate, Brown, Gadberry and
Olthoff were
awarded stock options, stock appreciation rights and/or restricted stock under the 2002 Stock Plan, and Mr. Hage was awarded stock options and restricted stock under such plan. Under the terms
of the 2002 Stock Plan and related award agreements, all unvested stock options, stock appreciation rights and restricted stock awards automatically fully vest upon the participant's death.

Payments Upon Termination

The following table provides quantitative disclosure of the estimated payments and benefits that would be provided to our Named
Executive Officers upon their termination, including their termination in connection with a change in control of the Company. The benefits set forth below are calculated as if the Named Executive
Officer's termination occurred on June 30, 2009, the last business day of the 2009 fiscal year. Each Named Executive Officer is entitled to receive amounts earned during the term

168

---



Table of Contents

of
his employment. These amounts include base salary, any accrued paid personal time off, any benefits that have accrued under the Short-Term Incentive Plan, Long-Term
Incentive Plan, 401(k) Plan, ESOP, Pension Plan and Excess Pension and, in the case of Mr. Hage, his deferral account under the Deferred Compensation Agreement, and are not reflected in the
below table. Consequently, the below table reflects only the additional compensation the Named Executive Officers are entitled to upon their termination.

See
(a) the "Grants of Plan-Based Awards for 2009" table for the amount of the Named Executive Officers' cash incentive awards earned in 2009 under the Company's
Short-Term Incentive Plan and Long-Term Incentive Plan, as applicable, (b) the "2009 Pension Benefits" table for the actuarial present value of accumulated benefits
payable to each of the Named Executive Officers under the Company's Pension Plan and Excess Pension Plan, and (c) the "Nonqualified Deferred Compensation for 2009" table for the amount of
Mr. Hage's aggregate deferral account under the Deferred Compensation Agreement.

Named Executive Officer

Cash
Severance
Payment
($)

Acceleration of
Outstanding
Stock Options,
SARs, and
Restricted
Stock Awards
($)

Other Benefits
($)

Total
Termination
Benefits
($)Curtis L. HageTermination by Us for "Cause"


0


0


0


0Termination by Us Without "Cause"


719,200


0


0


719,200Termination by Mr. Hage with 60 days notice


29,967


0


18,181
(12)

48,148Termination by Mr. Hage without 60 days notice


0


0


18,181
(12)

18,181Termination by the Bank because of Disability


89,900


0


18,181
(12)

108,081Termination because of Death


0


251,305
(1)

89,558
(2)

340,863Termination because of Retirement


0


0


0


0Termination following Change in Control


1,825,182
(4)

251,305
(3)

630,227
(7)

2,706,714Darrel L. PosegateTermination by Us for "Cause"


0


0


0


0Termination by Us Without "Cause" with 60 days notice


478,400


0


0


478,400Termination by Mr. Posegate with 60 days notice


19,933


0


0


19,933Termination by Mr. Posegate without 60 days notice


0


0


0


0Termination by the Bank because of Disability


59,800


0


0


59,800Termination because of Death


0


153,648
(1)

0


153,648Termination because of Retirement


0


0


0


0Termination following Change in Control


854,540
(5)

153,648
(3)

48,502
(8)

1,056,690David A. BrownTermination by Us for "Cause"


0


0


0


0Termination by Us Without "Cause" with 60 days notice


310,000


0


0


310,000Termination by Mr. Brown with 60 days notice


12,917


0


0


12,917Termination by Mr. Brown without 60 days notice


0


0


0


0Termination by the Bank because of Disability


38,750


0


0


38,750Termination because of Death


0


84,147
(1)

0


84,147Termination because of Retirement


0


0


0


0Termination following Change in Control


354,559
(6)

84,147
(3)

57,698
(9)

496,403Jon M. GadberryTermination by Us for "Cause"


0


0


0


0Termination by Us Without "Cause" with 60 days notice


270,400


0


0


270,400Termination by Mr. Gadberry with 60 days notice


11,267


0


0


11,267Termination by Mr. Gadberry without 60 days notice


0


0


0


0Termination by the Bank because of Disability


33,800


0


4,126


37,926Termination because of Death


0


8,439
(1)

4,126


12,565


169

---



Table of Contents

Named Executive Officer

Cash
Severance
Payment
($)

Acceleration of
Outstanding
Stock Options,
SARs, and
Restricted
Stock Awards
($)

Other Benefits
($)

Total
Termination
Benefits
($)Termination because of Retirement


0


0


0


0Termination following Change in Control


221,813
(6)

8,439
(3)

49,128
(10)

279,380Brent R. OlthoffTermination by Us for "Cause"


0


0


0


0Termination by Us Without "Cause" with 60 days notice


264,000


0


0


264,000Termination by Mr. Olthoff with 60 days notice


11,000


0


0


11,000Termination by Mr. Olthoff without 60 days notice


0


0


0


0Termination by the Bank because of Disability


33,000


0


6,942


39,942Termination because of Death


0


6,241
(1)

6,942


13,183Termination because of Retirement


0


0


0


0Termination following Change in Control


292,981
(6)

6,241
(3)

49,017
(11)

348,239


---

170

---



Table of Contents

Director Compensation

Each director of the Company is also a director of the Bank. In fiscal 2009, each non-employee director who served as a
member of the Board of Directors during the entire fiscal year, received an aggregate of 1,668 shares of restricted common stock pursuant to the 2002 Stock Option and Incentive Plan (the "2002 Stock
Plan"). Commencing with fiscal 2009, and continuing with each subsequent year, restricted stock awards will be made in November to align the grant date with the board members' term of service. The
Company's Certificate of Incorporation provides that no person will be eligible for election or reelection to the Board of Directors who beneficially owns less than 100 shares of the Company's common
stock.

Non-employee
directors serving on either of the Personnel, Compensation and Benefits Committee or the Nominating and Corporate Governance Committee also receive a meeting fee
of $400 for each committee meeting they attend. Non-employee directors serving on the Audit Committee (other than in the capacity of Chairman) receive a meeting fee of $600 for each
committee meeting they attend, and the Chairman of the Audit Committee receives a fee of $800 for each meeting attended. Employee directors receive no fees or other awards for their service as a
director.

The
following table reflects the compensation paid to the Company's non-employee directors for 2009. The compensation paid to Mr. Hage, the Company's Chairman,
President and Chief Executive Officer, is presented above in the Summary Compensation Table and the related explanatory tables.

Name

Fees
Earned
or
Paid in
Cash
($)

Stock
Awards
($)(1)(2)

Option
Awards
($)

Non-Equity
Incentive
Plan
Compensation
($)

Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)

All Other
Compensation
($)

Total
($)(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)Curtis J. Bernard


5,900


20,800


0


0


0


0


26,700Charles T. Day


8,100


20,800


0


0


0


0


28,900Christine E. Hamilton


8,100


20,800


0


0


0


0


28,900Robert L. Hanson


7,700


20,800


0


0


0


0


28,500Bill Pederson


7,300


20,800


0


0


0


0


28,100Thomas L. Van Wyhe


9,300


20,800


0


0


0


0


30,100


---

171

---



Table of Contents



Compensation Committee Interlocks and Insider Participation

As stated above, in fiscal 2009, the members of the Personnel, Compensation and Benefits Committee were Mr. Pederson,
Mr. Day, Ms. Hamilton and Mr. Van Wyhe. During fiscal 2009, none of the Company's executive officers served on the compensation committee (or its equivalent) or board of directors
of another entity whose executive officers served on the Company's Personnel, Compensation and Benefits Committee or Board of Directors. No current or past officer or employee of the Company or any of
its subsidiaries served on the Personnel, Compensation and Benefits Committee during fiscal 2009. No member of the Personnel, Compensation and Benefits Committee had any relationship requiring
disclosure under Item 404 of Regulation S-K of the Exchange Act, other than described in this Form 10-K under the heading "Certain Relationships and
Related Party Transactions, and Director Independence."

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.

The
following table sets forth certain information regarding beneficial ownership of our common stock as of August 31, 2009, by (i) each person known to the Company to own
beneficially more than 5% of our common stock, (ii) each director and director nominee of the Company, (iii) each officer named in the Summary Compensation Table, and (iv) all
directors and executive officers as a group.

172

---



Table of Contents

Unless
otherwise indicated, each person in the table has sole voting and investment power as to the shares shown.

Name and Address of
Beneficial Owner

Amount and Nature of
Beneficial Ownership

Percentage of
Outstanding StockPL Capital Group
20 East Jefferson Avenue, Suite 22
Naperville, Illinois 60540


326,721
(1)

8.12
%Dimensional Fund Advisors LP
Palisades West, Building One, 6300 Bee Cave Road
Austin, Texas 78746


290,013
(2)

7.20
%HF Financial Corp.
Employee Stock Ownership Plan
225 South Main Avenue
Sioux Falls, South Dakota 57104


196,312
(3)

4.88
%Curtis L. Hage,
Chairman, President, Chief Executive Officer and Director


230,641
(4)

5.66
%Darrel L. Posegate,
Executive Vice President, Chief Financial Officer and Treasurer and President, Home Federal Bank


40,329
(5)

*David A. Brown,
Senior Vice President / Community Banking, Home Federal Bank


37,868
(6)

*Jon M. Gadberry,
Senior Vice President / Wealth Management, Home Federal Bank


1,337
(7)

*Brent R. Olthoff,
Senior Vice President / Chief Financial Officer and Treasurer, Home Federal Bank


1,580
(8)

*Curtis J. Bernard, Director


5,836


*Charles T. Day, Director


2,995


*Christine E. Hamilton, Director


7,076


*Robert L. Hanson, Director


52,025


1.29
%David J. Horazdovsky, Nominee


2,605


*Bill Pederson, Director


21,383
(9)

*Thomas L. Van Wyhe, Director


17,524


*Directors and executive officers as a group (18 persons)


498,872
(10)

12.05
%


---

173

---



Table of Contents





174

---



Table of Contents



Item 13.Certain Relationships and Related Transactions, and Director Independence

Certain Transactions

The Bank, like many financial institutions, has followed a policy of granting officers, directors and employees loans secured by the
borrower's residence, consumer loans and commercial loans. Consumer loans to employees are originated at market rates and terms currently available to the public, and modified to one percent below the
market rate. Modifications are not made on loans granted with special promotional rates. In addition, in connection with single-family mortgage loans made to employees, origination fees up to one
percent and the underwriting fees are waived for qualified employee applicants, no more than once every twelve months. If the employee relationship ceases, the

175

---



Table of Contents

terms
of the loan revert back to the terms that would have applied except for the employee-employer relationship.

Loans
by the Bank to its officers and directors are not prohibited under Section 402 of the Sarbanes-Oxley Act of 2002 because the Bank is an insured depository institution and
such loans are subject to the insider lending restrictions of section 22(h) of the Federal Reserve Act. Loans by the Bank to its officers and directors are also subject to OTS regulations
restricting loans and other transactions with affiliated persons of the Bank and federal laws that require all such loans be made on terms and conditions comparable to those for similar transactions
with non-affiliates. All loans by the Bank to its officers and directors are made in the ordinary course of business; are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable loans with persons not related to the Bank; and do not involve more than the normal risk of collectability or present other unfavorable
features. All loans from the Bank to its officers, directors, key employees or their affiliates are approved by the Bank's Loan Committee and ratified by the Bank's Board of Directors.

Policy on Review, Approval or Ratification of Transactions with Related Persons

The Board of Directors has adopted a written statement of policy with respect to transactions involving the Bank and "related persons"
(generally the executive officers (anyone in the position of senior vice president and above), directors and principal stockholders and their immediate family members). All employee loans (other than
loans to related persons) must be approved by a senior vice president authorized to grant credit, and all loans to related persons require prior approval by the Audit Committee.

The
Company intends that all transactions between the Company or the Bank and its officers, directors, holders of 10% or more of the shares of any class of its common stock and
affiliates thereof, will contain terms no less favorable to the Company than could have been obtained by it in arm's-length negotiations with unaffiliated persons and will be approved by a majority of
disinterested members of the Audit Committee.

Additionally,
all transactions with affiliates (an affiliate of a savings association includes the parent company, which controls the savings association and any other company that is
controlled by the parent company, which controls the savings association) require the prior approval of a member of the executive management team.

Independent Directors and Director Nominees

The Board of Directors has determined that the following current directors are "independent directors," as defined by the NASDAQ
Marketplace Rules: Curtis J. Bernard, Charles T. Day, Christine E. Hamilton, Robert L. Hanson, William G. Pederson, and Thomas L. Van Wyhe. The Board of Directors has determined that the
following Class I director nominee is also an "independent director," as defined by the NASDAQ Marketplace Rules: David J. Horadovsky. Messrs. Pederson and Horadovsky are both
Class I director nominees for the upcoming 2009 Annual Meeting of Stockholders.

Item 14.Principal Accountant Fees and Services

Information
concerning the fees for professional services rendered by the Company's registered public accounting firm is incorporated by reference from the
discussion under the heading "Report of the Audit Committee" in the 2009 Proxy Statement.

176

---



Table of Contents

Information
concerning the pre-approval policies and procedures of the Company's Audit Committee is incorporated by reference from the discussion under the heading "Audit
Committee Pre-Approval Policies" in the 2009 Proxy Statement.

PART IV

Item 15.Exhibits and Financial Statement Schedules

Report of Independent Registered Public Accounting FirmManagement's Report on Internal Control Over Financial ReportingConsolidated Statements of Financial Condition at June 30, 2009 and 2008Consolidated Statements of Income for the years ended June 30, 2009, 2008 and 2007Consolidated Statements of Stockholders' Equity for the years ended June 30, 2009, 2008 and 2007Consolidated Statements of Cash Flows for the years ended June 30, 2009, 2008 and 2007Notes to Consolidated Financial Statements






177

---





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 18, 2009

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 18, 2009/s/ DARREL L. POSEGATE Darrel L. Posegate

Executive Vice President, Chief
Financial Officer and Treasurer (Principal Financial and Accounting
Officer)

September 18, 2009/s/ THOMAS L. VAN WYHE Thomas L. Van Wyhe

Director

September 18, 2009/s/ ROBERT L. HANSON Robert L. Hanson

Director

September 18, 2009/s/ CURTIS J. BERNARD Curtis J. Bernard

Director

September 18, 2009


178

---



Table of Contents

Name

Title

Date/s/ WILLIAM G. PEDERSON William G. Pederson

Director

September 18, 2009/s/ CHARLES T. DAY Charles T. Day

Director

September 18, 2009/s/ CHRISTINE E. HAMILTON Christine E. Hamilton

Director

September 18, 2009


179

---





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.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).10.4

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).


---



Table of Contents

Exhibit
Number

Description10.5

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.10.17
+
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).


---



Table of Contents

Exhibit
Number

Description10.19
+
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 and
Natalie A. Sundvold (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 and Natalie A. Sundvold (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).10.27
+
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 Inventive 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).


---



Table of Contents

Exhibit
Number

Description10.30
+
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).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.


---

---