HFFC-2013.03.31-10Q

10-Q 1 hffc-20130331x10q.htm 10-Q HFFC-2013.03.31-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________

FORM 10-Q



(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2013
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For 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:

Common Stock, par value $0.01 per share

Securities registered pursuant to Section 12(g) of the Act:

None

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 ý No o

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



Large accelerated filer o	Accelerated filer ¨	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

As of April 30, 2013, there were 7,055,020 shares of the registrant's common stock outstanding.

Quarterly Report on Form 10-Q

Table of Contents



		Page Number

PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements:	3

	Consolidated Statements of Financial Condition At March 31, 2013 and June 30, 2012	3

	Consolidated Statements of Income Three and Nine Months Ended March 31, 2013 and 2012	4

	Condensed Consolidated Statements of Comprehensive Income Three and Nine Months Ended March 31, 2013 and 2012	5

	Consolidated Statements of Cash Flows Nine Months Ended March 31, 2013 and 2012	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	58

Item 4.	Controls and Procedures	60

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	60

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61

Item 3.	Defaults upon Senior Securities	61

Item 4.	Mine Safety Disclosures	61

Item 5.	Other Information	61

Item 6.	Exhibits	61

Form 10-Q	Signature Page	62

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(DOLLARS IN THOUSANDS, except share data)



	March 31, 2013			June 30, 2012
	(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents	$	22,974		$	50,334
Securities available for sale	419,195			373,246
Correspondent bank stock	7,519			7,843
Loans held for sale	8,510			16,207

Loans and leases receivable	682,614			683,704
Allowance for loan and lease losses	(10,664		)	(10,566		)
Loans and leases receivable, net	671,950			673,138

Accrued interest receivable	4,906			5,431
Office properties and equipment, net of accumulated depreciation	14,062			14,760
Foreclosed real estate and other properties	901			1,627
Cash value of life insurance	19,794			19,276
Servicing rights, net	10,799			11,932
Goodwill, net	4,366			4,366
Other assets	12,196			14,431
Total assets	$	1,197,172		$	1,192,591
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits	$	897,215		$	893,859
Advances from Federal Home Loan Bank and other borrowings	135,125			142,394
Subordinated debentures payable to trusts	27,837			27,837
Advances by borrowers for taxes and insurance	18,269			12,708
Accrued expenses and other liabilities	19,308			18,977
Total liabilities	1,097,754			1,095,775
Stockholders' equity
Preferred stock, $.01 par value, 500,000 shares authorized, none outstanding	—			—
Series A Junior Participating Preferred Stock, $1.00 stated value, 50,000 shares authorized, none outstanding	—			—
Common stock, $.01 par value, 10,000,000 shares authorized, 9,138,475 and 9,125,751 shares issued at March 31, 2013 and June 30, 2012, respectively	91			91
Additional paid-in capital	46,028			45,673
Retained earnings, substantially restricted	85,705			83,571
Accumulated other comprehensive (loss), net of related deferred tax effect	(1,509		)	(1,622		)
Less cost of treasury stock, 2,083,455 shares at March 31, 2013 and June 30, 2012	(30,897		)	(30,897		)
Total stockholders' equity	99,418			96,816
Total liabilities and stockholders' equity	$	1,197,172		$	1,192,591

See accompanying notes to unaudited consolidated financial statements.

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HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)



	Three Months Ended					Nine Months Ended
	March 31,					March 31,
	2013		2012			2013			2012
Interest, dividend and loan fee income:
Loans and leases receivable	$	8,082	$	9,833		$	25,892		$	32,513
Investment securities and interest-bearing deposits	1,561		1,184			3,826			3,591
	9,643		11,017			29,718			36,104
Interest expense:
Deposits	1,111		1,664			3,716			5,692
Advances from Federal Home Loan Bank and other borrowings	1,432		1,608			4,384			4,824
	2,543		3,272			8,100			10,516
Net interest income	7,100		7,745			21,618			25,588
Provision for losses on loans and leases	—		264			(172		)	2,906
Net interest income after provision for losses on loans and leases	7,100		7,481			21,790			22,682
Noninterest income:
Fees on deposits	1,361		1,360			4,921			4,528
Loan servicing income, net	406		8			(84		)	873
Gain on sale of loans	1,151		671			3,584			1,884
Earnings on cash value of life insurance	200		168			611			512
Trust income	209		206			593			560
Commission and insurance income	177		173			496			492
Gain on sale of securities, net	146		539			1,968			874
Loss on disposal of closed-branch fixed assets	—		(233		)	—			(245		)
Other	5		115			(1,256		)	326
	3,655		3,007			10,833			9,804
Noninterest expense:
Compensation and employee benefits	5,258		4,910			14,973			15,532
Occupancy and equipment	1,096		1,076			3,167			3,269
FDIC insurance	195		261			606			796
Check and data processing expense	677		728			2,256			2,169
Professional fees	484		560			1,663			2,464
Marketing and community investment	106		323			778			1,087
Foreclosed real estate and other properties, net	16		137			325			222
Other	716		701			2,057			1,989
	8,548		8,696			25,825			27,528
Income before income taxes	2,207		1,792			6,798			4,958
Income tax expense	802		580			2,283			1,590
Net income	$	1,405	$	1,212		$	4,515		$	3,368

Basic earnings per common share	$	0.20	$	0.17		$	0.64		$	0.48
Diluted earnings per common share	0.20		0.17			0.64			0.48
Dividend declared per common share	0.11		0.11			0.34			0.34

See accompanying notes to unaudited consolidated financial statements.

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HF FINANCIAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)



	Three Months Ended					Nine Months Ended
	March 31,					March 31,
	2013			2012		2013			2012

Net income	$	1,405		$	1,212	$	4,515		$	3,368
Other comprehensive income (loss), net of taxes
Securities available for sale	(458		)	468		(1,130		)	961
Cash flow hedges-interest rate swap contracts	147			242		1,243			(257		)
Other comprehensive income (loss), net of taxes	(311		)	710		113			704
Comprehensive income	$	1,094		$	1,922	$	4,628		$	4,072

See accompanying notes to unaudited consolidated financial statements.

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HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)



	Nine Months Ended
	March 31,
	2013			2012
Cash Flows From Operating Activities
Net income	$	4,515		$	3,368
Adjustments to reconcile net income to net cash provided by (used in) operating activities
(Benefit) provision for losses on loans and leases	(172		)	2,906
Provision for allowance on servicing rights	750			330
Depreciation	1,324			1,350
Amortization of discounts and premiums on securities and other	5,710			4,350
Stock based compensation	313			253
Net change in loans held for resale	11,281			5,314
(Gain) on sale of loans	(3,584		)	(1,884		)
Realized (gain) on sale of securities, net	(1,968		)	(874		)
(Gains) losses and provision-for-losses on foreclosed real estate and other properties, net	(42		)	24
Loss on disposal of office properties and equipment, net	89			270
Change in other assets and liabilities	3,073			(5,705		)
Net cash provided by operating activities	21,289			9,702
Cash Flows From Investing Activities
Net change in loans outstanding	1,336			105,439
Securities available for sale
Sales, maturities and repayments	160,043			91,945
Purchases	(209,680		)	(195,421		)
Purchase of correspondent bank stock	(6,935		)	(997		)
Redemption of correspondent bank stock	7,259			997
Proceeds from sale of office properties and equipment	172			115
Purchase of office properties and equipment	(887		)	(2,000		)
Purchase of servicing rights from external sources	(3		)	(426		)
Proceeds from sale of foreclosed real estate and other properties	737			440
Net cash provided by (used in) investment activities	(47,958		)	92
Cash Flows From Financing Activities
Net increase (decrease) in deposit accounts	3,356			(324		)
Proceeds of advances from Federal Home Loan Bank and other borrowings	160,841			79,634
Payments on advances from Federal Home Loan Bank and other borrowings	(168,110		)	(79,630		)
Increase in advances by borrowers	5,561			7,132
Proceeds from issuance of common stock	42			135
Cash dividends paid	(2,381		)	(2,356		)
Net cash provided by (used in) financing activities	(691		)	4,591
Increase (decrease) in cash and cash equivalents	(27,360		)	14,385
Cash and Cash Equivalents
Beginning	50,334			55,617
Ending	$	22,974		$	70,002

Supplemental Disclosure of Cash Flows Information
Cash payments for interest	$	8,497		$	11,785
Cash payments for income and franchise taxes	470			2,028

See accompanying notes to unaudited consolidated financial statements.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

NOTE 1—SELECTED ACCOUNTING POLICIES

Basis of Financial Statement Presentation

The consolidated financial information of HF Financial Corp. (the “Company”) and its wholly-owned subsidiaries included in this Quarterly Report on Form 10-Q is unaudited. Interim consolidated financial statements and the notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include certain information and footnote disclosures required by U.S. generally accepted accounting principles (“GAAP”) for complete annual financial statements. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2012 (“fiscal 2012”), filed with the SEC.

The accompanying consolidated balance sheet as of June 30, 2012, which has been derived from audited financial statements, and the unaudited consolidated interim financial statements have been prepared in accordance with GAAP and reflect all adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the nine months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending June 30, 2013.

The interim consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, Home Federal Bank (the “Bank”), HF Financial Group, Inc. (“HF Group”) and HomeFirst Mortgage Corp. (the “Mortgage Corp.”), and the Bank’s wholly-owned subsidiaries, Mid America Capital Services, Inc. (“Mid America Capital”), Hometown Investment Services, Inc. (“Hometown”), Mid-America Service Corporation and PMD, Inc. The interim consolidated financial statements reflect the deconsolidation of the wholly-owned subsidiary trusts of the Company: HF Financial Capital Trust III (“Trust III”), HF Financial Capital Trust IV (“Trust IV”), HF Financial Capital Trust V (“Trust V”) and HF Financial Capital Trust VI (“Trust VI”). See Note 11 of “Notes to Consolidated Financial Statements.” All intercompany balances and transactions have been eliminated in consolidation.

Management has evaluated subsequent events for potential disclosure or recognition through May 3, 2013, the date of the filing of the consolidated financial statements with the Securities and Exchange Commission.

Reclassification

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

NOTE 2—REGULATORY CAPITAL

The following table summarizes the Bank's compliance with its minimum regulatory capital requirements at March 31, 2013:



	Amount		Percent
Tier I (core) capital (to adjusted total assets):
Required	$	59,246	5.00	%
Actual	116,099		9.80
Excess over required	56,853		4.80

Total risk-based capital (to risk-weighted assets):
Required	76,484		10.00
Actual	125,623		16.42
Excess over required	49,139		6.42

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

NOTE 3—EARNINGS PER SHARE

Basic earnings per common share is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Shares outstanding include the nonvested shares of the Company. See Note 10 “Stock-Based Compensation Plans” for additional information related to the nonvested share activity. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period they were outstanding.

Dilutive earnings per common share is similar to the computation of basic earnings per common share except the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive options outstanding had been exercised.

Following is 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 periods presented:



	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2013		2012		2013		2012
Net income	$	1,405	$	1,212	$	4,515	$	3,368

Basic EPS:
Weighted average number of common shares outstanding	7,054,902		6,992,886		7,053,880		6,979,858
Basic earnings per common share	$	0.20	$	0.17	$	0.64	$	0.48

Diluted EPS:
Weighted average number of common shares outstanding	7,054,902		6,992,886		7,053,880		6,979,858
Common share equivalents—Stock Options / Stock Appreciation Rights (SARs) under employee compensation plans/warrant	2,084		3,329		2,487		422
Weighted average number of common shares and common share equivalents	7,056,986		6,996,215		7,056,367		6,980,280
Diluted earnings per common share	$	0.20	$	0.17	$	0.64	$	0.48

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

NOTE 4—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:



	March 31, 2013
	Amortized Cost		Total Other-Than Temporary Impairment Recognized in Accumulated Other Comprehensive Income			Adjusted Carrying Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Debt securities:
U.S. government agencies	$	3,501	$	—		$	3,501	$	3	$	(1	)	$	3,503
Corporate bonds	2,290		—			2,290		—		(23		)	2,267
Municipal bonds	11,726		—			11,726		217		(18		)	11,925
	17,517		—			17,517		220		(42		)	17,695
Equity securities:
FNMA	8		(8		)	—		—		—			—
Federal Ag Mortgage	7		—			7		5		—			12
Other investments	253		—			253		—		—			253
	268		(8		)	260		5		—			265
Agency residential mortgage-backed securities	398,952		—			398,952		3,230		(947		)	401,235
	$	416,737	$	(8	)	$	416,729	$	3,455	$	(989	)	$	419,195

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)



	June 30, 2012
	Amortized Cost		Total Other-Than Temporary Impairment Recognized in Accumulated Other Comprehensive Income			Adjusted Carrying Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Debt securities:
U.S. government agencies	$	2,008	$	—		$	2,008	$	7	$	—		$	2,015
Municipal bonds	9,659		—			9,659		324		(3		)	9,980
	11,667		—			11,667		331		(3		)	11,995
Equity securities:
FNMA	8		(8		)	—		—		—			—
Federal Ag Mortgage	7		—			7		3		—			10
Other investments	253		—			253		—		—			253
	268		(8		)	260		3		—			263
Agency residential mortgage-backed securities	357,030		—			357,030		4,461		(503		)	360,988
	$	368,965	$	(8	)	$	368,957	$	4,795	$	(506	)	$	373,246

Management has a process to identify securities that could potentially have a credit impairment that is other-than-temporary. This process involves evaluating the length of time and extent to which the fair value has been less than the amortized cost basis, reviewing available information regarding the financial position of the issuer, monitoring the rating of the security, and projecting cash flows. Management also determines if it is more likely than not 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 the Company determines that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized.

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

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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



	March 31, 2013
	Less than 12 Months					12 Months or More					Total
	Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)
Debt securities:
U.S. government agencies	$	999	$	(1	)	$	—	$	—		$	999	$	(1	)
Corporate bonds	2,267		(23		)	—		—			2,267		(23		)
Municipal bonds	2,573		(18		)	70		—			2,643		(18		)
	5,839		(42		)	70		—			5,909		(42		)
Agency residential mortgage-backed securities	181,684		(935		)	1,951		(12		)	183,635		(947		)
	$	187,523	$	(977	)	$	2,021	$	(12	)	$	189,544	$	(989	)

The unrealized loss reported for U.S. government agencies relate to one security issued by the Federal National Mortgage Association (“FNMA”). This unrealized loss is primarily attributable to changes in interest rates and the contractual cash flows of this investment which is guaranteed by an agency of the U.S. government. Management does not believe the unrealized loss as of March 31, 2013 represents an other-than-temporary impairment for this investment. The Company does not have the intent to sell this security (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 this security before anticipated recovery of fair value.

The unrealized losses reported for corporate bonds relate to one corporate obligation. The unrealized loss is primarily attributed to changes in credit spreads, market interest rate increases and credit of the specific entity since the security was originally acquired. Management does not believe that the individual unrealized loss as of March 31, 2013, represents an other-than-temporary impairment for this investment. The Company does not have the intent to sell this security (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 this security before anticipated recovery of fair value.

The unrealized losses reported for municipal bonds relate to 13 municipal general obligation or revenue bonds. The unrealized losses are primarily attributed to changes in credit spreads or market interest rate increases since the securities were originally acquired, rather than due to credit or other causes. Management does not believe any individual unrealized losses as of March 31, 2013, 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 agency residential mortgage-backed securities relate to 68 securities issued by Federal National Mortgage Association ("FNMA"), the Government National Mortgage Association ("GNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC"). These unrealized losses are primarily attributable to changes in interest rates and the contractual cash flows of those investments which are guaranteed by an agency of the U.S. government. Management does not believe any of these unrealized losses as of March 31, 2013, 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.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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



	Nine Months Ended
	March 31,
	2013		2012
Beginning balance of credit losses on securities held as of July 1 for which a portion of other-than-temporary impairment was recognized in other comprehensive income⁽¹⁾	$	8	$	8
Credit losses for which an other-than-temporary impairment was not previously recognized	—		—
Increases to the amount related to the credit losses for which other-than-temporary was previously recognized	—		—
Sale of securities which previously had recorded a credit loss for other-than-temporary impairment	—		—
Ending balance of credit losses on securities held as of December 31 for which a portion of other-than-temporary impairment was recognized in other comprehensive income⁽¹⁾	$	8	$	8

_____________________________________


⁽¹⁾	Fannie Mae common stock.

The amortized cost and fair value of debt securities as of March 31, 2013, 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 Value
Due in one year or less	$	911	$	912
Due after one year through five years	8,818		8,929
Due after five years through ten years	4,500		4,585
Due after ten years	3,288		3,269
	17,517		17,695
Agency residential mortgage-backed securities	398,952		401,235
	$	416,469	$	418,930

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 for the three months ended March 31, 2013 were $18,386 and resulted in gross gains and gross losses of $166 and $20, respectively. Proceeds from the sale of securities available for sale for the three months ended March 31, 2012 were $31,671 and resulted in gross gains and gross losses of $539 and $0, respectively.

Proceeds from the sale of securities available for sale for the first nine months of fiscal 2013 were $91,418 and resulted in gross gains and gross losses of $1,988 and $20, respectively. Proceeds from the sale of securities available for sale for the first nine months of fiscal 2012 were $50,609 and resulted in gross gains and gross losses of $874 and $0, respectively.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

NOTE 5—LOANS AND LEASES RECEIVABLE

Loans and leases receivable by classes within portfolio segments, consist of the following:



	March 31, 2013				June 30, 2012
	Amount		Percent		Amount		Percent
Residential:
One-to four-family	$	49,669	7.3	%	52,626		7.7	%
Construction	1,981		0.3		2,808		0.4
Commercial:
Commercial business ⁽¹⁾	68,669		10.1		79,069		11.6
Equipment finance leases	2,105		0.3		3,297		0.5
Commercial real estate:
Commercial real estate	240,101		35.2		225,341		33.0
Multi-family real estate	47,313		6.9		47,121		6.9
Construction	9,804		1.4		12,172		1.8
Agricultural:
Agricultural real estate	76,528		11.2		70,796		10.4
Agricultural business	91,275		13.4		84,314		12.3
Consumer:
Consumer direct	21,002		3.1		21,345		3.1
Consumer home equity	71,307		10.4		81,545		11.9
Consumer overdraft & reserve	2,831		0.4		3,038		0.4
Consumer indirect	29		—		232		—
Total loans and leases receivable ⁽²⁾	$	682,614	100.0	%	$	683,704	100.0	%

_____________________________________


⁽¹⁾	Includes $2,024 and $2,262 tax exempt leases at March 31, 2013 and June 30, 2012, respectively.


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

Table of Contents

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

The following tables summarize the activity in the allowance for loan and lease losses by portfolio segment for the three months ended:



March 31, 2013
	Residential			Commercial			Commercial Real Estate			Agricultural			Consumer			Total
Balance at beginning of period	$	298		$	1,698		$	2,159		$	4,355		$	2,270		$	10,780
Charge-offs	—			(13		)	—			—			(176		)	(189		)
Recoveries	—			12			—			8			53			73
Provisions	33			105			(96		)	(63		)	21			—
Balance at end of period	$	331		$	1,802		$	2,063		$	4,300		$	2,168		$	10,664

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

The following tables summarize the activity in the allowance for loan and lease losses by portfolio segment for the nine months ended:



March 31, 2013
	Residential			Commercial			Commercial Real Estate			Agricultural			Consumer			Total
Balance at beginning of period	$	347		$	977		$	2,063		$	4,493		$	2,686		$	10,566
Charge-offs	(1		)	(34		)	(7		)	(395		)	(782		)	(1,219		)
Recoveries	20			289			—			976			204			1,489
Provisions	(35		)	570			7			(774		)	60			(172		)
Balance at end of period	$	331		$	1,802		$	2,063		$	4,300		$	2,168		$	10,664

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

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

The following tables summarize the related statement balances by portfolio segment:



	Residential		Commercial		Commercial Real Estate		Agricultural		Consumer		Total
March 31, 2013
Individually evaluated for impairment	$	42	$	960	$	57	$	1,571	$	77	$	2,707
Collectively evaluated for impairment	289		842		2,006		2,729		2,091		7,957
Allowance for loan and lease losses	$	331	$	1,802	$	2,063	$	4,300	$	2,168	$	10,664
Individually evaluated for impairment	$	337	$	4,228	$	1,423	$	16,389	$	796	$	23,173
Collectively evaluated for impairment	51,313		66,546		295,795		151,414		94,373		659,441
Loans and leases receivable	$	51,650	$	70,774	$	297,218	$	167,803	$	95,169	$	682,614

	Residential		Commercial		Commercial Real Estate		Agricultural		Consumer		Total
June 30, 2012
Individually evaluated for impairment	$	27	$	—	$	74	$	1,988	$	30	$	2,119
Collectively evaluated for impairment	320		977		1,989		2,505		2,656		8,447
Allowance for loan and lease losses	$	347	$	977	$	2,063	$	4,493	$	2,686	$	10,566
Individually evaluated for impairment	$	214	$	1,813	$	1,554	$	12,964	$	121	$	16,666
Collectively evaluated for impairment	55,220		80,553		283,080		142,146		106,039		667,038
Loans and leases receivable	$	55,434	$	82,366	$	284,634	$	155,110	$	106,160	$	683,704

Credit Quality Indicators

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

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

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

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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

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

The following tables summarize the credit quality indicators used to determine the credit quality by class within the portfolio segments:

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



	March 31, 2013								June 30, 2012
	Pass		Special Mention		Substandard		Doubtful		Pass		Special Mention		Substandard		Doubtful
Commercial:
Commercial business	$	60,718	$	2,567	$	4,545	$	907	$	72,478	$	2,596	$	4,065	$	—
Equipment finance leases	2,018		—		87		—		3,154		42		101		—
Commercial real estate:
Commercial real estate	228,069		—		12,434		—		209,647		67		16,817		—
Multi-family real estate	46,053		—		1,260		—		46,120		—		1,000		—
Construction	9,804		—		—		—		12,172		—		—		—
Agricultural:
Agricultural real estate	59,090		3,761		12,207		1,470		51,223		5,749		12,161		1,663
Agricultural business	88,073		—		3,320		—		78,941		2,496		2,748		141
	$	493,825	$	6,328	$	33,853	$	2,377	$	473,735	$	10,950	$	36,892	$	1,804

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



	March 31, 2013				June 30, 2012
	Performing		Nonperforming		Performing		Nonperforming
Residential:
One-to four- family	$	49,056	$	613	$	52,488	$	138
Construction	1,981		—		2,808		—
Consumer:
Consumer direct	20,992		10		21,342		3
Consumer home equity	70,519		788		80,977		569
Consumer OD & reserves	2,830		1		3,038		—
Consumer indirect	29		—		230		2
	$	145,407	$	1,412	$	160,883	$	712

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

The following table summarizes the aging of the past due financing receivables by classes within the portfolio segments and related accruing and nonaccruing balances:



March 31, 2013	Accruing and Nonaccruing Loans										Nonperforming Loans
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 89 Days		Total Past Due		Current⁽²⁾		Recorded Investment >90 Days and Accruing⁽¹⁾		Nonaccrual Balance		Total
Residential:
One-to four-family	$	—	$	—	$	401	$	401	$	49,268	$	165	$	448	$	613
Construction	—		—		—		—		1,981		—		—		—
Commercial:
Commercial business	407		3,109		—		3,516		65,153		—		4,225		4,225
Equipment finance leases	—		—		—		—		2,105		—		—		—
Commercial real estate:
Commercial real estate	76		—		—		76		240,025		—		1,202		1,202
Multi-family real estate	—		—		27		27		47,286		—		27		27
Construction	—		—		—		—		9,804		—		—		—
Agricultural:
Agricultural real estate	—		—		—		—		76,528		—		11,193		11,193
Agricultural business	40		—		—		40		91,235		—		4,648		4,648
Consumer:
Consumer direct	21		—		—		21		20,981		—		10		10
Consumer home equity	328		—		—		328		70,979		—		788		788
Consumer OD & reserve	4		—		1		5		2,826		1		—		1
Consumer indirect	—		—		—		—		29		—		—		—
Total	$	876	$	3,109	$	429	$	4,414	$	678,200	$	166	$	22,541	$	22,707

_____________________________________


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


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

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)



June 30, 2012	Accruing and Nonaccruing Loans										Nonperforming Loans
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 89 Days		Total Past Due		Current⁽²⁾		Recorded Investment >90 Days and Accruing⁽¹⁾		Nonaccrual Balance		Total
Residential:
One-to four-family	$	293	$	57	$	138	$	488	$	52,138	$	107	$	31	$	138
Construction	—		—		—		—		2,808		—		—		—
Commercial:
Commercial business	576		2,214		817		3,607		75,462		—		1,813		1,813
Equipment finance leases	—		60		17		77		3,220		—		17		17
Commercial real estate:
Commercial real estate	1,077		117		426		1,620		223,721		—		1,254		1,254
Multi-family real estate	—		—		32		32		47,089		—		32		32
Construction	—		—		—		—		12,172		—		—		—
Agricultural:
Agricultural real estate	906		—		500		1,406		69,390		—		11,185		11,185
Agricultural business	981		—		79		1,060		83,254		—		1,169		1,169
Consumer:
Consumer direct	40		—		3		43		21,302		—		3		3
Consumer home equity	185		155		412		752		80,793		—		569		569
Consumer OD & reserve	2		—		—		2		3,036		—		—		—
Consumer indirect	10		—		2		12		220		—		2		2
Total	$	4,070	$	2,603	$	2,426	$	9,099	$	674,605	$	107	$	16,075	$	16,182

_____________________________________


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


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

At March 31, 2013, the Bank had identified $23,173 of loans as impaired which includes performing troubled debt restructurings. A loan is identified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement and thus are placed on non-accrual status. Interest income on impaired loans is recognized on a cash basis. The average carrying amount is calculated for each quarter by using the daily average balance, which is then averaged with the other quarters' averages to determine an annual average balance.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

The following table summarizes impaired loans by class of loans and the specific valuation allowance:



	March 31, 2013						June 30, 2012
	Recorded Investment		Unpaid Principal Balance⁽¹⁾		Related Allowance		Recorded Investment		Unpaid Principal Balance⁽¹⁾		Related Allowance
With no related allowance recorded:
One-to four-family	$	84	$	84	$	—	$	—	$	—	$	—
Commercial business	994		994		—		1,813		1,815		—
Commercial real estate	1,273		1,307		—		1,112		1,112		—
Multi-family real estate	27		27		—		32		32		—
Agricultural real estate	4,487		4,487		—		3,957		3,957		—
Agricultural business	4,039		4,039		—		120		120		—
Consumer direct	5		5		—		—		—		—
Consumer home equity	565		565		—		—		—		—
	11,474		11,508		—		7,034		7,036		—
With an allowance recorded:
One-to four-family	253		253		42		214		214		27
Commercial business	3,234		3,234		960		—		—		—
Commercial real estate	123		123		57		410		443		74
Agricultural real estate	7,254		7,254		1,485		7,838		8,254		1,721
Agricultural business	609		609		86		1,049		1,049		267
Consumer home equity	226		226		77		121		121		30
	11,699		11,699		2,707		9,632		10,081		2,119
Total:
One-to four-family	337		337		42		214		214		27
Commercial business	4,228		4,228		960		1,813		1,815		—
Commercial real estate	1,396		1,430		57		1,522		1,555		74
Multi-family real estate	27		27		—		32		32		—
Agricultural real estate	11,741		11,741		1,485		11,795		12,211		1,721
Agricultural business	4,648		4,648		86		1,169		1,169		267
Consumer direct	5		5		—		—		—		—
Consumer home equity	791		791		77		121		121		30
	$	23,173	$	23,207	$	2,707	$	16,666	$	17,117	$	2,119

_____________________________________


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

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

The following table summarizes the Company's average recorded investment in impaired loans by class of loans and the related interest income recognized for the period indicated.



	For the Three Months Ended
	March 31, 2013				March 31, 2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
One-to four-family	$	338	$	3	$	336	$	6
Commercial business	4,355		7		113		—
Commercial real estate	1,407		4		271		5
Multi-family real estate	27		—		—		—
Agricultural real estate	10,407		63		12,080		18
Agricultural business	2,659		31		3,888		2
Consumer direct	5		—		—		—
Consumer home equity	855		9		122		2
	$	20,053	$	117	$	16,810	$	33



	For the Nine Months Ended
	March 31, 2013				March 31, 2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
One-to four-family	$	286	$	12	$	336	$	17
Commercial business	3,115		60		124		—
Commercial real estate	1,400		17		272		16
Multi-family real estate	30		—		—		—
Agricultural real estate	10,987		84		12,315		39
Agricultural business	1,897		31		3,893		6
Consumer direct	3		—		—		—
Consumer home equity	495		18		122		6
	$	18,213	$	222	$	17,062	$	84

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

Modifications of terms for the Company's loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve reduction of the interest rate or renewing at an interest rate below current market rates, extension of the term of the loan and/or forgiveness of principal, regardless of the period of the modification.

Loans and leases that are considered troubled debt restructurings are factored into the determination of the allowance for loan and lease losses through impaired loan analysis and any subsequent allocation of specific valuation allowance, if applicable. The Company measures impairment on an individual loan and the extent to which a specific valuation allowance is necessary by comparing the loan's outstanding balance to either the fair value of the collateral, less the estimated cost to sell or the present value of expected cash flows, discounted at the loan's effective interest rate. During fiscal 2013, new TDRs consisted of two commercial business, two residential, and seven consumer loans of which four were evaluated for

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

impairment based on collateral adequacy and seven were evaluated for impairment based upon the present value of discounted cash flows.

The following is a summary of the Company's performing troubled debt restructurings which are in-compliance with their modified terms:



March 31, 2013	Number of Contracts⁽¹⁾	Pre-Modification Recorded Balance		Post-Modification Outstanding Recorded Balance⁽¹⁾
Residential	2	$	253	$	253
Commercial business	3	143		143
Commercial real estate	3	316		350
Agricultural	7	8,799		8,799
Consumer	9	254		254
	24	$	9,765	$	9,799

June 30, 2012	Number of Contracts⁽²⁾	Pre-Modification Recorded Balance		Post-Modification Outstanding Recorded Balance⁽²⁾
Residential	1	$	216	$	214
Commercial real estate	3	544		442
Agricultural	8	12,191		11,649
Consumer	3	123		121
	15	$	13,074	$	12,426

_____________________________________


⁽¹⁾	Includes eleven customers, which are in compliance with their restructured terms, that are not accruing interest and have a recorded investment balance of $8,728.


⁽²⁾	Includes eight customers, which are in compliance with their restructured terms, that are not accruing interest and have a recorded investment balance of $11,213.

Excluded from above, at March 31, 2013, the Company had one agricultural relationship with a recorded balance of $197 that was originally restructured in fiscal 2012, one residential relationship with a recorded balance of $84 that was originally restructured in fiscal 2013, and one consumer relationship with a recorded balance of $5 that was originally restructured in fiscal 2013. These loans are not in compliance with their restructured terms and are in nonaccrual status. At June 30, 2012, the Company had one agricultural relationship with a recorded balance of $117, which was not in compliance with its restructured terms. It was in nonaccrual status at the time of the original restructuring in fiscal 2011. Loans can retain their accrual status at the time of their modification if the restructuring is not a result of terminated loan payments. For nonaccruing loans, a minimum of six months of performance related to the restructured terms are required before a loan is returned to accruing status.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

New TDRs initially classified as a TDR during the nine months ended March 31, were as follows:



	2013			2012
	Number	Amount		Number	Amount
Residential	2	$	125	—	$	—
Commercial business	2	134		3	566
Agricultural	—	—		4	6,854
Consumer	7	140		—	—
	11	$	399	7	$	7,420

Ten of the TDRs added during the first nine months of fiscal 2013 were due to loan maturity extensions granted which did not reduce the interest rate below the market rate and one was due to bankruptcy. One of the TDR defaulted in the first nine months of fiscal 2013 and is in foreclosure.

NOTE 6—LOAN SERVICING

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



	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2013			2012			2013			2012
Mortgage servicing rights, beginning	$	12,649		$	13,128		$	12,820		$	12,952
Additions	415			370			1,486			1,505
Amortization⁽¹⁾	(627		)	(536		)	(1,869		)	(1,495		)
Mortgage servicing rights, ending	$	12,437		$	12,962		$	12,437		$	12,962

Valuation allowance, beginning	$	(1,858	)	$	—		$	(888	)	$	—
(Additions) / reductions ⁽¹⁾	220			(330		)	(750		)	(330		)
Valuation allowance, ending	$	(1,638	)	$	(330	)	$	(1,638	)	$	(330	)

Mortgage servicing rights, net	$	10,799		$	12,632		$	10,799		$	12,632

Servicing fees received	$	813		$	874		$	2,535		$	1,824
Balance of loans serviced at:
Beginning of period	1,164,496			1,206,214			1,187,900			1,199,059
End of period	1,151,376			1,196,786			1,151,376			1,196,786

_____________________________________


⁽¹⁾	Changes to carrying amounts are reported net of loan servicing income on the statements of income for the periods presented.

Amortization of servicing rights is adjusted each quarter based upon analysis of portfolio attributes and factors, including an evaluation of historical prepayment activity. For the quarters ended March 31, 2013 and 2012, the constant prepayment rates (CPR) used to calculate the amortization was 16.4% and 12.8%, respectively. Management utilized a discount rate of 9.0% for valuation purposes for both periods. Prepayment speeds utilized at March 31, 2013 and 2012 were 15.8% and 14.4%, respectively, which are used in the calculation of the amortization expense for the subsequent quarter. Prepayment speeds are analyzed and adjusted each quarter.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

NOTE 7—SEGMENT REPORTING

Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company’s reportable segments are “banking” (including leasing activities) and “other”. The “banking” segment is conducted through the Bank and Mid America Capital and the “other” segment is composed of smaller non-reportable segments, the Company and intersegment eliminations.

The management approach is used as the conceptual basis for identifying reportable segments and is based on the way that management organizes the segments within the enterprise for making operating decisions, allocating resources and monitoring performance, which is primarily based on products.

The following tables summarize segment reporting information:



	Three Months Ended
	March 31,
	2013									2012
	Banking			Other			Total			Banking			Other			Total
Net interest income	$	7,497		$	(397	)	$	7,100		$	8,235		$	(490	)	$	7,745
Provision for losses on loans and leases	—			—			—			(264		)	—			(264		)
Noninterest income	3,371			284			3,655			2,941			66			3,007
Intersegment noninterest income	328			(185		)	143			(62		)	(4		)	(66		)
Noninterest expense	(8,119		)	(429		)	(8,548		)	(8,208		)	(488		)	(8,696		)
Intersegment noninterest expense	—			(143		)	(143		)	—			66			66
Income (loss) before income taxes	$	3,077		$	(870	)	$	2,207		$	2,642		$	(850	)	$	1,792
Total assets at March 31⁽¹⁾	$	1,192,492		$	4,680		$	1,197,172		$	1,186,026		$	10,100		$	1,196,126



	Nine Months Ended
	March 31,
	2013									2012
	Banking			Other			Total			Banking			Other			Total
Net interest income	$	22,855		$	(1,237	)	$	21,618		$	26,938		$	(1,350	)	$	25,588
Benefit (Provision) for losses on loans and leases	172			—			172			(2,906		)	—			(2,906		)
Noninterest income	10,396			437			10,833			9,561			243			9,804
Intersegment noninterest income	199			(189		)	10			(191		)	(8		)	(199		)
Noninterest expense	(24,358		)	(1,467		)	(25,825		)	(25,268		)	(2,260		)	(27,528		)
Intersegment noninterest expense	—			(10		)	(10		)	—			199			199
Income (loss) before income taxes	$	9,264		$	(2,466	)	$	6,798		$	8,134		$	(3,176	)	$	4,958
Total assets at March 31⁽¹⁾	$	1,192,492		$	4,680		$	1,197,172		$	1,186,026		$	10,100		$	1,196,126


⁽¹⁾	Included in total assets was goodwill totaling $4,366 at March 31, 2013 and $4,366 at March 31, 2012, which is attributed entirely to the banking segment.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

NOTE 8—DEFINED BENEFIT PLAN

The Company has a noncontributory (cash balance) defined benefit pension plan covering all employees of the Company and its wholly-owned subsidiaries who have attained the age of 21 and have completed 1,000 hours 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. 100% vesting occurs after 3 years with a retirement age of the later of age 65 or 3 years of participation.

The information relative to the components of net periodic benefit cost for the Company’s defined benefit plan is presented below:



	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2013			2012			2013			2012
Net periodic benefit cost
Service cost	$	165		$	196		$	494		$	588
Interest cost	163			176			491			529
Expected return on plan assets	(162		)	(199		)	(467		)	(584		)
Amortization of prior losses	32			—			96			—
Total costs recognized in expense	$	198		$	173		$	614		$	533

The Company previously disclosed in its consolidated financial statements for fiscal 2012, which are included in Part II, Item 8 “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K, that it contributed $470 in fiscal 2012 to fund its qualified pension plan. During the second quarter of fiscal 2013, the Company contributed $400 to fund its qualified pension plan. The Company does not anticipate to fund any additional contributions for fiscal 2013.

NOTE 9—SELF-INSURED HEALTHCARE PLAN

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

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.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

The following table is a summary of net healthcare costs by quarter:



	Fiscal Years Ended
	June 30,
	2013		2012
Quarter ended September 30	$	236	$	445
Quarter ended December 31	411		451
Quarter ended March 31	300		438
Quarter ended June 30	—		495
Net healthcare costs	$	947	$	1,829

NOTE 10—STOCK-BASED COMPENSATION PLANS

The fair value of each incentive stock option and each stock appreciation right grant is estimated at the grant date using the Black-Scholes option-pricing model. There were no stock options or stock appreciation rights (SARs) granted in the nine months ended March 31, 2013 and 2012.

Stock option activity for the nine months ended March 31, 2013, was as follows:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Beginning Balance	50,067		$	14.41
Granted	—		—
Forfeited	(5,711	)	16.49
Expired	(1,059	)	9.92
Exercised	(7,525	)	9.92
Ending Balance	35,772		$	15.16	1.37	$	—
Vested and exercisable at March 31	35,772		$	15.16	1.37	$	—

Stock appreciation rights activity for the nine months ended March 31, 2013, was as follows:



	SARs		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Beginning Balance	112,570		$	13.60
Granted	—		—
Forfeited	(8,923	)	14.21
Exercised	(1,938	)	12.48
Ending Balance	101,709		$	13.56	5.82	$	77
Vested and exercisable at March 31	85,899		$	13.76	5.71	$	58

The total intrinsic value of options exercised during the nine months ended March 31, 2013 and 2012 was $22 and $27, respectively. Cash received from the exercise of options and SARs for the nine months ended March 31, 2013 and 2012, was $43 and $136, respectively. There were no cashless option exercises or related tax benefit realized for the nine months ended

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

March 31, 2013 and 2012. The total unrecognized compensation cost related to nonvested SARs awards at March 31, 2013 was $18. This unrecognized cost is expected to be recognized over a weighted average period of five months.

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



	2013				2012
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Nonvested Balance, beginning	62,281		$	11.76	37,810		$	11.77
Granted	9,000		12.75		53,559		11.75
Vested	(35,354	)	11.54		(23,399	)	11.64
Forfeited	(1,408	)	12.28		(2,961	)	12.92
Nonvested Balance, ending	34,519		$	12.23	65,009		$	11.75

Pretax compensation expense recognized for nonvested shares for the nine months ended March 31, 2013 and 2012, was $151 and $71, respectively. The tax benefit for the nine months ended March 31, 2013 and 2012 was $51 and $24, respectively. As of March 31, 2013, there was $350 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 20 months. The total fair value of shares vested during the nine months ended March 31, 2013 and 2012 was $197 and $91, respectively.

In association with the 2002 Option Plan, awards of nonvested shares of the Company's common stock were made to outside directors of the Company. Each outside director was entitled to all voting, dividend and distribution rights during the vesting period. Pretax compensation expense recognized for nonvested shares for the nine months ended March 31, 2013 and 2012, was $131 and $132, respectively. The tax benefit for nine months ended March 31, 2013 and 2012 was $45 and $45, respectively. As of March 31, 2013, there was no unrecognized compensation cost related to nonvested shares. The total fair value of shares vested during the nine months ended March 31, 2013 and 2012 was $259 and $181, respectively.

The 2002 Stock Option and Incentive Plan expired effective September 20, 2012. No plan was in effect at March 31, 2013 for the purpose of issuing new shares. The Company's stock option and incentive plans are described more fully in Part II, Item 8 “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012, under Note 16 of “Notes to Consolidated Financial Statements.”

NOTE 11—SUBORDINATED DEBENTURES PAYABLE TO TRUSTS

The Company has issued and outstanding 27,000 shares totaling $27,000 of Company Obligated Mandatorily Redeemable Preferred Securities. These four Trusts were established and exist for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the Company. These subordinated debentures constitute the sole assets of the four Trusts. The securities provide for cumulative cash distributions calculated at a rate based on three-month LIBOR plus a range from 1.65% to 3.35% adjusted quarterly. The Company may, at one or more times, defer interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond the respective maturity date. At the end of the deferral period, all accumulated and unpaid distributions must be paid. The capital securities have redemption dates ranging from January 7, 2033 to October 1, 2037; however, the Company has the option to shorten the respective maturity date for all four securities 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.

NOTE 12—INTEREST RATE CONTRACTS

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

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

under the remaining agreements. These contracts are typically designated as cash flow hedges.

The Company has outstanding interest rate swap agreements with notional amounts totaling $27,000 to convert four variable-rate trust preferred securities into fixed-rate instruments. The agreements have a weighted average maturity of 2.8 years and have fixed rates ranging from 5.68% to 6.58% with a weighted average rate of 5.96%. The fair value of the derivatives was an unrealized loss of $2,556 at March 31, 2013 and an unrealized loss of $2,890 at March 31, 2012. The Company pledged $2,964 in cash under collateral arrangements as of March 31, 2013, to satisfy collateral requirements associated with these interest rate swap contracts.

The Company has borrower interest rate swap agreements with notional amounts totaling $26,211 to facilitate customer transactions and meet the borrower's financing needs. These swaps qualify as derivatives, but consist of two different types of instruments. The back-to-back loan swaps are not designated as hedging instruments, while the one-way loan swaps are classified as fair value hedging instruments. The loan interest rate swap derivatives had no impact on the consolidated statements of income for the first nine months ended March 31, 2013 and 2012. Any amounts due to the Company are expected to be collected from the borrowers. Credit risk exists if the borrower's collateral or financial condition indicates that the underlying collateral or financial condition of the borrower makes it probable that amounts due will be uncollectible. Management monitors this credit exposure on a quarterly basis.

During the first quarter of fiscal 2013, the Company terminated its five interest rate swap agreements with notional amounts totaling $35,000 which converted the variable-rate attributes of a pool of deposits into fixed-rate instruments. The Company recognized a charge of $1,456, which is included in other noninterest income in the financial statements. Comparatively, no gain or loss was recognized in net income for the nine months ended March 31, 2012 related to interest rate swaps.

No deferred net losses on interest rate swaps in other comprehensive loss as of March 31, 2013, are expected to be reclassified into net income during the current fiscal year. See Note 13 "Accumulated Other Comprehensive Loss" for amounts reported as other comprehensive loss.

The following table summarizes the derivative financial instruments utilized as of March 31, 2013.



				Estimated Fair Value
	Balance Sheet Location	Notional Amount		Gain		Loss
Non-designated derivatives	Other assets	$	8,610	$	110	$	—
Fair value hedge	Loans and leases receivable	8,991		—		(25		)
Cash flow hedge	Accrued expenses and other liabilities	27,000		—		(2,556		)
Non-designated derivatives	Accrued expenses and other liabilities	8,610		—		(110		)
		$	53,211	$	110	$	(2,691	)

The following table details the derivative financial instruments, the average remaining maturities and the weighted-average interest rates being paid and received as of March 31, 2013.



	Notional Value		Average Maturity (years)	Fair Value (Loss)			Receive		Pay
Liability conversion swaps	$	27,000	2.8	$	(2,556	)	2.72	%	5.96	%
Loan interest rate swaps	26,211		8.7	(25		)	2.15		4.58
	$	53,211		$	(2,581	)

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

The following table summarizes the amount of gains (losses) included in the income statement for the periods indicated:



		Three Months Ended				Nine Months Ended
		March 31,				March 31,
	Income Statement Location	2013		2012		2013			2012
Cash flow hedge	Other noninterest income	$	—	$	—	$	(1,456	)	$	—

NOTE 13—ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss as of March 31, are as follows:



	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2013			2012			2013			2012
Net income	$	1,405		$	1,212		$	4,515		$	3,368
Other comprehensive income (loss), net of tax:
Securities available for sale:
Change in unrealized gains (losses) on other securities	(593		)	1,293			145			2,424
Reclassification adjustment:
Security (gains) recognized in earnings	(146		)	(539		)	(1,968		)	(874		)
Income tax (expense) benefit	281			(286		)	693			(589		)
Other comprehensive income (loss) on securities available for sale	(458		)	468			(1,130		)	961
Cash flow hedging activities-interest rate swap contracts:
Net unrealized gains (losses)	223			391			521			(663		)
Reclassification adjustment:
Hedge losses recognized in earnings	—			—			1,456			—
Income tax (expense) benefit	(76		)	(149		)	(734		)	406
Other comprehensive income (loss) on cash flow hedging activities-interest rate swap contracts	147			242			1,243			(257		)
Total other comprehensive income (loss)	(311		)	710			113			704
Comprehensive income	$	1,094		$	1,922		$	4,628		$	4,072

Cumulative other comprehensive gain (loss) balances as of the following dates were:



	March 31,			June 30,
	2013			2012
Unrealized gain on securities available for sale net of related tax effect of $937 and $1,630	$	1,529		$	2,659
Unrealized loss on defined benefit plan net of related tax effect of $828 and $828	(1,351		)	(1,351		)
Unrealized loss on cash flow hedging activities net of related tax effect of $869 and $1,603	(1,687		)	(2,930		)
	$	(1,509	)	$	(1,622	)

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

NOTE 14—FINANCIAL INSTRUMENTS

The Company 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 Company's involvement in particular classes of financial instruments.

The Company'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 Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

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

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

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

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

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

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

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

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

Off-statement-of-financial-condition instruments—Fair values for the Company's off-statement-of-financial-condition instruments (unused lines of credit and letters of credit), which are based upon fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and counterparties' credit standing, are not significant. Many of the Company's off-statement-of-financial-condition instruments, primarily loan commitments and standby letters of credit, are expected to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements.

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

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

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

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

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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



March 31, 2013			Fair Value Measurements
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	22,974	$	22,974	$	22,974	$	—	$	—
Securities available for sale	419,195		419,195		12		419,183		—
Correspondent bank stock	7,519		7,519		—		7,519		—
Loans held for sale	8,510		8,510		—		8,510		—
Net loans and leases receivable	671,950		675,039		—		16,297		658,742
Accrued interest receivable	4,906		4,906		—		4,906		—
Servicing rights, net	10,799		10,799		—		—		10,799
Interest rate swap contracts	110		110		—		110		—
Financial liabilities
Deposits	897,215		899,241		—		—		899,241
Interest rate swap contracts	2,666		2,666		—		2,666		—
Borrowed funds	135,125		142,974		—		142,974		—
Subordinated debentures payable to trusts	27,837		31,949		—		—		31,949
Accrued interest payable and advances by borrowers for taxes and insurance	19,828		19,828		—		19,828		—



June 30, 2012			Fair Value Measurements
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	50,334	$	50,334	$	50,334	$	—	$	—
Securities available for sale	373,246		373,246		10		373,236		—
Correspondent bank stock	7,843		7,843		—		7,843		—
Loans held for sale	16,207		16,207		—		16,207		—
Net loans and leases receivable	673,138		677,139		—		12,314		664,825
Accrued interest receivable	5,431		5,431		—		5,431		—
Servicing rights, net	11,932		11,932		—		—		11,932
Interest rate swap contracts	65		65		—		65		—
Financial liabilities
Deposits	893,859		896,929		—		—		896,929
Interest rate swap contracts	4,598		4,598		—		4,598		—
Borrowed funds	142,394		151,370		—		151,370		—
Subordinated debentures payable to trusts	27,837		25,978		—		—		25,978
Accrued interest payable and advances by borrowers for taxes and insurance	14,664		14,664		—		14,664		—

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

Fair Value Measurement

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

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

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

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

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

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

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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 March 31, 2013:



	Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total at Fair Value
Securities available for sale
Debt securities:
U.S. government agencies	$	—	$	3,503	$	—	$	3,503
Municipal bonds	—		11,925		—		11,925
Equity securities:
Federal Ag Mortgage	12		—		—		12
Other investments	—		253		—		253
Agency residential mortgage-backed securities	—		401,235		—		401,235
Securities available for sale	12		416,916		—		416,928
Interest rate swap contracts	—		110		—		110
Total assets	12		417,026		—		417,038
Interest rate swaps contracts	—		2,691		—		2,691
Total liabilities	$	—	$	2,691	$	—	$	2,691

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

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

Interest rate swap contracts: The fair values of interest rate swap contracts relate to cash flow hedges of trust preferred debt securities issued by the Company and for specific borrower interest rate swap contracts classified as fair value hedges and non-designated derivatives. The fair value is estimated by a third party using inputs that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. These fair value estimations include primarily market observable inputs, such as yield curves, and include the value associated with counterparty credit risk. Management reviews this third party analysis and has approved the values estimated for the fair values.

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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 March 31, 2013:



	Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fiscal 2013 Incurred Losses
Impaired loans	$	—	$	16,297	$	4,169	$	209
Mortgage servicing rights	—		—		10,799		750
Foreclosed real estate and other properties	—		—		382		47

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

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

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

Servicing rights, net do not trade in an active, open market with readily observable prices. While sales of mortgage servicing rights do occur, the precise terms and conditions typically are not readily available to allow for a “quoted price for similar assets” comparison. Accordingly, the Company relies on an internal discounted cash flow model to estimate the fair value of its mortgage servicing rights. The Company uses a valuation model to project mortgage servicing rights cash flows based on the current interest rate scenario, which is then discounted to estimate an expected fair value of the mortgage servicing rights. The valuation model considers portfolio characteristics of the underlying mortgages, contractually specified servicing fees, prepayment assumptions, discount rate assumptions, other ancillary revenue, costs to service, and other economic factors. Certain tranches of the portfolio may exhibit distinct liquidity traits compared to other tranches. 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), not fair value measurement accounting, for its servicing rights assets. During the year, the estimated fair value was less than the amortized cost and a valuation allowance was recorded, which classifies servicing rights, net as a nonrecurring valuation.

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

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HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of March 31, 2013, the significant unobservable inputs used in the fair value measurements were as follows:



	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Averages)
Impaired loans	$	4,169	Discounted cash flow	Discount rate	3.3% - 9.0% (6.5%)
				Principal loss probability	0.0% - 100.0% (30.1%)

			Collateral valuation	Discount from appraised value	0.0% - 75.0% (18.2%)
				Costs to sell	7.5%

Servicing rights, net	10,799		Discounted cash flow	Constant prepayment rate	15.8%
				Discount rate	9.0%

Foreclosed real estate and other properties	382		Collateral valuation	Costs to sell	10.0% - 10.5% (10.1%)

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q ("Form 10-Q"), as well as other reports issued by 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 analysts, investors and others from time to time. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as "optimism," "look-forward," "bright," "believe," "expect," "anticipate," "intend," "hope," "plan," "estimate" or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may," are intended to identify these forward-looking statements.

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


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


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


•	forecasts of future economic performance.


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

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


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


•	the effect of recent legislation to help stabilize the financial markets;


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


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

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


•	prevailing economic, political and business conditions in South Dakota and Minnesota;


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


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


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


•	the effects of FDIC deposit insurance premiums and assessments;


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


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


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


•	soundness of other financial institutions;


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


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


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


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


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

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

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

Executive Summary

The Company's net income for the first nine months of fiscal 2013 was $4.5 million, or $0.64 in diluted earnings per common share, compared to $3.4 million, or $0.48 in diluted earnings per common share, for the same period of fiscal 2012. This resulted in a return on average equity (i.e., net income divided by average equity) of 6.11% for the first nine months of fiscal 2013, compared to 4.72% for the same period of the prior fiscal year. For the same respective periods, the return on average assets (i.e., net income divided by average assets) was 0.51% compared to 0.37%.

Net interest income for the first nine months of fiscal 2013 was $21.6 million, a decrease of $4.0 million, or 15.5%, compared to the same period a year ago. For the comparative time-frames, average interest-earning assets and average interest-bearing liabilities decreased 2.1% and 4.0%, respectively. The average yield on interest-earning assets decreased to 3.63% for the first nine months of fiscal 2013, compared to 4.31% a year ago, a decrease of 68 basis points, due primarily to the repricing of adjustable rate loans and competitive pricing pressures in a low interest rate environment. In addition, this economic environment impacts the yields on investment securities and other short-term investments and prepayment speeds of mortgage-

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backed securities purchased at a premium. For the same period, cost of deposits, which include all interest-bearing and noninterest-bearing deposits, decreased by 29 basis points to 0.56%, compared to 0.85% in the previous year.

The net interest margin expressed on a fully taxable equivalent basis (“Net Interest Margin, TE”) for the nine months ended March 31, 2013 was 2.68%, which is a decrease of 41 basis points from the same period of the prior fiscal year. The margin declined primarily due to the decreases in yields associated with loans and the declining average balances of loans, when compared to the same period of the prior fiscal year. Conversely, investment securities average balances increased, but at lower rates of earnings when compared to loan interest rates. Deposit rates and resulting interest expense also declined to partially offset the decline in interest income. A sustained overall decline in the interest rate yield curve has affected both the yield for the interest-earning assets and the interest-bearing liabilities, and the average balances for these categories decreased when compared to the same period of the prior year. Net Interest Margin, TE is a non-GAAP financial measure. See “Analysis of Net Interest Income” for a calculation of this non-GAAP financial measure and for further discussion as to the reasons we believe this non-GAAP financial measure is useful.

Total loans increased by $5.0 million during the most recent quarter to $682.6 million at March 31, 2013, which is similar to the balance at June 30, 2012 of $683.7 million. Commercial real estate and agricultural lending opportunities have increased during the last three months, while strong underwriting standards remain in place. Residential mortgage loan originations continued year-over-year increased production with the majority of these loans sold into the secondary market. Refinancing of single family loans has contributed to a decline in the consumer home equity portfolio. We remain cautiously optimistic that the overall strength of the local economic recovery is reflected in increased lending activity, while also acknowledging that we continue to operate in uncertain national conditions. We believe that the operating environment has resulted in increased competition among financial institutions for loan demand from credit-worthy borrowers.

The allowance for loan and lease losses increased by $98,000 to $10.7 million at March 31, 2013, compared to June 30, 2012. This resulted in a ratio of allowance for loan and lease losses to total loans and leases of 1.56% compared to 1.55% at June 30, 2012. The overall loan balances decreased by less than 1% during the first nine months of fiscal 2013, but the amount of loan balances from which the general reserve is calculated decreased by approximately 1.5%. The general reserve decreased due in part to the effects of the decrease in applicable loan balances, historical charge-off activity and management's assessment of environmental factors. During this time, recoveries exceeded charge-offs resulting in a net recovery of $270,000. The net recoveries exceeded the amounts added to the allowance for loan and lease losses and contributed to a net benefit for the provision for loan and lease losses of $172,000 for the first nine months of fiscal 2013. Total nonperforming assets at March 31, 2013 were $23.6 million as compared to $17.8 million at June 30, 2012. The ratio of nonperforming assets to total assets increased to 1.97% at March 31, 2013, compared to 1.49% at June 30, 2012. The overall increase in nonperforming assets from June 30, 2012 was primarily related to some continued difficulty in the dairy sector. Despite the increase in nonperforming assets, the Bank has $3.2 million less classified assets at March 31, 2013 when compared to June 30, 2012. The Company continues to pro-actively manage its problem assets which have been enhanced by improving conditions in the regional commercial and agricultural markets. The valuation allowance recorded in accordance with ASC 310 on identified impaired loans increased to $2.7 million at March 31, 2013, compared to $2.1 million at June 30, 2012, while the valuation allowance recorded in accordance with ASC 450 decreased by $490,000 due to the factors mentioned earlier. Approximately 58% of the valuation allowance on impaired loans relate to agricultural loans and, more specifically, 54% are within the dairy sector. All identified impaired loans are reviewed to assess the borrower's ability to make payments under the terms of the loan and/or a shortfall in collateral value that would result in charging off the loan or the portion of the loan that was impaired.

Foreclosed real estate and other properties totaled $901,000 at March 31, 2013, compared to $1.6 million at June 30, 2012, or a decrease of $726,000. The balance at March 31, 2013 consists primarily of residential loans that were foreclosed and remained unsold at quarter end.

The allowance for loan and lease losses is calculated based on loan and lease levels, loan and lease loss history over 12, 36, and 60 month time periods, credit quality of the loan and lease portfolio, and environmental factors such as economic health of the region and management experience. This risk rating analysis is designed to give the Company a consistent and systematic methodology to determine proper levels for the allowance at a given time. Management intends to continue its disciplined credit administration and loan underwriting processes and to remain focused on the creditworthiness of new loan originations. Management believes that it has identified the most significant nonperforming assets in the loan portfolio and is working to clarify and resolve the credit, credit administration, and environmental factor issues related to these assets to obtain the most favorable outcome for the Company.

Total deposits at March 31, 2013, were $897.2 million, an increase of $3.4 million from June 30, 2012. This increase was primarily due to the $50.6 million increase in core deposits and partially offset by a $46.6 million decrease of seasonal public fund balances. Public funds have seasonal fluctuations due to semiannual tax collection and subsequent disbursement to entities. Interest rates on deposits, which are one of the primary factors affecting the amount of interest expense paid,

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decreased to the average rate paid of 0.66% on interest-bearing deposits for the nine month period ended March 31, 2013, compared to 0.98% for the same period of the prior year.

On April 29, 2013, the Company announced it will pay a quarterly cash dividend of 11.25 cents per common share for the third quarter of fiscal 2013. The dividend will be paid on May 17, 2013, to stockholders of record on May 10, 2013.

The total risk-based capital ratio of 16.42% at March 31, 2013, increased by 55 basis points from 15.87% at June 30, 2012. Tier I capital increased 14 basis points to 9.80% at March 31, 2013 when compared to 9.66% at June 30, 2012. This continues to place the Bank in the “well-capitalized” category within financial institution regulation at March 31, 2013 and is consistent with the “well-capitalized” regulatory category in which the Company plans to operate. The Company historically has been able to manage the size of its assets through secondary market loan sales of single-family mortgages.

Noninterest income was $10.8 million for the nine months ended March 31, 2013, compared to $9.8 million for the same period in the prior fiscal year, an increase of $1.0 million. This increase was due to increases in gain on sale of loans and fees on deposits, but was partially offset by a decrease in net loan servicing income. The gain on sale of loans increased by $1.7 million due to increased volume of originated single-family loans. Deposit fees increased $393,000 to $4.9 million for the first nine months of fiscal 2013, as compared to the same period of the prior year. In the first quarter of fiscal 2013, $600,000 of nonrecurring vendor incentive fees were received related to a debit card brand change for customer accounts. Security gains totaled $2.0 million for the first nine months of fiscal 2013, which is an increase of $1.1 million compared to the same period of the prior year. The increases in security gains were offset by a decrease in other noninterest income of $1.6 million, primarily due to a first quarter nonrecurring charge related to the termination of hedging activity on deposit balances, for the nine months ended March 31, 2013. Net loan servicing income decreased $1.0 million to a net loss of $84,000 for the nine months ended March 31, 2013, due primarily to an increase in net impairment provisions and amortization expenses of $420,000 and $374,000, respectively, when compared to the same period of the prior year. These reductions in servicing income were primarily the result of higher prepayment speeds calculated within the servicing portfolio which have resulted from the low interest rate environment. During the most recent quarter, prepayment speeds declined, which contributed to an impairment provision benefit and a reduction in amortization when compared to December 31, 2012.

Noninterest expense was $25.8 million for the nine months ended March 31, 2013, as compared to $27.5 million for the same period of the prior fiscal year, a decrease of $1.7 million, or 6.2%. The decrease was attributed primarily to decreases in compensation and employee benefits of $559,000 and professional fees of $801,000. In addition, FDIC insurance and occupancy and equipment expenses decreased a total of $292,000. Compensation costs decreased due to a reduced number of average full-time equivalents (“FTE's”) for the first nine months of fiscal 2013 compared to the same period in the prior fiscal year, while employee benefits decreased due to reduced levels of utilization of the self-insurance health care plan. Professional fees have declined on a year-over-year basis due to the resolution of certain employment, regulatory and governance matters the Company faced in the first and second quarter of fiscal 2012. FDIC insurance decreased due to lower modified rates assessed, which may fluctuate based on asset quality, financial performance and other factors. Occupancy and equipment decreased when compared to the same period of the prior year because of the efficiency initiatives taken in the second through fourth quarters of fiscal 2012 which reduced the number of branches by consolidating six branches with other nearby branches to improve operating efficiencies.

During the prior fiscal year, the Company was informed by the South Dakota Housing Development Authority (“SDHDA”) that a change in business model was necessary for SDHDA to continue to meet the financing needs of its single family mortgage program in South Dakota. This change would include the development of a new bond resolution, to support a mortgage-backed securities program. As such, a request for proposal for a master servicer with a two year commitment period was provided to interested parties, and the Company was informed that a new master servicer would begin effective April 1, 2012. This change in business model terminated the new flow of servicing assets from SDHDA to the Company beginning in the fourth quarter of fiscal 2012. The Company does not expect this event to have a material impact on the fiscal 2013 income statement. The single family mortgage segment of the Company's SDHDA servicing portfolio is expected to decrease in value over time, as principal is reduced, which may be offset by increases to the Fannie Mae servicing portfolio balances through new origination activity. The Company continues to evaluate potential acquisition of servicing assets dependent upon market conditions and characteristics desirable by the Company, which may include bidding as the master servicer for SDHDA after the initial two year commitment is complete.

On November 12, 2009, the FDIC Board approved a rule requiring prepayment of the quarterly assessments for the fourth quarter of calendar year 2009 and the entire calendar years of 2010, 2011, and 2012. On December 30, 2009, the Company paid $4.9 million, which was recorded as a prepaid asset and is being proportionally expensed as each quarter elapses. At March 31, 2013, the remaining balance recorded as a prepaid asset was $855,000. The prepaid assessment credit program ended with the 13th and final credit application on the March 29, 2013 quarterly deposit insurance invoice. Refunds of any unused prepaid assessment credits will be issued on the June 28, 2013 invoice. Effective for each of the first three quarters of fiscal 2013, the FDIC insurance assessment rate was modified and reduced due to the Bank's asset quality ratios and earnings as

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compared to risk weighted assets. As a result, FDIC insurance decreased by $190,000, to $606,000 for the nine months ended March 31, 2013 compared to the same period in the prior fiscal year.

General

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

Financial Condition Data

At March 31, 2013, the Company had total assets of $1.20 billion, an increase of $4.6 million from the level at June 30, 2012. Total investment securities available for sale and cash and cash equivalents increased a combined $18.6 million, while loans held for sale and net loans and leases receivable decreased $7.7 million and $1.2 million, respectively. Total liabilities increased by $2.0 million primarily due to an increase in deposits of $3.4 million and advances to borrowers for taxes and insurance of $5.6 million, but were partially offset by a decrease in advances from the FHLB and other borrowings of $7.3 million. Stockholders' equity increased by $2.6 million since June 30, 2012, primarily due to net income and a decrease in accumulated other comprehensive loss, which were partially offset by the payment of dividends.

The securities available for sale increased by $45.9 million due primarily to the purchase of securities during the second and third quarters. Total proceeds on the sale of securities during the fiscal year were $91.4 million for a net gain of $2.0 million. The decrease in net loans and leases receivable, which excludes loans in process and deferred fees, was $1.2 million due to the decrease in loan balances of $1.1 million and the increase in the allowance for loan and lease losses of $98,000. Commercial real estate and agricultural loans increased a total of $25.3 million since June 30, 2012, while residential, commercial and consumer loans decreased a total of $26.4 million.

Loans held for sale decreased $7.7 million, primarily due to timing of mortgage financing activity sold to secondary market investors and the resulting amount of one-to four-family loans held at March 31, 2013.

See the Consolidated Statement of Cash Flows for a detailed analysis of the change in cash and cash equivalents.

Deposits increased $3.4 million, to $897.2 million at March 31, 2013, due primarily to the increase in core deposit accounts, exclusive of public funds and out-of-market certificates of deposits, and partially offset by a decrease in seasonal public fund balances. Core deposits increased $50.6 million, or 7.2% since June 30, 2012, while public fund deposit balances decreased $46.6 million. Advances from the FHLB and other borrowings decreased $7.3 million, to $135.1 million at March 31, 2013 as compared to June 30, 2012, due to reduced funding needs.

Stockholders' equity increased $2.6 million at March 31, 2013 when compared to June 30, 2012. Increases in stockholders' equity were derived from net income of $4.5 million, and a net decrease in accumulated other comprehensive loss of $113,000. These increases to equity were partially offset by the payment of cash dividends of $2.4 million.

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 tables present 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 tables do not reflect any effect of income taxes. Average balances consist of daily average balances for the Bank with simple average balances for all other subsidiaries of the Company. The average balances include nonaccruing loans and leases. The yields on loans and leases include origination fees, net of costs, which are considered adjustments to yield.

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	Three Months Ended March 31,
	2013						2012
	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⁾	$	687,223	$	8,082	4.77	%	$	743,977	$	9,833	5.32	%
Investment securities⁽²⁾⁽³⁾	415,936		1,508		1.47		356,436		1,124		1.27
Correspondent bank stock	7,417		53		2.90		8,068		60		2.99
Total interest-earning assets	1,110,576		$	9,643	3.52	%	1,108,481		$	11,017	4.00	%
Noninterest-earning assets	79,912						84,723
Total assets	$	1,190,488					$	1,193,204
Interest-bearing liabilities:
Deposits:
Checking and money market	$	380,004	$	241	0.26	%	$	334,647	$	469	0.56	%
Savings	118,408		70		0.24		133,518		90		0.27
Certificates of deposit	268,814		800		1.21		297,306		1,105		1.49
Total interest-bearing deposits	767,226		1,111		0.59		765,471		1,664		0.87
FHLB advances and other borrowings	132,781		1,029		3.14		147,401		1,108		3.02
Subordinated debentures payable to trusts	27,837		403		5.87		27,837		500		7.22
Total interest-bearing liabilities	$	927,844	$	2,543	1.11	%	$	940,709	$	3,272	1.40	%
Noninterest-bearing deposits	130,687						125,909
Other liabilities	32,987						31,057
Total liabilities	1,091,518						1,097,675
Equity	98,970						95,529
Total liabilities and equity	$	1,190,488					$	1,193,204
Net interest income; interest rate spread⁽⁴⁾			$	7,100	2.41	%			$	7,745	2.60	%
Net interest margin⁽⁴⁾⁽⁵⁾					2.59	%					2.81	%
Net interest margin, TE⁽⁶⁾					2.64	%					2.84	%


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


(2)	Includes federal funds sold and interest earning reserve balances at the Federal Reserve Bank.


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


(4)	Percentages for the three months ended March 31, 2013 and 2012 have been annualized.


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

(6)

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

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	Nine Months Ended March 31,
	2013						2012
	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⁾	$	696,667	$	25,892	4.95	%	$	792,551	$	32,513	5.46	%
Investment securities⁽²⁾⁽³⁾	386,484		3,668		1.26		313,159		3,407		1.45
Correspondent bank stock	7,627		158		2.76		8,201		184		2.99
Total interest-earning assets	1,090,778		$	29,718	3.63	%	1,113,911		$	36,104	4.31	%
Noninterest-earning assets	81,219						83,472
Total assets	$	1,171,997					$	1,197,383
Interest-bearing liabilities:
Deposits:
Checking and money market	$	357,910	$	889	0.33	%	$	323,823	$	1,532	0.63	%
Savings	113,678		215		0.25		125,585		250		0.26
Certificates of deposit	273,610		2,612		1.27		323,466		3,910		1.61
Total interest-bearing deposits	745,198		3,716		0.66		772,874		5,692		0.98
FHLB advances and other borrowings	137,177		3,128		3.04		147,918		3,389		3.05
Subordinated debentures payable to trusts	27,837		1,256		6.01		27,837		1,435		6.86
Total interest-bearing liabilities	$	910,212	$	8,100	1.19	%	$	948,629	$	10,516	1.48	%
Noninterest-bearing deposits	131,603						122,153
Other liabilities	31,677						31,644
Total liabilities	1,073,492						1,102,426
Equity	98,505						94,957
Total liabilities and equity	$	1,171,997					$	1,197,383
Net interest income; interest rate spread⁽⁴⁾			$	21,618	2.44	%			$	25,588	2.83	%
Net interest margin⁽⁴⁾⁽⁵⁾					2.64	%					3.06	%
Net interest margin, TE⁽⁶⁾					2.68	%					3.09	%

_____________________________________


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


⁽²⁾	Includes federal funds sold and interest earning reserve balances at the Federal Reserve Bank.


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


⁽⁴⁾	Percentages for the nine months ended March 31, 2013 and 2012 have been annualized.


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

⁽⁶⁾

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



	Three Months Ended March 31,						Nine Months Ended March 31,
	2013			2012			2013			2012
	(Dollars in Thousands)
Net interest income	$	7,100		$	7,745		$	21,618		$	25,588
Taxable equivalent adjustment	118			83			312			285
Adjusted net interest income	7,218			7,828			21,930			25,873
Average interest-earning assets	1,110,576			1,108,481			1,090,778			1,113,911
Net interest margin, TE	2.64		%	2.84		%	2.68		%	3.09		%

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 increases and decreases resulting from 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 previous rate) and (ii) changes in rate (i.e., changes in rate multiplied by previous volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.



	Three Months Ended March 31,									Nine Months Ended March 31,
	2013 vs 2012									2013 vs 2012
	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)
	(Dollars in Thousands)
Interest-earning assets:
Loans and leases receivable⁽¹⁾	$	(777	)	$	(974	)	$	(1,751	)	$	(3,944	)	$	(2,677	)	$	(6,621	)
Investment securities⁽²⁾	183			201			384			806			(545		)	261
Correspondent bank stock	(5		)	(2		)	(7		)	(13		)	(13		)	(26		)
Total interest-earning assets	$	(599	)	$	(775	)	$	(1,374	)	$	(3,151	)	$	(3,235	)	$	(6,386	)
Interest-bearing liabilities:
Deposits:
Checking and money market	$	61		$	(289	)	$	(228	)	$	161		$	(804	)	$	(643	)
Savings	(11		)	(9		)	(20		)	(25		)	(10		)	(35		)
Certificates of deposit	(110		)	(195		)	(305		)	(602		)	(696		)	(1,298		)
Total interest-bearing deposits	(60		)	(493		)	(553		)	(466		)	(1,510		)	(1,976		)
FHLB advances and other borrowings	(116		)	37			(79		)	(251		)	(10		)	(261		)
Subordinated debentures payable to trusts	—			(97		)	(97		)	—			(179		)	(179		)
Total interest-bearing liabilities	$	(176	)	$	(553	)	$	(729	)	$	(717	)	$	(1,699	)	$	(2,416	)

Net interest income decrease	$	(423	)	$	(222	)	$	(645	)	$	(2,434	)	$	(1,536	)	$	(3,970	)

_____________________________________


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


⁽²⁾	Includes federal funds sold and interest earning reserve balances at the Federal Reserve Bank.

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Application of Critical Accounting Policies

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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


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


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


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


•	Changes in the quality of the Company's loan review system;


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


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


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


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

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

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

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


•	Periodic inspections of the loan collateral;


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


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

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

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

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

Mortgage Servicing Rights ("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 from the South Dakota Housing Development Authority's first-time homebuyer's program. Due to the lack of quoted markets for the Company's servicing portfolio, the Company estimates the fair value of the MSRs using a present value of future cash flow analysis. If the fair value is greater than or equal to the amortized book value of the MSRs, no impairment is recognized. If the fair value is less than the book value, an expense for the difference is charged to net income by initiating a MSR valuation account. If the Company determines this impairment is temporary, any future changes in impairment are recorded as a change in net income and the valuation account. If the Company determines the impairment to be permanent, the valuation is written off against the MSRs, which results in a new amortized balance.

The Company has included MSRs as a critical accounting policy because the use of estimates for determining fair value using present value concepts may produce results which may significantly differ from other fair value analysis, perhaps even to the point of recording impairment. The risk to net income is when the underlying mortgages are paid off significantly faster than the assumptions used in the previously recorded amortization. Estimating future cash flows on the underlying mortgages is a difficult analysis and requires judgment based on the best information available. The Company looks at alternative assumptions and projections when preparing a reasonable and supportable analysis. Based on the Company's analysis of MSRs, an impairment valuation of $1.6 million has been recorded for temporary impairment at March 31, 2013 of which $750,000 was recorded during fiscal 2013.

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

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loss component recognized in net income, and the amount of the loss related to other factors is recognized in other comprehensive income net of taxes.

The amount of the credit loss component of a debt security impairment is estimated as the difference between amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset- backed or floating rate security. At March 31, 2013, the Company does not have other-than-temporarily impaired debt securities for which credit losses exist.

Level 3 Fair Value Measurement. GAAP requires the Company to measure the fair value of financial instruments under a standard which describes three levels of inputs that may be used to measure fair value. Level 3 measurement includes significant unobservable inputs that reflect the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This valuation process may take into consideration factors such as market liquidity. Imprecision in estimating these factors can impact the amount recorded on the balance sheet for a particular asset or liability with related impacts to earnings or other comprehensive income (loss).

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.

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 net income could be significant, as discussed below.

Derivative instruments are recorded on the Consolidated Statements of Financial Condition as Other assets or Accrued expenses or Other liabilities measured at fair value through adjustments to either accumulated other comprehensive income within stockholders' equity or within net income. Fair value is defined as the price that would be received to sell a derivative asset or paid to transfer a derivative liability in an orderly transaction between market participants on the transaction date. Fair value is determined using available market information and appropriate valuation methodologies.

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 (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 or is terminated, the derivative gains and losses that were accumulated in other comprehensive income will be recognized immediately in net income within other noninterest income. 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 net income. During the quarter ended September 30, 2012, the Company terminated its $35.0 million notional deposit hedges, with a resulting charge to other noninterest income of $1.5 million.

Interest rate swaps utilized by the Company are typically accounted for as cash flow hedges, including hedging the interest rate risk in the cash flows of long-term, variable-rate instruments, including subordinated debentures. The Company also has utilized interest rate swaps to hedge the interest rate risk in the cash flows of variable-rate deposits, accounted for as a cash flow hedge. 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, are deferred and reported as a component of other comprehensive income ("OCI"). The differential to be paid or received on cash flow swap agreements is accrued as interest rates change and is recognized in interest expense.

The Company also enters into interest rate swaps with loan customers to provide a facility to facilitate customer transactions and meet the borrower's financing needs. These swaps qualify as derivatives, but consist of two different types of instruments. The back-to-back loan swaps are not designated as hedging instruments and are reported at fair value in other assets or accrued expenses and other liabilities. Back-to-back swaps are matched in exact offsetting terms to interest rate swaps

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that the Company enters into with an outside third party. The one-way loan swaps are classified as fair value hedging instruments and are reported at fair value in loans and leases receivable.

Self-Insurance. The Company has a self-insured healthcare plan for its employees up to certain limits. To mitigate a portion of the risks involved with a self-insurance health plan, the Company has a stop-loss insurance policy through a commercial insurance carrier for coverage in excess of $75,000 per individual occurrence. Effective January 1, 2013, the Company transitioned to a self-insured dental plan for its employees from a fully insured plan. 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 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 claims could result in adjustments to the accrual. These adjustments could significantly affect net income if circumstances differ substantially from the assumptions used in estimating the accrual.

Asset Quality

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 affect a cure. Where appropriate, Bank personnel review the condition of the property and the financial circumstances of the borrower. Based upon the results of any such investigation, the Bank may: (i) accept a repayment program which under appropriate circumstances could involve an extension in the case of consumer loans for the arrearage from the borrower, (ii) seek evidence, in the form of a listing contract, of efforts by the borrower to sell the property if the borrower has stated that he is attempting to sell, or (iii) initiate foreclosure proceedings. When a loan payment is delinquent for 90 days, the Bank generally will initiate foreclosure proceedings unless management is satisfied the credit problem is correctable.

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 $5.8 million during the fiscal year to $23.6 million at March 31, 2013. The ratio of nonperforming assets to total assets, which is one indicator of credit risk exposure, increased to 1.97% at March 31, 2013, from 1.49% at June 30, 2012.

Nonaccruing loans and leases increased to $22.5 million at March 31, 2013 compared to $16.1 million at June 30, 2012. Included in nonaccruing loans and leases at March 31, 2013 were three loans totaling $448,000 secured by one- to four-family real estate, six commercial business loans totaling $4.2 million, eight commercial real estate loans totaling $1.2 million, six agricultural real estate loans totaling $11.2 million, seven agricultural business loans totaling $4.6 million, and 12 consumer loans totaling $798,000.

Accruing loans and leases delinquent more than 90 days increased $59,000, to $166,000 at March 31, 2013 compared to $107,000 at June 30, 2012. Included in accruing loans and leases delinquent more than 90 days at March 31, 2013 were two loans aggregating $165,000 secured by one-to four-family real estate which have a weighted average loan to value ratio of 88.2% at March 31, 2013 and remain in accruing status due to the government guarantees on the loans.

The Company's nonperforming loans and leases, which represent nonaccrual loans and leases plus those past due over 90 days and still accruing were $22.7 million, an increase of $6.5 million from the levels at June 30, 2012. Approximately two-

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thirds of the nonperforming loans at March 31, 2013 were comprised of dairy operations which is similar to the percentage at June 30, 2012. The risk rating system in place is designed to identify and manage the nonperforming loans and leases. Commercial and agricultural loans and equipment finance leases will have specific reserve allocations based on collateral values or based on the present value of expected cash flows if the loans or leases are deemed impaired. Loans and leases that are not performing do not necessarily result in a loss.

As of March 31, 2013, the Company had $901,000 of foreclosed assets. The balance of foreclosed assets consisted of $882,000 in single-family residences and $19,000 in consumer vehicles.

At March 31, 2013, the Company had designated $39.7 million of its assets as classified, which management has determined need to be closely monitored because of possible credit problems of the borrowers or the cash flows of the secured properties. This amount includes $589,000 of unused lines of credit for those borrowers that have classified assets. At March 31, 2013, the Company had $12.8 million in commercial real estate and commercial business loans purchased, of which none of the amounts were classified at March 31, 2013. These loans and leases were considered in determining the adequacy of the allowance for loan and lease losses. The allowance for loan and lease losses is established based on management's evaluation of the risks probable in the loan and lease portfolio and changes in the nature and volume of loan and lease activity. Such evaluation, which includes a review of all loans and leases for which full collectability may not be reasonably assured, considers the estimated fair market value of the underlying collateral, present value of expected principal and interest payments, economic conditions, historical loss experience and other factors that warrant recognition in providing for an adequate loan and lease loss allowance.

Although the Company's management believes that the March 31, 2013, recorded allowance for loan and lease losses was adequate to provide for probable losses on the related loans and leases, there can be no assurance that the allowance existing at March 31, 2013 will be adequate in the future.

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

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



	March 31, 2013			June 30, 2012
	(Dollars in Thousands)
Nonaccruing loans and leases:
One- to four-family	$	448		$	31
Commercial business	4,225			1,813
Equipment finance leases	—			17
Commercial real estate	1,202			1,254
Multi-family real estate	27			32
Agricultural real estate	11,193			11,185
Agricultural business	4,648			1,169
Consumer direct	10			3
Consumer home equity	788			569
Consumer indirect	—			2
Total	22,541			16,075
Accruing loans and leases delinquent more than 90 days:
One- to four-family	165			107
Consumer OD & reserve	1			—
Total	166			107
Foreclosed assets:
One- to four-family	882			1,515
Agricultural real estate	—			109
Consumer direct	19			3
Total⁽¹⁾	901			1,627
Total nonperforming assets⁽²⁾	$	23,608		$	17,809
Ratio of nonperforming assets to total assets⁽³⁾	1.97		%	1.49		%
Ratio of nonperforming loans and leases to total loans and leases⁽⁴⁾	3.33		%	2.37		%
Accruing troubled debt restructures	$	1,037		$	1,213

_____________________________________


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


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


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


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

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



	Nine Months Ended March 31,
	2013			2012
	(Dollars in Thousands)
Balance at beginning of period	$	10,566		$	14,315
Charge-offs:
One- to four-family	(1		)	(100		)
Commercial business	(14		)	(1,011		)
Equipment finance leases	(20		)	(42		)
Commercial real estate	(7		)	(941		)
Agricultural real estate	(21		)	(1,536		)
Agricultural business	(374		)	(2,954		)
Consumer direct	(64		)	(55		)
Consumer home equity	(521		)	(592		)
Consumer OD & reserve	(172		)	(163		)
Consumer indirect	(25		)	(27		)
Total charge-offs	(1,219		)	(7,421		)
Recoveries:
One- to four-family	20			10
Commercial business	282			27
Equipment finance leases	7			58
Commercial real estate	—			32
Agricultural real estate	232			53
Agricultural business	744			456
Consumer direct	15			4
Consumer home equity	58			22
Consumer OD & reserve	79			56
Consumer indirect	52			22
Total recoveries	1,489			740
Net recoveries (charge-offs)	270			(6,681		)
Additions charged to operations	(172		)	2,906
Allowance related to assets acquired (sold), net	—			—
Balance at end of period	$	10,664		$	10,540
Ratio of net (recoveries) charge-offs during the period to average loans and leases outstanding during the period ⁽²⁾	(0.05		)%	1.12		%
Ratio of allowance for loan and lease losses to total loans and leases at end of period	1.56		%	1.48		%
Ratio of allowance for loan and lease losses to nonperforming loans and leases at end of period⁽¹⁾	46.96		%	48.11		%

_____________________________________


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


⁽²⁾	Percentages for the nine months ended March 31, 2013 and 2012 have been annualized.

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The distribution of the Company’s allowance for loan and lease losses and impaired loss summary as required by ASC Topic 310, “Accounting by Creditors for Impairment of a Loan” are summarized in the following tables. The combination of ASC Topic 450, “Accounting for Contingencies” and ASC Topic 310 calculations comprise the Company’s allowance for loan and lease losses.



	General Allowance for Loan and Lease Losses		Specific Impaired Loan Valuation Allowance		General Allowance for Loan and Lease Losses		Specific Impaired Loan Valuation Allowance
Loan Type	March 31, 2013				June 30, 2012
	(Dollars in Thousands)
Residential	$	289	$	42	$	320	$	27
Commercial business	842		960		977		—
Commercial real estate	2,006		57		1,989		74
Agricultural	2,729		1,571		2,505		1,988
Consumer	2,091		77		2,656		30
Total	$	7,957	$	2,707	$	8,447	$	2,119



	Number of Loan Customers	Loan Balance		Impaired Loan Valuation Allowance		Number of Loan Customers	Loan Balance		Impaired Loan Valuation Allowance
Loan Type	March 31, 2013					June 30, 2012
	(Dollars in Thousands)
Residential	3	$	337	$	42	1	$	214	$	27
Commercial business	5	4,228		960		5	1,813		—
Commercial real estate	9	1,423		57		5	1,554		74
Agricultural	15	16,389		1,571		16	12,964		1,988
Consumer	12	796		77		1	121		30
Total	44	$	23,173	$	2,707	28	$	16,666	$	2,119

The allowance for loan and lease losses was $10.7 million at March 31, 2013, as compared to $10.6 million at June 30, 2012. This increase is attributable to the specific valuation allowance increase of $588,000 to $2.7 million, which is directly attributed to specific impaired loans, and was partially offset by a decrease in the general valuation allowance of $490,000 due to fluctuations in historical losses and environmental factors. The majority of the specific valuation allowance continues to be related to the agricultural portfolio segment. The ratio of the allowance for loan and lease losses to total loans and leases was 1.56% at March 31, 2013, compared to 1.55% at June 30, 2012. 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. The Company periodically utilizes an external loan review to assist in the assessment of the appropriateness of risk ratings and of risks within the portfolio. A periodic credit review is performed on all types of loans and leases to establish the necessary reserve based on the estimated risk within the portfolio. This assessment of risk takes into account the composition of the loan and lease portfolio, historical loss experience for each loan and lease category, previous loan and lease experience, concentrations of credit, current economic conditions and other factors that in management's judgment deserve recognition.

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

At March 31, 2013, the Company also had an allowance for credit losses on off-balance sheet credit exposures of $77,000. This amount is maintained as a separate liability account to cover estimated potential credit losses associated with off-balance sheet credit instruments such as off-balance sheet loan commitments, standby letters of credit, and guarantees and is recorded in

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other liabilities in the Consolidated Statements of Financial Condition. Although management believes that it uses the best information available to determine the allowances, unforeseen market conditions could result in adjustments and net income being significantly affected if circumstances differ substantially from the assumptions used in making the final determinations. Future additions to the Company's allowances may result from periodic loan, property and collateral reviews and thus cannot be predicted in advance. See Note 1 of "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of the Company's Form 10-K for the year ended June 30, 2012, for a description of the Company's policy regarding the provision for losses on loans and leases.

Comparison of the Three Months Ended March 31, 2013 and March 31, 2012

General. The Company's net income was $1.4 million or $0.20 for basic and diluted earnings per common share for the quarter ended March 31, 2013, a $193,000 increase in net income compared to $1.2 million or $0.17 for basic and diluted earnings per common share, respectively, compared to the same quarter of the prior year. The third quarter of fiscal 2013 resulted in a return on average equity (i.e., net income divided by average equity) of 5.76%, compared to 5.10% in the same quarter of the prior year. For the quarter ended March 31, 2013, the return on average assets (i.e., net income divided by average assets) was 0.48% compared to 0.41% in the prior year's quarter. As discussed in more detail below, the increases were due to a variety of key factors, including an increase in noninterest income of $648,000, a decrease in the provision for losses on loans and leases of $264,000, and a decrease in noninterest expense of $148,000. These were partially offset by a decrease in net interest income of $645,000, and an increase in income taxes of $222,000.

Interest, Dividend and Loan Fee Income. Interest, dividend and loan fee income was $9.6 million for the quarter ended March 31, 2013, as compared to $11.0 million for the same quarter of the prior year, a decrease of $1.4 million or 12.5%. Interest earned on loans and leases receivable totaled $8.1 million for the quarter which is a decrease of $1.8 million, when compared to the same quarter of the prior fiscal year. The average balance of loans and leases receivable decreased from $744.0 million for the quarter ended March 31, 2012, to $687.2 million for the quarter ended March 31, 2013, while the average yield was 4.77%, a decrease of 55 basis points from 5.32% in the same quarter of the prior year. The decrease in interest earned on loans and leases receivable was partially offset by an increase of $377,000 in interest earned on investment securities and interest-earning deposits, which totaled $1.6 million for the current quarter. The average balance of investment securities increased by $59.5 million to $415.9 million for the quarter ended March 31, 2013, compared to the same period of the prior year. In addition, the average yield increased 20 basis points to 1.47%. Overall, the average balance of total interest-earning assets increased by 0.2%, but resulted in a decrease of overall interest and dividends of $599,000 because of the change of mix in average interest-earning assets. The average yield on interest-earning assets decreased 48 basis points, resulting in a decrease to overall interest and dividend income of $775,000.

Interest Expense. Interest expense was $2.5 million for the quarter ended March 31, 2013, as compared to $3.3 million for the same quarter of the prior year, a decrease of $729,000 or 22.3%. While a $60,000 decrease in interest expense was the result of a 0.2% increase in the average balance of deposits and due to a change in the mix of deposit products, a $493,000 decrease in interest expense was the result of a decrease in average deposit rates of 28 basis points. The average rate on interest-bearing deposits was 0.59% for the quarter ended March 31, 2013, as compared to 0.87% for the prior year's third quarter. Interest expense on deposits was reduced by $201,000 for the three months ended March 31, 2013 as compared to the same quarter of the prior year due to the termination of deposit swaps in the first quarter of fiscal 2013, which helped reduce the average rate paid on deposits. A $116,000 decrease in interest expense was the result of a 9.9% decrease in the average balance of FHLB advances and other borrowings, and was partially offset by a $37,000 increase in interest expense resulting from an increase in the average rate paid on remaining advances. A savings on interest expense due to hedging arrangements on the subordinated debentures was realized when forward-starting swap arrangements became effective during the second quarter of fiscal 2013. The savings generated due to the decrease in the average effective rate paid on the subordinated debentures was $97,000 when comparing the interest expense from the current quarter to the same quarter of the prior year.

Net Interest Income. The Company's net interest income for the quarter ended March 31, 2013, decreased $645,000 or 8.3%, to $7.1 million as compared to the prior fiscal year's third quarter. The decrease in net interest income was due primarily to the impact of declining average balances of loans and leases receivable in excess of the combination of increasing average balances of investment securities and declining average balances of interest-bearing liabilities. Net interest income decreased by $777,000 due to the declining average balance of loans and leases receivable, but was partially offset by $359,000 due to increased income for investment securities and decreased expense for interest-bearing liabilities. Average balance changes in assets and liabilities impacted net interest income by a net reduction of $423,000 when comparing the current quarter to the same quarter of the prior year. The decrease in net interest income due to interest rate changes was $222,000. This reduction in net interest income due to rate, was primarily due to lesser rates earned on loans and leases receivable of $974,000 and partially offset by increases to rates earned on investments securities and decreases to rates paid on interest-bearing liabilities of $201,000 and $553,000, respectively. The Company's net interest margin on a fully taxable equivalent basis was 2.64% for the quarter ended March 31, 2013, as compared to 2.84% for the prior year's quarter. The Company continues to have a diversified

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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 by 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 balances 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 to $0 for the quarter ended March 31, 2013, as compared to $264,000 in the prior year's quarter. The decrease in the provision is due in part to a decline in loan balances during the past 12 months, the minimal amount of net charge-offs recorded during the quarter, and a decrease in classified assets. Net charge-offs decreased from $745,000 in the third quarter of fiscal 2012 to $116,000 during the third quarter of fiscal 2013. Nonperforming assets decreased by $909,000, or 3.7%, to $23.6 million at March 31, 2013 when compared to March 31, 2012. Dairy-related credits within the agricultural sector remain the largest segment within nonperforming assets at March 31, 2013.

The allowance for losses on loans and leases at March 31, 2013 was $10.7 million. The allowance increased from the March 31, 2012 balance of $10.5 million due to an increase in the specific valuation recorded on impaired loans and partially offset by a decrease in the general allowance due to the decrease in overall loans and adjusted for changes in environmental factors and loan loss history. The ratio of allowance for loan and lease losses to nonperforming loans and leases at March 31, 2013, was 46.96% compared to 48.11% at March 31, 2012. The allowance for loan and lease losses to total loans and leases at March 31, 2013, was 1.56% compared to 1.48% at March 31, 2012. The Bank's management believes that the March 31, 2013, 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 $3.7 million for the quarter ended March 31, 2013, as compared to $3.0 million for the quarter ended March 31, 2012, which represents an increase of $648,000 or 21.5%. For the third quarter of fiscal 2013, the increase over the prior fiscal year's quarter was primarily due to an increase in net gain on sale of loans and net loan servicing income of $480,000 and $398,000, respectively. These increases in income were partially offset by a decrease in gain on sale of securities of $393,000 when comparing the third quarter of fiscal 2013 to the same quarter of fiscal 2012. In addition, the prior year's third quarter included $233,000 of charges against income due to the loss on the disposal of closed-branch fixed assets. In the third quarter of the current fiscal year, other noninterest income includes a charge of $83,000 due to the sale of land that was held for possible future expansion, which was determined to be no longer needed.

Net gain on the sale of loans totaled $1.2 million, an increase of $480,000 for the three months ended March 31, 2013, as compared to the prior fiscal year's quarter. Increased loan origination activity generated from the low interest rate environment primarily accounted for the increase in gains from the same quarter of the prior year.

Loan servicing income increased by $398,000 to $406,000 for the third quarter of fiscal 2013 primarily due to a valuation allowance benefit recaptured in March 2013 of $220,000 compared to a provision recorded of $330,000 in March 2012. Amortization expense for the third quarter of fiscal 2013 was $627,000, or an increase of $91,000 when compared to the third quarter of fiscal 2012. This increase in expense partially reduced the amount of income increases for loan servicing. For the quarter, the valuation allowance adjustment partially reversed the prior quarters' allowance recorded and increased the carrying value of the capitalized portfolio asset to the estimated fair value of the capitalized asset, as required by GAAP. An assessment of prepayment speeds for the portfolio contributed to the valuation allowance decrease since the prior quarter, but the levels of prepayment speeds are higher than a year ago which increased the amount of amortization expense as compared to the prior year's quarter.

Net gain on the sale of securities totaled $146,000, a decrease of $393,000 for the three months ended March 31, 2013, as compared to the prior fiscal year's quarter. Investment securities sold in the third quarter of fiscal 2012 were $31.7 million compared to $18.4 million for the quarter ended March 31, 2013.

Noninterest Expense. Noninterest expense was $8.5 million for the quarter ended March 31, 2013, as compared to $8.7 million for the quarter ended March 31, 2012, a decrease of $148,000, or 1.7%. Decreases in marketing and community investment of $217,000 and foreclosed real estate and other properties of $121,000 were primary factors in the decrease for the quarter as compared to the same quarter a year ago. In addition, FDIC insurance and professional fees decreased by $66,000 and $76,000, respectively. Compensation and employee benefits offset some of the decrease in noninterest expense due to an increase of $348,000 during the third quarter of fiscal 2013 compared to the same period of fiscal 2012.

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Marketing and community investment decreased $217,000 to $106,000 for the quarter ended March 31, 2013. A customer reward program was primarily responsible for the decrease in overall expense when compared to the third quarter of fiscal 2012. The reward program accrues points and related reward costs as a marketing expense. During the third quarter of fiscal 2013, unregistered and expired reward points were terminated and resulted in the recapture of $120,000. In addition, point accruals were reduced from the prior years' levels and a total of $202,000 of total costs were saved in the third quarter of fiscal 2013 when compared to the same quarter of fiscal 2012. Advertising and community investments were similar to the amounts reported in the same quarter of the prior year.

Net foreclosed real estate and other property expense decreased by $121,000 to $16,000 for the three months ended March 31, 2013 compared to the same period in the prior fiscal year. The decrease was due primarily to a decrease in foreclosure activity of single family real estate during the current quarter as compared to the third quarter of fiscal 2012.

FDIC insurance decreased by $66,000, to $195,000 for the three months ended March 31, 2013 compared to the same period in the prior fiscal year. During the first three quarters of fiscal 2013, the FDIC insurance assessment rate, which is based upon Bank performance ratios, was modified to lesser amounts. The cumulative effects of the reduced assessment rates since March 31, 2012 resulted in the comparative decrease.

Professional fees were $484,000 for the third quarter of fiscal 2013, which is a decrease of $76,000, or 13.6%, from the third quarter of fiscal 2012. This decrease was due primarily to the resolution of certain employment, regulatory, and governance matters which had contributed to higher costs in the prior year's quarter.

Compensation and employee benefits were $5.3 million for the quarter ended March 31, 2013, an increase of $348,000, or 7.1% when compared to the quarter ended March 31, 2012. The primary factors for the increase over the prior year's quarter were performance-based incentive pay related to employee performance outcomes and mortgage commissions of $413,000 and $163,000, respectively. Partially offsetting these increases, salaries and wages decreased $230,000 or 6.6% for the third quarter of fiscal 2013, when compared to the same period of fiscal 2012. This decrease was due primarily to a reduction of FTE's from 311 at December 31, 2011, to 298 FTE's at March 31, 2013. In addition, health insurance costs decreased by $138,000 to $300,000 for the quarter ending March 31, 2013.

Income tax expense. The Company's income tax expense for the quarter ended March 31, 2013 increased to $802,000 compared to $580,000 for the same period of the prior fiscal year. The effective tax rates were 36.3% and 32.4% for the quarter ended March 31, 2013 and 2012, respectively. The current quarter's tax rate is higher than anticipated due to tax adjustments recorded for nonrecurring income items and state tax expenses.

Comparison of the Nine Months Ended March 31, 2013 and March 31, 2012

General. The Company's net income was $4.5 million or $0.64 for basic and diluted earnings per common share for the nine months ended March 31, 2013, a $1.1 million increase in net income compared to $3.4 million or $0.48 for basic and diluted earnings per common share, respectively, for the same period of the prior year. For the first nine months of fiscal 2013 the return on average equity (i.e., net income divided by average equity) was 6.11%, compared to 4.72% in the same period of the prior year. The return on average assets (i.e., net income divided by average assets) was 0.51% compared to 0.37% for the same respective periods. As discussed in more detail below, the increases were due to a variety of key factors, including a decrease in the provision for losses on loans and leases of $3.1 million, a decrease in noninterest expense of $1.7 million and an increase in noninterest income of $1.0 million, partially offset by a decrease in net interest income of $4.0 million and an increase in income taxes of $693,000.

Interest, Dividend and Loan Fee Income. Interest, dividend and loan fee income was $29.7 million for the nine months ended March 31, 2013, as compared to $36.1 million for the same period of the prior year, a decrease of $6.4 million or 17.7%. Interest earned on loans and leases receivable totaled $25.9 million for the first nine months of fiscal 2013 which is a decrease of $6.6 million, when compared to the same period of the prior fiscal year. The average balance of loans and leases receivable decreased from $792.6 million for the first nine months of fiscal 2013, to $696.7 million for the same period in fiscal 2012, while the average yield declined by 51 basis points to 4.95%, during the same period comparison. The decrease in interest earned on loans and leases receivable was partially offset by an increase of $261,000 in interest earned on investment securities and interest-earning deposits, which totaled $3.7 million for the nine month period ended March 31, 2013. The average balance of investment securities increased by $73.3 million to $386.5 million for the three quarters ended March 31, 2013, compared to the same period of the prior year. This increase in income due to increased average balances was partially offset by a decrease in the average yield of 19 basis points to 1.26%, due in part to a larger allocation of liquid balances held at the Federal Reserve Bank earning 25 basis points. The average balance of total interest-earning assets decreased by 2.1%, resulting in a decrease to interest and dividends of $3.2 million, while the average yield on interest-earning assets decreased 68 basis points, resulting in a decrease to interest and dividend income of $3.2 million.

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Interest Expense. Interest expense was $8.1 million for the nine months ended March 31, 2013, as compared to $10.5 million for the same period of the prior year, a decrease of $2.4 million or 23.0%. While a $466,000 decrease in interest expense was the result of a 3.6% decrease in the average balance of deposits, a $1.5 million decrease in interest expense was the result of a decrease of 32 basis points in average deposit rates paid. The average rate on interest-bearing deposits was 0.66% for the nine months ended March 31, 2013, as compared to 0.98% for the same period of the prior year. The average balance of deposits decreased $27.7 million, with additional interest expense savings realized through a portion of maturing certificates of deposits balances being retained into lower cost checking and money market accounts. Interest expense on deposits was reduced by $476,000 for the nine months ended March 31, 2013 as compared to the same period of the prior year due to the termination of deposit swaps in the first quarter of fiscal 2013, which helped reduce the average rate paid on deposits. A $251,000 decrease in interest expense was the result of a decrease in average balances for FHLB advances and other borrowings. Reduced costs for interest expense due to hedging arrangements on the subordinated debentures were realized when these forward-starting swap arrangements became effective during the second quarter of fiscal 2013. The savings generated due to the lower rates paid on the subordinated debentures was $179,000 when comparing the interest expense for the first nine months of fiscal 2013 to the same period in fiscal 2012.

Net Interest Income. The Company's net interest income for the nine months ended March 31, 2013, decreased $4.0 million or 15.5%, to $21.6 million as compared to the prior fiscal year's first nine months. The decrease in net interest income was due primarily to the decrease in the average loan balances and the declining average rates on the loans, which exceeded the savings realized from the decrease in the average deposit balances and the declining average rates paid on deposits. The decrease in average loan balances reduced net interest income by $3.9 million, while the increase in average balances of investment securities and the decrease in average balances of deposits combined to partially offset the loan interest decrease by $806,000 and $466,000, respectively. The decrease in overall net interest income due to the declining rates received from interest-earning assets in excess of the declining rates paid on interest-bearing liabilities totaled $1.5 million. The Company's net interest margin on a fully taxable equivalent basis was 2.68% for the nine months ended March 31, 2013, as compared to 3.09% for the prior year's period. 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 by 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 balance 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 $3.1 million, to a net benefit of $172,000 for the nine months ended March 31, 2013, as compared to $2.9 million for the same period in the prior year. The decrease in the provision is due in part to declining loan balances, a decrease in classified assets and the amount of overall net recoveries recorded during fiscal 2013. Net recoveries totaled $270,000 for the first nine months of fiscal 2013 compared to a net charge-off total of $6.7 million in the first nine months of fiscal 2012, as management continued a proactive approach to resolving problem assets. Nonperforming assets increased by $909,000, or 3.7%, to $23.6 million at March 31, 2013 when compared to March 31, 2012. Dairy-related credits within the agricultural sector remain the largest segment within the nonperforming assets for March 31, 2013.

The allowance for losses on loans and leases at March 31, 2013 was $10.7 million. The allowance increased from the March 31, 2012 balance of $10.5 million due to the increase in valuation allowance recorded on impaired loans. This increase is partially offset by the decrease in the allowance resulting from the decrease in overall loans and adjusted for changes in environmental factors and loan loss history. The ratio of allowance for loan and lease losses to nonperforming loans and leases at March 31, 2013, was 46.96% compared to 48.11% at March 31, 2012. The allowance for loan and lease losses to total loans and leases at March 31, 2013, was 1.56% compared to 1.48% at March 31, 2012. The Bank's management believes that the March 31, 2013, 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 $10.8 million for the nine months ended March 31, 2013, as compared to $9.8 million for the same period of the prior fiscal year, which represents an increase of $1.0 million or 10.5%. This increase was primarily due to an increase in the net gain on sale of loans and securities of $1.7 million and $1.1 million, respectively, and an increase in fees on deposits of $393,000. These increases were partially offset by a decrease in net loan servicing income of $1.0 million and a decrease in other noninterest income of $1.6 million. In the first quarter of fiscal 2013, interest rate swap contracts on deposits were terminated which resulted in a one-time charge of $1.5 million and was reported as a reduction to other noninterest income.

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Net gain on the sale of loans totaled $3.6 million, an increase of $1.7 million for the nine months ended March 31, 2013, as compared to the same period of the prior fiscal year. Increased loan origination activity generated from the low interest rate environment primarily accounted for the increase in gains in this comparison.

Net gain on the sale of securities totaled $2.0 million, an increase of $1.1 million for the nine months ended March 31, 2013, as compared to the same period of the prior fiscal year. The Company received proceeds of $91.4 million for net gains of $2.0 million for the first nine months of fiscal 2013 as compared to proceeds received of $50.6 million for net gains of $874,000 for the first nine months of fiscal 2012.

Fees on deposits increased $393,000, or 8.7% to $4.9 million for the nine months ended March 31, 2013, as compared to the same period of the prior year. Deposit fees included $600,000 of nonrecurring vendor incentive fees related to a debit card vendor transition, which was received in the first quarter of fiscal 2013. Partially offsetting this increase were decreases in customer overdraft fee income of $128,000, or 7.1%, and service charge income of $40,000, or 8.0%, when compared to the same period of the prior year.

Loan servicing income decreased by $1.0 million to a net expense of $84,000 for the first nine months of fiscal 2013 primarily due to valuation allowances recorded of $420,000 and increased amortization expense of $374,000. The valuation allowance adjustments reduced the carrying value of the capitalized portfolio asset to the estimated fair value of the capitalized asset, as required by GAAP. An assessment of prepayment speeds within the portfolio contributed to the valuation allowance increase, which also increased the amount of amortization expense as compared to the same period of the prior year.

Noninterest Expense. Noninterest expense was $25.8 million for the nine months ended March 31, 2013, compared to $27.5 million for the nine months ended March 31, 2012, a decrease of $1.7 million, or 6.2%. Decreases in compensation and employee benefits and professional fees of $559,000 and $801,000, respectively, were the primary factors of the decrease in noninterest expense. In addition, occupancy and equipment, marketing and community investment, and FDIC insurance decreased by $102,000, $309,000, and $190,000, respectively. These decreases were partially offset by an increase in foreclosed real estate and other properties expense of $103,000.

Compensation and employee benefits were $15.0 million for the nine months ended March 31, 2013, a decrease of $559,000, or 3.6% when compared to the same period ended March 31, 2012. Salaries and wages decreased $1.4 million or 12.6% for the first nine months of fiscal 2013, when compared to the same period of fiscal 2012. This decrease was due primarily to a reduction of average FTE's from 327 for the nine month period ended March 31, 2012, to 300 average FTE's for the same period ended March 31, 2013. In addition, health and insurance benefits decreased by $387,000 due to reduced utilization of the health plan's benefits when compared to the same period of the prior year. Partially offsetting these decreases, performance-based incentive pay increased $901,000 due to an increase in employee performance outcomes and mortgage commissions paid for the first nine months of fiscal 2013 as compared to the same period of the prior fiscal year.

Professional fees were $1.7 million for the first nine months of fiscal 2013, which is a decrease of $801,000, or 32.5%, from the period of fiscal 2012. This decrease was due primarily to the resolution of certain employment, regulatory, and governance matters which had contributed to higher costs in the first nine months of the prior fiscal year.

Occupancy and equipment decreased $102,000 or 3.1%, to $3.2 million for the nine months ended March 31, 2013 when compared to the prior year. Rent and depreciation expense decreased $181,000 and $44,000, respectively, primarily due to the elimination of six branches within a close proximity to other branches during the prior fiscal year's second, third and fourth quarters. These decreases were partially offset by an increase in maintenance contract costs of $68,000 and an increase in repairs and maintenance of $44,000. Maintenance contract cost increases were primarily the result of nonrecurring costs associated with transferring ATM contracts to a vendor in meeting new compliance requirements.

Marketing and community investment decreased $309,000 to $778,000 for the nine months ended March 31, 2013. A customer reward program change was primarily responsible for this decrease. The program accrues points and related reward costs. During the third quarter of fiscal 2013, unregistered and expired points were terminated and resulted in the recapture of $120,000. In addition, point accruals were reduced from the prior years' levels and a total of $230,000 of costs were saved during the first nine months of fiscal 2013 when compared to the same period of fiscal 2012. Community investments decreased by $64,000 during the first nine months of fiscal 2013 when comparable to the same period of fiscal 2012 due to changes in sponsorship support.

FDIC insurance decreased by $190,000, to $606,000 for the nine months ended March 31, 2013 compared to the same period in the prior year. During the first three quarters of fiscal 2013, the FDIC insurance assessment rate, which is based upon Bank performance ratios, was modified to lesser amounts. The cumulative effects of the reduced assessment rates since March 31, 2012 resulted in the comparative decrease.

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Net foreclosed real estate and other property expense increased by $103,000 to $325,000 for the nine months ended March 31, 2013 compared to the same period in the prior fiscal year. The increase was due primarily to an increase in repairs and maintenance of foreclosed single family real estate.

Income tax expense. The Company's income tax expense for the nine months ended March 31, 2013 increased to $2.3 million compared to $1.6 million for the same period of the prior fiscal year. The effective tax rates were 33.6% and 32.1% for the nine months ended March 31, 2013 and 2012, 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 for the nine months ended March 31, 2013 was $21.3 million, which was partially offset by net cash used in investing activities and financing activities of $48.0 million and $691,000, respectively. For the same period ended March 31, 2012, net cash provided by operating, investing and financing activities was $9.7 million, $92,000 and $4.6 million, respectively. The results were a decrease in cash and cash equivalents of $27.4 million for the nine months ended March 31, 2013 compared to an increase in cash and cash equivalents of $14.4 million for the same period of the prior fiscal year.

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

Liquidity management is both a daily and long-term responsibility of management. The Bank adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits, and (v) the objectives of its asset/liability management program. Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term government and agency obligations. During the nine months ended March 31, 2013, the Bank decreased its borrowings with the FHLB and other borrowings by 7.3 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 March 31, 2013, the Bank had the following sources of additional borrowings:


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


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


•	$64.0 million of available credit from the Federal Reserve Bank; and


•	$288.3 million of available credit from FHLB of Des Moines (after deducting outstanding borrowings with FHLB of Des Moines).

The Bank may also seek other sources of contingent liquidity including additional federal funds purchased lines with correspondent banks and lines of credit with the Federal Reserve Bank. There were no funds drawn on the uncommitted, unsecured line of federal funds with First Tennessee Bank, NA, Zions Bank and the Federal Reserve Bank at March 31, 2013. The Bank, as a member of the FHLB of Des Moines, is required to acquire and hold shares of capital stock in the FHLB of Des Moines equal to 0.12% of the total assets of the Bank at December 31 annually. The Bank is also required to own activity-based stock, which is based on 4.45% of the Bank's outstanding advances. These percentages are subject to change at the discretion of the FHLB Board of Directors.

In addition to the above sources of additional borrowings, the Bank has implemented arrangements to acquire out-of-market certificates of deposit as an additional source of funding. As of March 31, 2013, the Bank had $11.8 million in out-of-market certificates of deposit.

The Bank anticipates that it will have sufficient funds available to meet current loan commitments. At March 31, 2013, the Bank had outstanding commitments to originate and purchase mortgage and commercial loans of $32.4 million and to sell mortgage loans of $8.5 million. Commitments by the Bank to originate loans are not necessarily executed by the customer. The Bank monitors the ratio of commitments to funding for use in liquidity management. At March 31, 2013, the Bank had

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outstanding commitments to purchase $7.5 million of investment securities available for sale and no commitments to sell investment securities available for sale.

The Company has an available line of credit with United Bankers' Bank for liquidity needs of $4.0 million with no funds advanced at March 31, 2013. The line of credit was renewed on October 1, 2012 and is available through October 1, 2013. The Company has pledged 100% of Bank stock as collateral for this line of credit.

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

Savings institutions insured by the FDIC are required to meet three regulatory capital requirements. If a requirement is not met, regulatory authorities may take legal or administrative actions, including restrictions on growth or operations or, in extreme cases, seizure. Institutions not in compliance may apply for an exemption from the requirements and submit a recapitalization plan. Under these capital requirements, at March 31, 2013, the Bank met all current capital requirements.

The OCC has adopted capital requirements for savings institutions comparable to the requirement for national banks. The minimum OCC core capital requirement for well-capitalized institutions is 5% of total adjusted assets. The Bank had Tier 1 (core) capital of 9.80% at March 31, 2013. The minimum OCC total risk-based capital requirement for well-capitalized institutions is 10% of risk-weighted assets. The Bank had total risk-based capital of 16.42% at March 31, 2013.

The Company has entered into interest rate swap contracts which are classified as cash flow hedge contracts, fair value hedge contracts, or non-designated derivative contracts. At March 31, 2013, the total notional amount of interest rate swap contracts was $53.2 million with a fair value net loss of $2.6 million. The Company is exposed to losses if the counterparties fail to make their payments under the contract in which the Company is in a receiving status. The Company minimizes its risk by monitoring the credit standing of the counterparties. The Company anticipates the counterparties will be able to fully satisfy their obligations under the remaining agreements. See Note 12 of "Notes to Consolidated Financial Statements" of this Form 10-Q for additional information.

Impact of Inflation and Changing Prices

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

Off-Balance Sheet Arrangements

In the normal course of business, the Company makes use of a number of different financial instruments to help meet the financial needs of its customers. In accordance with GAAP, the full notional amounts of these transactions are not recorded in the accompanying consolidated financial statements and are referred to as off-balance sheet instruments. These transactions and activities include commitments to extend lines of credit and standby letters of credit and are discussed further in Part II, Item 8 “Financial Statements and Supplementary Data” of the Company's Annual Report on Form 10-K for fiscal 2012, under Note 19 in the “Notes to Consolidated Financial Statements.”

Off-balance sheet arrangements also include trust preferred securities, which have been de-consolidated in this report. Further information regarding trust preferred securities can be found in Note 11 in the "Notes to Consolidated Financial Statements" of this Form 10-Q.

Recent Accounting Pronouncements

In June 2011, FASB issued ASU 2011-05 "Comprehensive Income" (ASC Topic 220) and in December 2011 issued ASU 2011-12 as an update for the effective date for reclassification of adjustments out of accumulated other comprehensive income. These updates require the presentation of comprehensive income in financial statements. An entity has the option to present the total comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and early adoption is permitted. The Company adopted these updates in the first quarter of fiscal 2013 and the adoption did not have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

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In December 2011, FASB issued ASU 2011-11 “Balance Sheet” (ASC Topic 210), disclosures about offsetting assets and liabilities. This update affects all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. The guidance is effective for annual periods beginning January 1, 2013 and the interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company anticipates to adopt this update in the first quarter of fiscal 2014 and does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

In October 2012, FASB issued ASU 2012-06 “Business Combinations” (ASC Topic 805), subsequent accounting for an indemnification asset recognized at the acquisition date as a result of a government-assisted acquisition of a financial institution. This guidance requires that in a business combination, an acquirer should measure at each subsequent reporting date an indemnification asset on the same basis as the indemnified liability or asset, subject to any contractual limitations on its amount, and, for an indemnification asset that is not subsequently measured at its fair value, management's assessment of the collectability of the indemnification asset. The guidance is effective for annual periods beginning December 15, 2012 and the interim periods within those annual periods. The Company anticipates to adopt this update in the first quarter of fiscal 2014 and does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

In February 2013, FASB issued ASU 2013-02 “Comprehensive Income” (ASC Topic 220), reporting of amounts reclassified out of accumulated other comprehensive income. This updates objective is to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. The guidance is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted this update in the third quarter of fiscal 2013 and the adoption did not have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

In February 2013, FASB issued ASU 2013-04 “Liabilities” (ASC Topic 405), obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. This update requires measuring the obligation resulting from joint and several liability arrangements to include (1) the amount the reporting entity agreed to pay on the basis of its arrangement amount its co-obligors and, (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance is effective for fiscal years beginning after December 15, 2013 and the interim periods within those fiscal years. The amendments in this update should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the update's scope that exist at the beginning of an entity's fiscal year of adoption. Early adoption is permitted. The Company anticipates to adopt this update in the first quarter of fiscal 2015 and does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

In April 2013, FASB issued ASU 2013-07 “Presentation of Financial Statements” (ASC Topic 205), liquidation basis of accounting. The amendments require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy). The guidance is effective for entities that determine liquidation is imminent for fiscal years beginning after December 15, 2013 and the interim periods within those fiscal years. The Company anticipates to adopt this update in the first quarter of fiscal 2015 and does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

Since February 1, 2013, the date of our previously filed quarterly report, the FASB issued ASU No. 2013-01 through 2013-07. Other than ASU 2013-02, 2013-04 and ASU 2013-07 mentioned above, none of the other updates are applicable to the consolidated financial statements of the Company.

Subsequent Event

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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Interest Rate Risk Management

The Company's net income is largely dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities with short- and medium-term maturities mature or reprice more rapidly than its interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net income.

In an attempt to manage its exposure to change in interest rates, management monitors the Company's interest rate risk. The Company's Asset/Liability Committee meets periodically to review the Company's interest rate risk position and profitability, and to recommend adjustments for consideration by executive management. Management also reviews the Bank's securities portfolio, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the Board's objectives in the most effective manner. In managing market risk and the asset/liability mix, the Bank has placed its emphasis on developing a portfolio in which, to the extent practicable, assets and liabilities reprice within similar periods. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty which may have an adverse effect on net income.

The Company adjusts its asset/liability position to mitigate the Company's interest rate risk. At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, management may increase the Company's interest rate risk position in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long- and short-term interest rates.

As set forth below, the volatility of a rate change, the change in asset or liability mix of the Company or other factors may produce a decrease in net interest margin in an upward moving rate environment even as the net portfolio value (“NPV”) estimate indicates an increase in net value. The inverse situation may also occur. One approach used by the Company to quantify interest rate risk is an NPV analysis. This analysis calculates the difference between the present value of the liabilities and the present value of expected cash flows from assets and off-balance sheet contracts. The following tables set forth, at March 31, 2013 and June 30, 2012, an analysis of the Company's interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve. Management does not believe that the Company has experienced any material changes in its market risk position from that disclosed in the Company's Annual Report on Form 10-K for fiscal 2012 or that the Company's primary market risk exposures and how those exposures were managed during the nine months ended March 31, 2013 changed significantly when compared to June 30, 2012.

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



March 31, 2013
			Estimated Increase (Decrease) in NPV
Change in Interest Rates	Estimated NPV Amount		Estimated Increase (Decrease) in NPV
Change in Interest Rates	Estimated NPV Amount		Amount			Percent
	(Dollars in Thousands)
Basis Points
+300	$	224,873	$	45,475		25	%
+200	214,426		35,028			20
+100	199,463		20,065			11
—	179,398		—			—
-100	134,783		(44,615		)	(25	)

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June 30, 2012
			Estimated Increase (Decrease) in NPV
Change in Interest Rates	Estimated NPV Amount		Estimated Increase (Decrease) in NPV
Change in Interest Rates	Estimated NPV Amount		Amount			Percent
	(Dollars in Thousands)
Basis Points
+300	$	179,611	$	34,275		24	%
+200	172,348		27,012			19
+100	161,049		15,713			11
—	145,336		—			—
-100	112,025		(33,311		)	(23	)

In managing market risk and the asset/liability mix, the Bank has placed an emphasis on developing a portfolio in which, to the extent practicable, assets and liabilities reprice within similar periods. The goal of this policy is to provide a relatively consistent level of net interest income in varying interest rate cycles and to minimize the potential for significant fluctuations from period to period.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31, 2013, an evaluation was performed by the Company's management, including the Company's President and Chief Executive Officer and the Company's Senior Vice President, Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) to provide reasonable assurance that information required to be disclosed in the reports the Company files and submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Based upon that evaluation, the Company's President and Chief Executive Officer and the Company's Senior Vice President, Chief Financial Officer and Treasurer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2013.

There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2013, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company, the Bank and each of their subsidiaries are, from time to time, involved as plaintiff or defendant in various legal actions arising in the normal course of their businesses. While the ultimate outcome of any such proceedings cannot be predicted with certainty, it is generally the opinion of management, after consultation with counsel representing the Bank and the Company in any such proceedings, 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 material legal actions or other proceedings contemplated by governmental authorities outside of the normal course of business.

Item 1A. Risk Factors

The discussion of our business and operations should be read together with the risk factors contained in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. There have been no material changes to the risk factors set forth in the above-referenced filing as of March 31, 2013.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

See "Exhibit Index."

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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:	May 3, 2013	By:	/s/ STEPHEN M. BIANCHI
			Stephen M. Bianchi, President and Chief Executive Officer (Principal Executive Officer)
Date:	May 3, 2013	By:	/s/ BRENT R. OLTHOFF
			Brent R. Olthoff, Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)

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Exhibit Index



Exhibit Number		Description
10.1		Amended and Restated Employment Agreement between Stephen M. Bianchi and Home Federal Bank, dated March 27, 2013 (incorporated by reference to Exhibit 10.1 from the Company's Current Report on Form 8-K dated March 27, 2013, and filed with the SEC on April 2, 2013, file no. 033-44383).
10.2		Amended and Restated Change-in-Control Agreement between Stephen M. Bianchi and Home Federal Bank, dated March 27, 2013 (incorporated by reference to Exhibit 10.2 from the Company's Current Report on Form 8-K dated March 27, 2013, and filed with the SEC on April 2, 2013, file no. 033-44383).
10.3		Employment Agreement between Brent R. Olthoff and Home Federal Bank, dated March 27, 2013 (incorporated by reference to Exhibit 10.3 from the Company's Current Report on Form 8-K dated March 27, 2013, and filed with the SEC on April 2, 2013, file no. 033-44383).
10.4		Change-in-Control Agreement between Brent R. Olthoff and Home Federal Bank, dated March 27, 2013 (incorporated by reference to Exhibit 10.4 from the Company's Current Report on Form 8-K dated March 27, 2013, and filed with the SEC on April 2, 2013, file no. 033-44383).
10.5		Employment Agreement between Michael Westberg and Home Federal Bank, dated March 27, 2013 (incorporated by reference to Exhibit 10.5 from the Company's Current Report on Form 8-K dated March 27, 2013, and filed with the SEC on April 2, 2013, file no. 033-44383).
10.6		Change-in-Control Agreement between Michael Westberg and Home Federal Bank, dated March 27, 2013 (incorporated by reference to Exhibit 10.6 from the Company's Current Report on Form 8-K dated March 27, 2013, and filed with the SEC on April 2, 2013, file no. 033-44383).
10.7		Employment Agreement between Jon M. Gadberry and Home Federal Bank, dated March 27, 2013.
10.8		Change-in-Control Agreement between Jon M. Gadberry and Home Federal Bank, dated March 27, 2013.
10.9		Employment Agreement between Natalie A. Sundvold and Home Federal Bank, dated March 27, 2013.
10.10		Employment Agreement between Pamela F. Russo and Home Federal Bank, dated March 27, 2013.
10.11		Change-in-Control Agreement between Pamela F. Russo and Home Federal Bank, dated March 27, 2013.
31.1		Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Senior Vice President, Chief Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Senior Vice President, Chief Financial Officer and Treasurer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase
101.DEF*		XBRL Taxonomy Extension Definition Linkbase
101.LAB*		XBRL Taxonomy Extension Label Linkbase
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase

^{___________________________________________________}

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