Executive Summary
The Company's net income for fiscal 2012 was $5.2 million, or $0.74 per diluted share, compared to $679,000, or $0.10 per diluted share for fiscal 2011. Return on average equity was 5.41% at June 30, 2012, compared to 0.72% at June 30, 2011. 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 $6.8 million and increases in noninterest income of $4.0 million. These were partially offset by a decrease in net interest income of $3.7 million and an increase in income taxes of $2.7 million.
Modest improvement in national economic conditions continued to offer a challenging operating environment in fiscal 2012. Generally reflective of the experience of community banks throughout the country, this challenging operating environment has resulted in increased competition among financial institutions with limited loan demand from creditworthy borrowers. During 2012, the Company benefited from continued proactive management of problem assets leading to a $19.4 million reduction in nonperforming assets from fiscal 2011. While a majority of problem asset stress in 2011 related to the agricultural portfolio, and in particular dairy operations, signs of stabilization did occur and commodity prices remained favorable for most agricultural production in 2012. Agricultural and commercial loans accounted for the majority of the decrease in loan balances between fiscal 2012 and 2011. Agricultural real estate loans were $70.8 million at June 30, 2012, down $41.0 million or 36.7% since June 30, 2011, and comprised 10.4% of total loans outstanding. Agricultural business loans were $84.3 million at the end of 2012, down $54.5 million or 39.3% since fiscal year 2011, and comprised 12.3% of total loans outstanding. Decreases were attributable in part to proactive problem loan resolutions and competitive pressures for long-term financing. Loans of this type are in a diverse range of agricultural enterprises, including grain production, dairy and livestock operations. The credit risk related to agricultural loans is largely influenced by general economic conditions and the resulting impact on a borrower's operations or

on the value of underlying collateral, if any. Credit risk is managed by employing sound underwriting guidelines, lending primarily to borrowers in local markets, periodically evaluating the underlying collateral, and formally reviewing each borrower's financial soundness and relationship on an ongoing basis. Commercial loans decreased $25.2 million or 24.1% since June 30, 2011, to $79.1 million at June 30, 2012. We believe many of the loan customers have been substantially deleveraging during the last three years as they have been reducing their debt while waiting for better or less risky opportunities for their businesses. We believe this phenomenon may be starting to change back to a more normal situation based upon recent activity as the economy slowly recovers, but we cannot precisely predict when or by how much our loan portfolio will start to grow due to existing customer demand.
The provision for loan losses is the charge to net income that management determines to be necessary to maintain the allowance for loan and lease losses at a sufficient level reflecting management's estimate of probable incurred losses in the loan portfolio. Management performs periodic and systematic detailed reviews of the loan portfolio to identify trends and to assess the overall collectibility of the loan portfolio. The allowance for loan and lease losses decreased $3.7 million to $10.6 million at June 30, 2012, a decrease of 26.2%. The ratio of allowance for loan and lease losses to total loans and leases was 1.55% as of June 30, 2012, compared to 1.73% at June 30, 2011. This decrease is primarily attributable to the specific valuation allowance decrease of $4.5 million, of which $4.2 million was related to the agricultural loan portfolio and improvement in related nonperforming assets. The general valuation allowance increased $770,000 due in part to increases allocated primarily to consumer loans based upon a review of historical loss and environmental factors. At June 30, 2012, classified assets declined to $42.9 million from $46.1 million at June 30, 2011 and from a high of $81.8 million at December 31, 2010. Total nonperforming assets at June 30, 2012 were $17.8 million as compared to $37.2 million at June 30, 2011. The ratio of nonperforming assets to total assets was 1.49% for June 30, 2012, compared to 3.12% at June 30, 2011. 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. See "Asset Quality" for more information.
Total deposits at June 30, 2012, were $893.9 million, an increase of $702,000, or 0.1%, from June 30, 2011. Due to the continued low interest rate environment, the Company experienced a preference by customers of non-maturity deposits. Noninterest-bearing checking accounts increased $14.6 million to $147.0 million at June 30, 2012, while interest-bearing checking accounts, money market accounts, and savings accounts increased $24.7 million, $12.7 million, and $36.6 million, respectively, to $138.1 million, $210.3 million, and $121.1 million, respectively, at June 30, 2012. Public funds, which are included in the various types of deposits account balances, decreased $14.3 million, or 7.5%, from June 30, 2011. Interest expense on deposits was $7.2 million for fiscal 2012, a decrease of $2.3 million, or 24.5%, over fiscal 2011.
Management's objectives are to provide capital sufficient to cover the risks inherent in the Company's businesses, to maintain excess capital to well-capitalized standards, and to assure ready access to the capital markets. The total risk-based capital ratio was 15.87% at June 30, 2012, compared to 13.28% at June 30, 2011. Tier I capital increased 22 basis points to 9.66% at June 30, 2012 when compared to 9.44% at June 30, 2011. This continues to allow the Bank to meet the regulatory criteria to be considered a "well-capitalized" institution at June 30, 2012. The Company historically has been able to manage the size of its assets through secondary market loan sales of single-family mortgages, student loans and a loan securitization. The Company continued to return capital to investors through a quarterly dividend, or $0.45 per diluted common share on an annual basis.
The current interest rate environment has been directly affected by the intervention of the Federal Reserve as it assisted in the economic recovery. The target federal funds rate remained at 25 basis points during fiscal 2012. The impact of this historically low interest rate environment on the Company has been mixed. While the low interest rates negatively affected yields of loans and the securities portfolio, the impact to our cost of funds was favorable. Net interest income for fiscal 2012 was $33.7 million, a decrease of $3.7 million or 9.9% over the same period a year ago. The net interest margin was 3.03%, compared to 3.27% for the same period a year ago, a decrease of 24 basis points. On a fully taxable equivalent basis, the net interest margin for fiscal 2012 was 3.07%, compared to 3.31% in fiscal 2011. Net Interest Margin, TE is a non-GAAP financial measure. See "Analysis of Net Interest Income" for a calculation of this non-GAAP financial measure and for further discussion as to the reasons we believe this non-GAAP financial measure is useful. The cost of funds rate on interest-bearing liabilities decreased from 1.72% in fiscal 2011 to 1.44% in fiscal 2012, a change of 28 basis points. For the same period, yields on earning assets decreased from 4.77% to 4.25%, a decrease of 52 basis points. Decreases in volume from fiscal 2011 to fiscal 2012 of average earning assets and interest-bearing liabilities were 2.8% and 1.5% respectively.

Variability of the net interest margin ratio may be affected by many factors, including Federal Reserve policies for short-term interest rates, competitive and global economic conditions and customer preferences for various products and services. As of June 30, 2012, management believes that it has positioned the institution for a neutral to slightly earning-asset sensitive interest rate risk profile, whereas an asset sensitive institution will generally realize an increase in income if interest rates rise due to the fact that more assets will be reinvested at higher market rates than liabilities. However, within a twelve month time horizon there may be a slight lag effect where liabilities may initially reprice faster than assets for a portion of the time period. Noninterest income for fiscal 2012 was $12.9 million, compared to $8.9 million for the same period a year ago, an increase of $4.0 million or 45.3%. Net gain on sale of securities of $1.5 million for fiscal 2012 increased by $5.1 million from a net loss on sale of securities of $3.6 million in fiscal 2011. In fiscal 2011, the Company sold its pooled trust preferred securities, which yielded a pre-tax charge to net income of $6.3 million. In addition, these securities yielded net impairment losses recognized in noninterest income of $549,000, which had no impact for fiscal 2012. Net loan servicing income decreased by $973,000, to $603,000 for fiscal 2012, which partially reduced the overall increase in noninterest income from the prior year. This reduction in net loan servicing income was due to a provision for an allowance of $888,000 recorded against the servicing asset and increased amortization of $70,000, which was due in part to increased prepayment rates within the portfolio. Another slight decrease to noninterest income was due to a loss on disposal of closed-branch fixed assets of $473,000 as the Company merged six branches into other nearby branches to optimize branch efficiencies.
During the second fiscal quarter of 2012, 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 effectively ended the new flow of servicing assets from SDHDA to the Company beginning in the fourth fiscal quarter. The Company does not expect this event to have a material impact on the fiscal 2013 income statement. The single family mortgage segment of the Company's servicing portfolio is expected to decrease in value over time, as principal is reduced. The Company continues to evaluate potential acquisition of servicing assets dependent upon market conditions and characteristics desirable by the Company, which may include bidding as the master servicer for SDHDA after the initial two year commitment is complete.
The ability to successfully manage expenses is important to our long-term prosperity. During fiscal 2012, the Company executed on a strategic initiative to improve efficiency and completed six branch closures within the South Dakota market area as it merged branches into other nearby branches. Fiscal year costs related to the streamlining effort included $473,000 for the disposition of closed-branches fixed assets and additional one-time expenses of $591,000 for severance and lease terminations. In return, management anticipates annual cost savings of these branch closures to approach $1.3 million.
Noninterest expense for fiscal 2012 was $37.1 million, a decrease of $29,000 from fiscal 2011. Compensation and employee benefits and FDIC insurance decreased $1.3 million and $425,000, respectively, when compared to the prior fiscal year. Professional fees and occupancy and equipment increased $842,000 and $310,000, respectively, which partially offset the cost decreases. Compensation and employee benefits decreased 6.2% from fiscal 2011 costs primarily from the reduction of headcount and performance based incentive pay when compared to the prior year. Management further assessed staff efficiency, and reduced full-time equivalent ("FTE") employees from 342 at June 30, 2011 to 292 at June 30, 2012. Incentive pay decreases were the direct result of lower employee performance outcomes versus performance targets. FDIC insurance decreased by 28.9% due to the modified assessment schedule implemented by the FDIC effective April 1, 2011, which modified the assessment base from deposit totals to asset totals, and in return, reduced the effective rates. Professional fees increased 35.7% due in part to certain employment, regulatory and governance matters. Occupancy and equipment increased by 6.7% due primarily to additional lease termination costs incurred in the merging of six branches to other nearby locations. The cost to buy out the existing leases totaled $500,000 for fiscal 2012, compared to none in the prior year.
The Company focuses on balancing operating costs with operating revenue levels in order to provide better efficiency ratios over time and continues to review its operations for ways to reduce its cost structure while continuing to support long-term revenue enhancements. The operating efficiency ratio (i.e., noninterest expense divided by total revenue adjusted for interest expense of trust preferred securities and the loss on disposal of closed-branch fixed assets) for fiscal 2012 was 77.17%, compared to 78.34% for the same period a year ago, a decrease of 117 basis points. The operating efficiency ratio excludes both the impact of net interest expense on the variable priced trust preferred securities and losses due to non-operating activities. The operating efficiency ratio is a non-GAAP financial measure. See Item 6, "Selected Financial Data-Non-GAAP Reconciliation of the Operating Efficiency Ratio" of this Form 10-K for further analysis. The Company had issued trust preferred securities

primarily to provide funding for stock repurchases and to repay other borrowings. Net interest expense on the $27.8 million of trust preferred securities outstanding was $1.9 million for fiscal 2012, a $39,000 increase from the prior fiscal year. The average rate paid for fiscal 2012 and fiscal 2011 was 6.69% and 6.55%, respectively. The total efficiency ratio (i.e., noninterest expense divided by total revenue) was 79.74% for the year ended June 30, 2012, compared to 80.38% for the prior year, a decrease of 64 basis points. Primary changes which affected the efficiency ratio from the prior year, were the increase in revenue from the $5.1 million increase in net gain on sale of securities, the decrease of $3.7 million in net interest income, and an allowance for servicing rights of $888,000. As a result, the overall total revenues increased by $335,000, while noninterest expenses decreased by $29,000. Management believes that improvement to the operating efficiency ratio can be accomplished through steady growth of the balance sheet and the containment of incremental operating expenses.
The enactment of the Dodd-Frank Act in July 2010 significantly impacted how financial services companies are regulated and authorizes expansive new regulation by various federal agencies. Many of the most sweeping changes in the Dodd-Frank Act are currently still in the process of being implemented through the agency rulemaking process and thus uncertainty exists as to the full impact of the Dodd-Frank Act and its implementing regulations. The Company and Bank continue to closely monitor and evaluate developments under the Dodd-Frank Act with respect to our business, financial condition, results of operations and prospects.
In particular, the Company and Bank believe that the following non-exclusive list of provisions or topics of the Dodd-Frank Act which are still in the process of implementation are significant to the business of the Company and the Bank:
In connection with the Federal Reserve's assumption of responsibility for the supervision and examination of savings and loan holding companies as mandated by the Dodd-Frank Act, the FRB has indicated that it intends (and has), "to the greatest extent possible taking into account any unique characteristics of savings and loan holding companies and the requirements of the Home Owners' Loan Act, as amended ("HOLA"), to assess the condition, performance, and activities of savings and loan holding companies on a consolidated risk-based basis in a manner that is consistent with the Federal Reserve's established approach regarding bank holding company supervision." Accordingly, the Company anticipates that it may over time become subject to the same or similar supervisory standards and guidance applicable to bank holding companies. The Dodd-Frank Act requires that savings and loan holding companies, for the first time, become subject to the same capital requirements as those applicable to bank holding companies. In addition to compliance with capital requirements pursuant to a multi-year implementation plan as proposed by the Federal Reserve and other banking agencies, savings and loan holding companies are obligated to serve as a "source of financial and managerial strength" to their depository institution subsidiaries. This statutory obligation requires savings and loan holding companies, including the Company, to provide financial assistance to a depository institution subsidiary in the event that that subsidiary experiences financial distress. It is anticipated that the Federal Reserve will be issuing interpretive guidance and rules clarifying the contours of this obligation. The Dodd-Frank Act further requires that existing capital requirements for banking organizations be re-examined by regulators and made counter-cyclical. This effort, and the pending U.S. adoption of Basel III, will result in new capital and other standards for the Company and the Bank as set forth in proposed joint rulemaking issued in June 2012 by the banking agencies. In addition to requirements affecting capital and leverage, the proposed rules include new limits on capital distributions and discretionary bonuses for banking organizations that do not hold a specified amount of common equity tier 1 capital in addition to the common equity necessary to meet the minimum risk-based capital requirements (referred to as a capital conservation buffer). The Dodd-Frank Act established a new consumer agency known as the Consumer Financial Protection Bureau ("CFPB") with rulemaking, supervisory, enforcement, and other authorities relating to consumer financial products and services. These authorities include the ability to issue regulations under more than a dozen federal consumer financial laws, which transferred to the CFPB from seven federal agencies on July 21, 2011. Among the expansive rulemaking authority over consumer products and practices granted to the CFPB is the authority to define unfair, deceptive or abusive practices and to centralize consumer complaints. The Dodd-Frank Act imposed new duties on mortgage lenders, including a duty to determine the borrower's ability to repay the loan, and imposed a requirement on mortgage securitizers to retain a minimum level of economic interest in securitized pools of certain mortgage types. The CFPB is currently in the process of developing various mortgage-related rulemakings mandated by the Dodd-Frank Act.
The list above is not exhaustive. It reflects the Company's continuing assessment of the Dodd-Frank Act provisions that are reasonably likely to have a substantial impact in the future. It is possible that at least some other areas unexpectedly will become significant to the Company or the Bank as the regulatory processes unfold. For additional information on the laws and regulations governing the activities of the Company and Bank, see "Item 1:
Business--Regulation" below.
Recent events in the financial markets continue to produce uncertainties for management about future operating results

and the future financial condition of the Company. The interdependencies of the national economy and financial markets do affect the macro economics reviewed by management and may produce outcomes in the future that have not impacted the Company previously.
General
The Company is a financial services provider and, as such, has inherent risks that must be managed in order to achieve net income. Primary risks that affect net income include credit risk, liquidity risk, operational risk, regulatory compliance risk and reputation risk. The Company's net income is derived by management of the net interest margin, the ability to collect fees from services provided, by controlling the costs of delivering services and the management of loan and lease losses. The primary source of revenues 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 June 30, 2012, the Company had total assets of $1,192.6 million, a decrease of $922,000 from the level at June 30, 2011. The decrease in liabilities of $3.3 million was primarily due to decreased advances from the FHLB and other borrowings of $5.0 million offset by increased advances by borrowers for taxes and insurance of $1.1 million. Stockholders' equity increased by $2.4 million since June 30, 2011, primarily due to increases in net income and partially offset by an increase in accumulated other comprehensive loss, and the payment of dividends.
The decrease in net loans and leases receivable, which excludes loans in process and deferred fees, was $138.0 million due to the decrease in net loan balances of $141.8 million and slightly offset by the decrease in the allowance for loan and lease losses of $3.7 million. Agricultural and commercial business loans decreased $95.5 million and $28.1 million, respectively, due primarily to proactive problem asset resolution, increased competitive pressure for long term financing and borrowers adapting to the current operating environment, including reducing their debt while waiting for better or less risky opportunities for their businesses. We believe this phenomenon may be starting to change back to a more normal situation as the economy recovers based upon recent activity, but we cannot precisely predict when or by how much our loan portfolio will start to grow due to existing customer demand.
In addition, loans held for sale increased $4.2 million, primarily due to increased mortgage financing activity and the amount of one-to four-family loans held at June 30, 2012.
See the Consolidated Statement of Cash Flows for a detailed analysis of the change in cash and cash equivalents.
Deposits remained relatively constant, but had an overall increase of $702,000, to $893.9 million at June 30, 2012. Deposits, excluding time certificates, increased by $88.6 million, or 16.8%, while time certificates decreased $87.9 million, or 24.1% due primarily to a consumer shift towards transactional deposit accounts as a result of the low interest rate environment. Deposit accounts, exclusive of public funds and out-of-market certificates of deposits, increased $18.3 million, or 2.7% since June 30, 2011. Advances from the FHLB and other borrowings decreased $5.0 million, to $142.4 million at June 30, 2012 as compared to June 30, 2011, due to slightly reduced funding needs. Stockholders' equity increased $2.4 million at June 30, 2012 when compared to June 30, 2011. Increases in stockholders' equity was derived from net income of $5.2 million, stock issuances of $174,000, the amortization of stock-based compensation of $383,000, and partially offset by a net increase in accumulated other comprehensive loss of $204,000 and cash dividends of $3.1 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 table presents for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. The table does not reflect any effect of income taxes. Average balances consist of daily average balances for the Bank with simple average balances for all other 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.

                                                                       Years Ended June 30,
                                     2012                                      2011                                      2010
                       Average        Interest                   Average        Interest                   Average        Interest
                     Outstanding       Earned/      Yield/     Outstanding       Earned/      Yield/     Outstanding       Earned/      Yield/
                       Balance          Paid         Rate        Balance          Paid         Rate        Balance          Paid         Rate
                                                                      (Dollars in Thousands)
Interest-earning
assets:
Loans and leases
receivable(1)(3)    $    772,344     $  42,283       5.47 %   $    867,346     $  48,557       5.60 %   $    860,882     $  49,658       5.77 %
Investment
securities(2)(3)         329,387         4,671       1.42          263,964         5,526       2.09          241,126         7,414       3.07
FHLB stock                 8,101           257       3.17           10,047           328       3.26           11,948           282       2.36
Total
interest-earning
assets                 1,109,832     $  47,211       4.25 %      1,141,357     $  54,411       4.77 %      1,113,956     $  57,354       5.15 %
Noninterest-earning
assets                    86,266                                    83,181                                    77,642
. . .