HF Financial 10Q 2016 Q3 Quarterly report

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, 2016
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 ý	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company ¨

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 May 2, 2016, there were 7,073,065 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, 2016 and June 30, 2015	3

	Consolidated Statements of Income Three and Nine Months Ended March 31, 2016 and 2015	4

	Consolidated Statements of Comprehensive Income Three and Nine Months Ended March 31, 2016 and 2015	5

	Consolidated Statements of Cash Flows Nine Months Ended March 31, 2016 and 2015	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	66

Item 4.	Controls and Procedures	68

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	69

Item 1A.	Risk Factors	70

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71

Item 3.	Defaults upon Senior Securities	71

Item 4.	Mine Safety Disclosures	71

Item 5.	Other Information	71

Item 6.	Exhibits	71

Form 10-Q	Signature Page	72

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(DOLLARS IN THOUSANDS, except share data)



	March 31, 2016			June 30, 2015
	(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents	$	19,320		$	21,476
Investment securities available for sale	148,353			158,806
Investment securities held to maturity	19,918			20,156
Correspondent bank stock	4,062			4,177
Loans held for sale	2,586			9,038

Loans and leases receivable	892,227			914,419
Allowance for loan and lease losses	(11,592		)	(11,230		)
Loans and leases receivable, net	880,635			903,189

Accrued interest receivable	5,192			5,414
Office properties and equipment, net of accumulated depreciation	16,114			15,493
Foreclosed real estate and other properties	99			157
Cash value of life insurance	21,830			21,320
Servicing rights, net	9,723			10,584
Goodwill and intangible assets, net	4,915			4,737
Other assets	9,130			10,648
Total assets	$	1,141,877		$	1,185,195
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits	$	910,552		$	963,229
Advances from Federal Home Loan Bank and other borrowings	65,367			65,558
Subordinated debentures payable to trusts, net of unamortized debt issuance costs	24,662			24,655
Advances by borrowers for taxes and insurance	17,564			14,197
Accrued expenses and other liabilities	13,339			13,579
Total liabilities	1,031,484			1,081,218
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, 9,149,803 and 9,137,906 shares issued at March 31, 2016 and June 30, 2015, respectively	91			91
Additional paid-in capital	46,590			46,320
Retained earnings, substantially restricted	95,163			90,145
Accumulated other comprehensive (loss), net of related deferred tax effect	(554		)	(1,682		)
Less cost of treasury stock, 2,083,455 shares at March 31, 2016 and June 30, 2015	(30,897		)	(30,897		)
Total stockholders' equity	110,393			103,977
Total liabilities and stockholders' equity	$	1,141,877		$	1,185,195

See accompanying notes to unaudited consolidated financial statements.

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)



	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2016			2015			2016		2015
Interest, dividend and loan fee income:
Loans and leases receivable	$	10,131		$	9,197		$	30,194	$	28,549
Investment securities and interest-earning deposits	807			863			2,360		3,128
	10,938			10,060			32,554		31,677
Interest expense:
Deposits	947			846			2,720		2,661
Advances from Federal Home Loan Bank and other borrowings	389			365			1,139		2,517
	1,336			1,211			3,859		5,178
Net interest income	9,602			8,849			28,695		26,499
Provision for losses on loans and leases	162			282			532		1,201
Net interest income after provision for losses on loans and leases	9,440			8,567			28,163		25,298
Noninterest income:
Fees on deposits	1,210			1,375			4,037		4,524
Loan servicing income, net	(100		)	319			564		1,034
Gain on sale of loans	497			457			1,940		1,476
Earnings on cash value of life insurance	210			204			632		619
Trust income	231			234			680		682
Commission and insurance income	358			438			1,281		1,224
Gain (loss) on sale of securities, net	—			(1,076		)	20		(1,117		)
Gain on sale of bank branch	—			—			2,847		—
Loss on disposal of closed-branch fixed assets	—			(298		)	—		(461		)
Other	96			402			298		540
	2,502			2,055			12,299		8,521
Noninterest expense:
Compensation and employee benefits	4,914			5,675			17,092		16,434
Occupancy and equipment	1,087			1,330			3,216		3,381
FDIC insurance	147			221			485		627
Check and data processing expense	938			815			2,668		2,463
Professional fees	644			447			2,228		1,512
Marketing and community investment	222			444			841		1,192
Loss on early extinguishment of debt	—			—			—		4,065
Other	918			848			2,747		2,276
	8,870			9,780			29,277		31,950
Income before income taxes	3,072			842			11,185		1,869
Income tax expense	1,003			123			3,786		206
Net income	$	2,069		$	719		$	7,399	$	1,663

Basic earnings per common share	$	0.29		$	0.10		$	1.05	$	0.24
Diluted earnings per common share	0.29			0.10			1.05		0.24
Dividend declared per common share	0.11			0.11			0.34		0.34

See accompanying notes to unaudited consolidated financial statements.

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)



	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2016			2015			2016			2015
Net income	$	2,069		$	719		$	7,399		$	1,663
Other comprehensive income, net of tax:
Investment securities available for sale:
Change in unrealized gains or losses on other securities	2,085			803			1,529			1,759
Reclassification adjustment:
Investment security (gains) losses recognized in earnings	—			1,076			(20		)	1,117
Income tax (expense)	(793		)	(714		)	(574		)	(1,093		)
Other comprehensive income on investment securities available for sale	1,292			1,165			935			1,783
Cash flow hedging activities-interest rate swap contracts:
Net unrealized gains	72			89			292			339
Reclassification adjustment:
Income tax (expense)	(24		)	(30		)	(99		)	(114		)
Other comprehensive income on cash flow hedging activities-interest rate swap contracts	48			59			193			225
Total other comprehensive income	1,340			1,224			1,128			2,008
Comprehensive income	$	3,409		$	1,943		$	8,527		$	3,671

See accompanying notes to unaudited consolidated financial statements.

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)



	Nine Months Ended
	March 31,
	2016			2015
Cash Flows From Operating Activities
Net income	$	7,399		$	1,663
Adjustments to reconcile net income to net cash from operating activities:
Provision for losses on loans and leases	532			1,201
Provision for allowance on servicing rights	407			—
Depreciation	1,425			1,234
Amortization of intangible assets	61			81
Amortization of discounts and premiums on investment securities and other	1,910			4,010
Amortization of stock-based compensation	270			102
Net change in loans held for resale	8,392			3,189
(Gain) on sale of loans	(1,940		)	(1,476		)
Realized (gain) loss on sale of investment securities, net	(20		)	1,117
Loss and provision for losses on foreclosed real estate and other properties, net	37			16
Loss on disposal of office properties and equipment, net	8			212
(Gain) on sale of bank branch	(2,847		)	—
Change in other assets and liabilities	(19		)	(2,306		)
Net cash provided by operating activities	15,615			9,043
Cash Flows From Investing Activities
Net change in loans and leases outstanding	(2,479		)	(60,389		)
Purchases of investment securities	(26,752		)	(6,593		)
Proceeds from sales, maturities and repayments of investment securities	38,172			192,715
Purchases of correspondent bank stock	(16,727		)	(17,392		)
Proceeds from redemption of correspondent bank stock	16,842			20,556
Purchases of office properties and equipment	(2,242		)	(3,818		)
Proceeds from sale of office properties and equipment	22			1,295
Net proceeds from sale of bank branch property and other	538			—
Proceeds from sale of bank branch loans	24,333			—
Proceeds from sale of foreclosed real estate and other properties	157			204
Purchases of intangible assets	(239		)	—
Net cash provided by investment activities	31,625			126,578
Cash Flows From Financing Activities
Net (decrease) in deposits	(31,300		)	(64,856		)
Sale of bank branch deposits	(21,378		)	—
Gain on sale of bank branch deposits	2,462			—
Proceeds of advances from Federal Home Loan Bank and other borrowings	901,947			1,065,250
Payments on advances from Federal Home Loan Bank and other borrowings	(902,138		)	(1,144,692		)
Increase in advances by borrowers	3,392			6,735
Cash dividends paid	(2,381		)	(2,381		)
Net cash (used in) financing activities	(49,396		)	(139,944		)
(Decrease) in cash and cash equivalents	(2,156		)	(4,323		)
Cash and Cash Equivalents
Beginning	21,476			24,256
Ending	$	19,320		$	19,933
Supplemental Disclosure of Cash Flows Information
Cash payments for interest	$	3,777		$	5,384
Cash payments for income and franchise taxes	3,005			1,439

See accompanying notes to unaudited consolidated financial statements.

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, 2015 (“fiscal 2015”), filed with the SEC.

The accompanying consolidated balance sheet as of June 30, 2015, 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, 2016 are not necessarily indicative of the results that may be expected for the year ending June 30, 2016.

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”) and Hometown Investment Services, Inc. (“Hometown”). 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 13 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 5, 2016, the date of the filing of the consolidated financial statements with the Securities and Exchange Commission.

Disclosure of Change in Accounting Policy and Retroactive Restatement Disclosure

As of July 1, 2015, the Company adopted the provisions of Accounting Standards Update (ASU) 2015-03, Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability. Adoption of this accounting standard update requires retroactive application by restating the financial statements of all prior periods presented.

The Company has adopted this standard as management believes this presentation more accurately reflects the costs of borrowing for arrangements in which debt issuance costs are incurred. The implementation resulted in the decrease of assets and subordinated debentures payable to trusts of $182 for the year ended June 30, 2015. This restatement only impacted the Consolidated Statement of Financial Condition for the year ended June 30, 2015. See Note 13 of “Notes to Consolidated Financial Statements” for more information on the unamortized debt issuance costs related to the Company's debt.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

NOTE 2—REGULATORY CAPITAL

At March 31, 2016 and June 30, 2015, actual capital levels and minimum required levels were:



									To Be Well
					Minimum Required				Capitalized Under
					For Capital				Prompt Corrective
	Actual				Adequacy Purposes				Action Regulations
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2016
Tier I capital (to average assets)
Bank	$	125,444	10.94	%	$	45,877	4.00	%	$	57,347	5.00	%
Consolidated	130,668		11.37		45,955		4.00		57,444		5.00
Tier I capital (to risk-weighted assets)
Bank	125,444		12.72		59,186		6.00		78,915		8.00
Consolidated	130,668		13.23		59,268		6.00		79,025		8.00
Common equity tier I capital (to risk-weighted assets)
Bank	125,444		12.72		44,390		4.50		64,118		6.50
Consolidated	106,668		10.80		44,451		4.50		64,207		6.50
Risk-based capital (to risk-weighted assets)
Bank	137,078		13.90		78,915		8.00		98,644		10.00
Consolidated	142,302		14.41		79,025		8.00		98,781		10.00

June 30, 2015
Tier I capital (to average assets)
Bank	$	121,306	10.39	%	$	46,713	4.00	%	$	58,391	5.00	%
Consolidated	125,550		10.73		46,811		4.00		58,514		5.00
Tier I capital (to risk-weighted assets)
Bank	121,306		12.16		59,831		6.00		79,774		8.00
Consolidated	125,550		12.58		59,904		6.00		79,872		8.00
Tier I common equity capital (to risk-weighted assets)
Bank	121,306		12.16		44,873		4.50		64,816		6.50
Consolidated	101,550		10.17		44,928		4.50		64,896		6.50
Risk-based capital (to risk-weighted assets)
Bank	132,485		13.29		79,774		8.00		99,718		10.00
Consolidated	136,829		13.70		79,872		8.00		99,840		10.00

The Company was categorized as "well capitalized" at March 31, 2016 and June 30, 2015.

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 11 “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.

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

The 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,
	2016		2015		2016		2015
Net income	$	2,069	$	719	$	7,399	$	1,663

Basic EPS:
Weighted average number of common shares outstanding	7,057,191		7,054,197		7,056,236		7,054,662
Basic earnings per common share	$	0.29	$	0.10	$	1.05	$	0.24

Diluted EPS:
Weighted average number of common shares outstanding	7,057,191		7,054,197		7,056,236		7,054,662
Common share equivalents—Stock Options / Stock Appreciation Rights (SARs) under employee compensation plans/warrant	11,373		6,838		12,310		5,143
Weighted average number of common shares and common share equivalents	7,068,564		7,061,035		7,068,546		7,059,805
Diluted earnings per common share	$	0.29	$	0.10	$	1.05	$	0.24

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

NOTE 4—INVESTMENT SECURITIES

The amortized cost and fair value of investment securities classified as available for sale and held to maturity according to management's intent, are as follows:



	March 31, 2016
	Adjusted Carrying Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Investment securities available for sale:
Debt securities:
U.S. government agencies	$	9,816	$	90	$	—		$	9,906
Municipal bonds	10,463		140		(6		)	10,597
	20,279		230		(6		)	20,503
Equity securities:
FNMA⁽¹⁾	—		—		—			—
Federal Ag Mortgage	7		9		—			16
Other investments	354		—		—			354
	361		9		—			370
Agency residential mortgage-backed securities	126,598		1,158		(276		)	127,480
Total investment securities available for sale	$	147,238	$	1,397	$	(282	)	$	148,353

Investment securities held to maturity:
Municipal bonds	$	18,263	$	638	$	—		$	18,901
Agency residential mortgage-backed securities	1,655		70		—			1,725
Total investment securities held to maturity	$	19,918	$	708	$	—		$	20,626

___________________________________________________________

⁽¹⁾ $8 amortized cost and $8 total other-than-temporary impairment recognized in Accumulated Other Comprehensive Income.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)



	June 30, 2015
	Adjusted Carrying Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Investment securities available for sale:
Debt securities:
U.S. government agencies	$	21,914	$	119	$	(27	)	$	22,006
Municipal bonds	8,277		21		(36		)	8,262
	30,191		140		(63		)	30,268
Equity securities:
FNMA⁽¹⁾	—		—		—			—
Federal Ag Mortgage	7		6		—			13
Other investments	353		—		—			353
	360		6		—			366
Agency residential mortgage-backed securities	128,649		516		(993		)	128,172
Total investment securities available for sale	$	159,200	$	662	$	(1,056	)	$	158,806

Investment securities held to maturity:
Municipal bonds	$	18,308	$	283	$	(10	)	$	18,581
Agency residential mortgage-backed securities	1,848		50		—			1,898
Total investment securities held to maturity	$	20,156	$	333	$	(10	)	$	20,479

___________________________________________________________

⁽¹⁾ $8 amortized cost and $8 total other-than-temporary impairment recognized in Accumulated Other Comprehensive Income.

Management determines the appropriate classification of securities at the date individual securities are acquired and evaluates the appropriateness of such classifications at each statement of financial condition date. Investment securities classified as held to maturity are those debt securities that management has the positive intent and ability to hold to maturity, are reported at amortized cost and adjusted for amortization of premiums and accretion of discounts using a method that approximates level yield. Investment securities classified as available for sale are those debt securities that the Company intends to hold for an indefinite period of time, but may not hold necessarily to maturity, and all equity securities.

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.

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, 2016
	Less than 12 Months					12 Months or More					Total
	Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)
Investment securities available for sale:
Debt securities:
Municipal bonds	$	1,192	$	(1	)	$	730	$	(5	)	$	1,922	$	(6	)
	1,192		(1		)	730		(5		)	1,922		(6		)
Agency residential mortgage-backed securities	6,784		(21		)	32,713		(255		)	39,497		(276		)
Total investment securities available for sale	$	7,976	$	(22	)	$	33,443	$	(260	)	$	41,419	$	(282	)

Investment securities held to maturity:
Municipal bonds	$	115	$	—		$	—	$	—		$	115	$	—
Total investment securities held to maturity	$	115	$	—		$	—	$	—		$	115	$	—



	June 30, 2015
	Less than 12 Months					12 Months or More					Total
	Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)
Investment securities available for sale:
Debt securities:
U.S. government agencies	$	10,046	$	(27	)	$	—	$	—		$	10,046	$	(27	)
Municipal bonds	4,166		(23		)	894		(13		)	5,060		(36		)
	14,212		(50		)	894		(13		)	15,106		(63		)
Agency residential mortgage-backed securities	24,046		(173		)	43,955		(820		)	68,001		(993		)
Total investment securities available for sale	$	38,258	$	(223	)	$	44,849	$	(833	)	$	83,107	$	(1,056	)

Investment securities held to maturity:
Municipal bonds	$	1,972	$	(10	)	$	115	$	—		$	2,087	$	(10	)
Total investment securities held to maturity	$	1,972	$	(10	)	$	115	$	—		$	2,087	$	(10	)

The unrealized losses reported for municipal bonds relate to nine available for sale and one held to maturity 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, 2016, 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.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

The unrealized losses reported for agency residential mortgage-backed securities relate to 34 available for sale 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, 2016, represent an other-than-temporary impairment for those investments. The Company does not have the intent to sell these securities (has not made a decision to sell) and has assessed that it is not more likely than not that the Company will be required to sell these securities before anticipated recovery of fair value.

The 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,
	2016		2015
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 March 31 for which a portion of other-than-temporary impairment was recognized in other comprehensive income⁽¹⁾	$	8	$	8

_____________________________________


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

The amortized cost and fair values of available for sale and held to maturity debt securities as of March 31, 2016, 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.



	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	1,037	$	1,041	$	403	$	403
Due after one year through five years	13,812		13,905		7,753		7,929
Due after five years through ten years	5,140		5,265		8,937		9,318
Due after ten years	290		292		1,170		1,251
	20,279		20,503		18,263		18,901
Agency residential mortgage-backed securities	126,598		127,480		1,655		1,725
	$	146,877	$	147,983	$	19,918	$	20,626

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

No securities available for sale were sold for the three months of fiscal 2016. Proceeds from the sale of securities available for sale for the three months of fiscal 2015 were $118,661 and resulted in gross gains of $235 and gross losses of $1,311.

Proceeds from the sale of securities available for sale for the first nine months of fiscal 2016 were $12,468 and resulted in gross gains of $99 and gross losses of $79. Proceeds from the sale of securities available for sale for the first nine months of fiscal 2015 were $140,317 and resulted in gross gains of $332 and gross losses of $1,449.

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, 2016				June 30, 2015
	Amount		Percent		Amount		Percent
Residential:
One-to four-family	$	57,873	6.5	%	$	55,572	6.1	%
Construction	7,485		0.8		6,308		0.7
Commercial:
Commercial business ⁽¹⁾	65,910		7.4		78,493		8.6
Equipment finance leases	88		—		158		—
Commercial real estate:
Commercial real estate	338,151		37.9		325,453		35.6
Multi-family real estate	126,090		14.1		111,354		12.2
Construction	49,293		5.5		48,224		5.3
Agricultural:
Agricultural real estate	81,642		9.2		96,952		10.6
Agricultural business	100,855		11.3		123,988		13.5
Consumer:
Consumer direct	13,735		1.5		14,837		1.6
Consumer home equity	48,871		5.5		50,377		5.5
Consumer overdraft & reserve	2,234		0.3		2,703		0.3
Total loans and leases receivable ⁽²⁾	$	892,227	100.0	%	$	914,419	100.0	%

________________________________________________________


⁽¹⁾	Includes $1,238 and $1,377 tax exempt leases at March 31, 2016 and June 30, 2015, respectively.


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

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



March 31, 2016
	Residential			Commercial			Commercial Real Estate			Agricultural		Consumer			Total
Balance at beginning of period	$	311		$	714		$	5,423		$	3,847	$	1,164		$	11,459
Charge-offs	—			—			—			—		(61		)	(61		)
Recoveries	—			16			—			—		16			32
Provisions	(13		)	(1		)	(30		)	235		(29		)	162
Balance at end of period	$	298		$	729		$	5,393		$	4,082	$	1,090		$	11,592

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)



March 31, 2015
	Residential		Commercial			Commercial Real Estate		Agricultural			Consumer			Total
Balance at beginning of period	$	272	$	873		$	4,471	$	3,865		$	1,452		$	10,933
Charge-offs	—		(32		)	—		(118		)	(118		)	(268		)
Recoveries	—		34			—		—			31			65
Provisions	33		(96		)	51		363			(69		)	282
Balance at end of period	$	305	$	779		$	4,522	$	4,110		$	1,296		$	11,012

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 nine months ended:



March 31, 2016
	Residential			Commercial			Commercial Real Estate		Agricultural			Consumer			Total
Balance at beginning of period	$	301		$	795		$	4,761	$	4,037		$	1,336		$	11,230
Charge-offs	—			—			—		(96		)	(345		)	(441		)
Recoveries	—			65			—		125			81			271
Provisions	(3		)	(131		)	632		16			18			532
Balance at end of period	$	298		$	729		$	5,393	$	4,082		$	1,090		$	11,592

March 31, 2015
	Residential			Commercial			Commercial Real Estate		Agricultural			Consumer			Total
Balance at beginning of period	$	283		$	932		$	3,819	$	3,842		$	1,626		$	10,502
Charge-offs	—			(32		)	—		(462		)	(348		)	(842		)
Recoveries	—			51			4		2			94			151
Provisions	22			(172		)	699		728			(76		)	1,201
Balance at end of period	$	305		$	779		$	4,522	$	4,110		$	1,296		$	11,012

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:



	March 31, 2016
	Residential		Commercial		Commercial Real Estate		Agricultural		Consumer		Total
Allowance for loan and lease losses:
Individually evaluated for impairment	$	25	$	3	$	213	$	362	$	115	$	718
Collectively evaluated for impairment	273		726		5,180		3,720		975		10,874
Total allowance for loan and lease losses	$	298	$	729	$	5,393	$	4,082	$	1,090	$	11,592
Loans and leases receivable:
Individually evaluated for impairment	$	157	$	1,277	$	5,832	$	11,625	$	902	$	19,793
Collectively evaluated for impairment	65,201		64,721		507,702		170,872		63,938		872,434
Total loans and leases receivable	$	65,358	$	65,998	$	513,534	$	182,497	$	64,840	$	892,227

	June 30, 2015
	Residential		Commercial		Commercial Real Estate		Agricultural		Consumer		Total
Allowance for loan and lease losses:
Individually evaluated for impairment	$	32	$	7	$	4	$	—	$	236	$	279
Collectively evaluated for impairment	269		788		4,757		4,037		1,100		10,951
Total allowance for loan and lease losses	$	301	$	795	$	4,761	$	4,037	$	1,336	$	11,230
Loans and leases receivable:
Individually evaluated for impairment	$	148	$	2,731	$	712	$	14,009	$	1,192	$	18,792
Collectively evaluated for impairment	61,732		75,920		484,319		206,931		66,725		895,627
Total loans and leases receivable	$	61,880	$	78,651	$	485,031	$	220,940	$	67,917	$	914,419

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:

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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.

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, 2016								June 30, 2015
	Pass		Special Mention		Substandard		Doubtful		Pass		Special Mention		Substandard		Doubtful
Commercial:
Commercial business	$	63,782	$	36	$	2,846	$	—	$	74,660	$	1,047	$	2,795	$	—
Equip. finance leases	88		—		—		—		158		—		—		—
Commercial real estate:
Commercial real estate	334,814		—		3,337		—		316,790		4,277		4,386		—
Multi-family real estate	113,915		5,876		6,299		—		110,239		—		1,115		—
Construction	49,293		—		—		—		48,224		—		—		—
Agricultural:
Agricultural real estate	74,483		300		6,859		—		89,772		595		6,599		—
Agricultural business	96,254		623		5,941		—		118,937		912		4,303		—
	$	732,629	$	6,835	$	25,282	$	—	$	758,780	$	6,831	$	19,198	$	—

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



	March 31, 2016				June 30, 2015
	Performing		Nonperforming		Performing		Nonperforming
Residential:
One-to four- family	$	57,751	$	122	$	55,460	$	112
Construction	7,485		—		6,308		—
Consumer:
Consumer direct	13,709		26		14,792		45
Consumer home equity	48,763		108		50,140		237
Consumer OD & reserves	2,234		—		2,703		—
	$	129,942	$	256	$	129,403	$	394

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, 2016	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	$	—	$	—	$	15	$	15	$	57,858	$	15	$	107	$	122
Construction	—		—		—		—		7,485		—		—		—
Commercial:
Commercial business	—		—		3		3		65,907		—		1,277		1,277
Equipment finance leases	—		—		—		—		88		—		—		—
Commercial real estate:
Commercial real estate	—		—		247		247		337,904		—		481		481
Multi-family real estate	—		—		—		—		126,090		—		5,207		5,207
Construction	—		—		—		—		49,293		—		—		—
Agricultural:
Agricultural real estate	454		—		—		454		81,188		—		3,153		3,153
Agricultural business	190		400		334		924		99,931		—		5,461		5,461
Consumer:
Consumer direct	24		—		2		26		13,709		—		26		26
Consumer home equity	15		60		79		154		48,717		—		108		108
Consumer OD & reserve	—		—		—		—		2,234		—		—		—
Total	$	683	$	460	$	680	$	1,823	$	890,404	$	15	$	15,820	$	15,835

_____________________________________


⁽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.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)



June 30, 2015	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	$	—	$	—	$	—	$	—	$	55,572	$	—	$	112	$	112
Construction	4		—		—		4		6,304		—		—		—
Commercial:
Commercial business	26		—		485		511		77,982		—		2,398		2,398
Equipment finance leases	—		—		—		—		158		—		—		—
Commercial real estate:
Commercial real estate	23		—		—		23		325,430		—		359		359
Multi-family real estate	—		—		—		—		111,354		—		—		—
Construction	—		—		—		—		48,224		—		—		—
Agricultural:
Agricultural real estate	375		139		1,203		1,717		95,235		—		4,482		4,482
Agricultural business	720		521		1,206		2,447		121,541		—		5,474		5,474
Consumer:
Consumer direct	18		3		3		24		14,813		—		45		45
Consumer home equity	190		—		135		325		50,052		—		237		237
Consumer OD & reserve	5		—		—		5		2,698		—		—		—
Total	$	1,361	$	663	$	3,032	$	5,056	$	909,363	$	—	$	13,107	$	13,107

_____________________________________


⁽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.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

At March 31, 2016, the Company had identified $19,793 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.

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



	March 31, 2016						June 30, 2015
	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	$	16	$	16	$	—	$	—	$	—	$	—
Commercial business	1,199		1,199		$	—	2,571		2,571		$	—
Commercial real estate	480		480		—		689		689		—
Agricultural real estate	6,073		6,073		—		7,633		7,633		—
Agricultural business	4,698		4,698		—		6,376		6,376		—
Consumer direct	4		4		—		9		24		—
Consumer home equity	487		487		—		580		580		—
	12,957		12,957		—		17,858		17,873		—
With an allowance recorded:
One-to four-family	141		141		25		148		148		32
Commercial business	78		78		3		160		160		7
Commercial real estate	144		144		64		23		23		4
Multi-family real estate	5,208		5,208		149		—		—		—
Agricultural business	854		854		362		—		—		—
Consumer direct	22		22		22		36		36		36
Consumer home equity	389		389		93		567		567		200
	6,836		6,836		718		934		934		279
Total:
One-to four-family	157		157		25		148		148		32
Commercial business	1,277		1,277		3		2,731		2,731		7
Commercial real estate	624		624		64		712		712		4
Multi-family real estate	5,208		5,208		149		—		—		—
Agricultural real estate	6,073		6,073		—		7,633		7,633		—
Agricultural business	5,552		5,552		362		6,376		6,376		—
Consumer direct	26		26		22		45		60		36
Consumer home equity	876		876		93		1,147		1,147		200
	$	19,793	$	19,793	$	718	$	18,792	$	18,807	$	279

_____________________________________


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

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

The following tables summarize the Company's average recorded investment in impaired loans by class of loans and the related interest income recognized for the periods indicated:



	Three Months Ended March 31,
	2016				2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
One-to four-family	$	150	$	1	$	152	$	1
Commercial business	1,386		—		3,161		15
Commercial real estate	697		2		671		1
Multi-family real estate	2,604		70		6,130		69
Agricultural real estate	6,836		69		6,266		44
Agricultural business	5,666		—		6,313		14
Consumer direct	28		—		56		—
Consumer home equity	923		14		1,335		19
	$	18,290	$	156	$	24,084	$	163



	Nine Months Ended March 31,
	2016				2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
One-to four-family	$	149	$	2	$	156	$	2
Commercial business	1,844		—		3,569		44
Commercial real estate	715		3		749		2
Multi-family real estate	1,302		70		6,194		139
Agricultural real estate	7,206		112		8,319		136
Agricultural business	5,911		—		4,947		14
Consumer direct	34		—		61		—
Consumer home equity	998		40		1,554		47
	$	18,159	$	227	$	25,549	$	384

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 2016, new TDRs consisted of three agricultural loans and five consumer loans. Of these new TDRs, eight were evaluated for impairment based on collateral adequacy.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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



March 31, 2016	Number of Contracts⁽¹⁾	Pre-Modification Recorded Balance		Post-Modification Outstanding Recorded Balance⁽¹⁾
Residential	1	$	34	$	34
Commercial business	3	1,270		1,270
Commercial real estate	2	233		233
Agricultural	5	7,302		7,302
Consumer	30	893		893
	41	$	9,732	$	9,732

June 30, 2015	Number of Contracts⁽²⁾	Pre-Modification Recorded Balance		Post-Modification Outstanding Recorded Balance⁽²⁾
Residential	2	$	148	$	148
Commercial business	5	2,234		2,234
Commercial real estate	5	712		712
Agricultural	8	8,045		8,045
Consumer	39	1,142		1,127
	59	$	12,281	$	12,266

_____________________________________


⁽¹⁾	Includes 15 customers, which are in compliance with their restructured terms, that are not accruing interest and have a recorded investment balance of $8,937.


⁽²⁾	Includes 18 customers, which are in compliance with their restructured terms, that are not accruing interest and have a recorded investment balance of $9,499.

Excluded from above, at March 31, 2016, the Company had one residential loan with a recorded balance of $107 that was originally restructured in fiscal 2015. The residential loan is not in compliance with its restructured terms and is in nonaccrual status due to bankruptcy. At June 30, 2015, the Company had no TDRs that were not in compliance with their stated terms in the agreements. 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.

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



	2016					2015
	Number of Contracts	Pre-Modification Recorded Balance		Post-Modification Outstanding Recorded Balance		Number of Contracts	Pre-Modification Recorded Balance		Post-Modification Outstanding Recorded Balance
Commercial real estate	—	$	—	$	—	1	$	200	$	200
Agricultural	3	1,650		1,650		4	1,001		1,001
Consumer	5	221		221		15	437		437
	8	$	1,871	$	1,871	20	$	1,638	$	1,638

Eight TDRs were added during the first nine months of fiscal 2016. Of these, six were negotiated to extend a loan maturity without reducing the interest rate below market rate and two were due to bankruptcy. None of the new TDRs defaulted during the first nine months of fiscal 2016. 20 TDRs were added during the first nine months of fiscal 2015 of which

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

17 were negotiated to extend a loan maturity without reducing the interest rate below market rate and three were due to bankruptcy. No TDRs defaulted during the first nine months of fiscal 2015.

NOTE 6—LOAN SERVICING

Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition.



	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2016			2015			2016			2015
Mortgage servicing rights, beginning	$	10,321		$	10,876		$	10,584		$	11,218
Additions	165			187			648			618
Amortization⁽¹⁾	(356		)	(392		)	(1,102		)	(1,165		)
Mortgage servicing rights, ending	$	10,130		$	10,671		$	10,130		$	10,671

Valuation allowance, beginning	$	—		$	—		$	—		$	—
(Additions) / reductions ⁽¹⁾	(407		)	—			(407		)	—
Valuation allowance, ending	$	(407	)	$	—		$	(407	)	$	—

Mortgage servicing rights, net	$	9,723		$	10,671		$	9,723		$	10,671

Servicing fees received	$	663		$	711		$	2,073		$	2,199
Balance of loans serviced at:
Beginning of period	947,410			1,014,468			974,893			1,048,671
End of period	932,277			992,417			932,277			992,417

___________________________________


⁽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 and prospective industry consensus rates. For the quarters ended March 31, 2016 and 2015, the constant prepayment rates (CPR) used to calculate the amortization were 8.9% and 9.4%, respectively. For valuation purposes, management utilized a discount rate of 10.1% and 10.5% at March 31, 2016 and 2015, respectively. Prepayment speeds utilized at March 31, 2016 and 2015 were 9.5% and 9.6%, respectively, which are used in the calculation of the amortization expense for the subsequent quarter. Prepayment speeds are analyzed and adjusted each quarter. Based on the Company's analysis of mortgage servicing rights, a $407 valuation reserve was recorded for temporary impairment at March 31, 2016 and $0 for 2015.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

NOTE 7—GOODWILL AND INTANGIBLE ASSETS, NET

The components of goodwill and intangible assets, net, are as follows:



	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2016		2015		2016		2015
Goodwill⁽¹⁾	$	4,366	$	4,366	$	4,366	$	4,366

Amortizable intangible assets
Customer base⁽³⁾	$	670	$	479	$	670	$	479
Covenant not to compete⁽⁴⁾	167		119		167		119
Total amortizable intangible assets	837		598		837		598

Accumulated amortization, beginning	265		188		227		134
Amortization expense	23		27		61		81
Accumulated amortization, ending	288		215		288		215

Amortizable intangible assets, net⁽²⁾	$	549	$	383	$	549	$	383

Goodwill and intangible assets, net	$	4,915	$	4,749	$	4,915	$	4,749

^{_______________________________________________________________}

⁽¹⁾Banking segment related goodwill.

⁽²⁾Other segment related intangible assets.

⁽³⁾ Amortization life of 10.0 years.

⁽⁴⁾ Amortization life of 2.0 years.

NOTE 8—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.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

The following tables summarize segment reporting information:



	Three Months Ended March 31,
	2016									2015
	Banking			Other			Total			Banking			Other			Total
Net interest income	$	9,884		$	(282	)	$	9,602		$	9,107		$	(258	)	$	8,849
(Provision) for losses on loans and leases	(162		)	—			(162		)	(282		)	—			(282		)
Noninterest income	2,146			356			2,502			1,614			441			2,055
Intersegment noninterest income	79			(75		)	4			76			(72		)	4
Noninterest expense	(7,979		)	(891		)	(8,870		)	(9,111		)	(669		)	(9,780		)
Intersegment noninterest expense	—			(4		)	(4		)	—			(4		)	(4		)
Income (loss) before income taxes	$	3,968		$	(896	)	$	3,072		$	1,404		$	(562	)	$	842
Total assets at March 31⁽¹⁾⁽²⁾	$	1,139,517		$	2,360		$	1,141,877		$	1,136,156		$	2,210		$	1,138,366

^{_______________________________________________}


⁽¹⁾	Included in total assets were goodwill and intangible assets, net totaling $4,366 and $549 for the banking segment and other segment, respectively, at March 31, 2016.

⁽²⁾ Included in total assets were goodwill and intangible assets, net totaling $4,366 and $383 for the banking segment and other segment, respectively, at March 31, 2015.



	Nine Months Ended March 31,
	2016									2015
	Banking			Other			Total			Banking			Other			Total
Net interest income	$	29,554		$	(859	)	$	28,695		$	27,365		$	(866	)	$	26,499
(Provision) for losses on loans and leases	(532		)	—			(532		)	(1,201		)	—			(1,201		)
Noninterest income	11,032			1,267			12,299			7,293			1,228			8,521
Intersegment noninterest income	237			(223		)	14			228			(217		)	11
Noninterest expense	(26,342		)	(2,935		)	(29,277		)	(29,928		)	(2,022		)	(31,950		)
Intersegment noninterest expense	—			(14		)	(14		)	—			(11		)	(11		)
Income (loss) before income taxes	$	13,949		$	(2,764	)	$	11,185		$	3,757		$	(1,888	)	$	1,869
Total assets at March 31⁽¹⁾⁽²⁾	$	1,139,517		$	2,360		$	1,141,877		$	1,136,156		$	2,210		$	1,138,366

^{________________________________________________}


⁽¹⁾	Included in total assets were goodwill and intangible assets, net totaling $4,366 and $549 for the banking segment and other segment, respectively, at March 31, 2016.

⁽²⁾ Included in total assets were goodwill and intangible assets, net totaling $4,366 and $383 for the banking segment and other segment, respectively, at March 31, 2015.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

NOTE 9—DEFINED BENEFIT PLAN

The Company has a noncontributory (cash balance) defined benefit pension plan covering employees of the Company and its wholly-owned subsidiaries. Effective July 1, 2015, the Company froze the plan which eliminates future contributions for qualified individuals. The plan has not been terminated, so the plan continues to exist with related benefit obligations and plan assets for those vested within the plan.

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,
	2016			2015			2016			2015
Net periodic benefit cost
Service cost	$	13		$	169		$	38		$	509
Interest cost	162			186			488			558
Expected return on plan assets	(142		)	(164		)	(429		)	(474		)
Amortization of prior losses	20			31			62			94
Net periodic benefit cost	$	53		$	222		$	159		$	687

The Company previously disclosed in its consolidated financial statements for fiscal 2015, which are included in Part II, Item 8 “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K, that due to the freezing of the plan, the Company does not anticipate funding any contributions for fiscal 2016.

NOTE 10—SELF-INSURED HEALTHCARE PLAN

The Company has self-insured health and dental plans for its employees, subject to certain limits. The Bank is named the plan administrator for these plans and has retained the services of independent third party administrators to process claims and handle other duties for these plans. The third party administrators do not assume liability for benefits payable under these plans. To mitigate a portion of the risks involved with the self-insured health plan, the Company has a stop loss insurance policy through a commercial insurance carrier for coverage in excess of $75 per individual occurrence.

The Company assumes the responsibility for funding the plan benefits out of general assets; however, employees cover some of the costs of covered benefits through contributions, deductibles, co-pays and participation amounts. An employee is eligible for coverage upon completion of 30 calendar days of regular employment. The plans, which are on a calendar year basis, are 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 and dental claims expenses and administration fees offset by stop loss and employee reimbursement.

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



	Fiscal Years Ended
	June 30,
	2016		2015
Quarter ended September 30	$	588	$	309
Quarter ended December 31	515		430
Quarter ended March 31	465		420
Quarter ended June 30	—		619
Net healthcare costs	$	1,568	$	1,778

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

NOTE 11—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, 2016 and 2015.

Stock appreciation rights activity for the nine months ended March 31, 2016, was as follows:



	SARs		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Beginning Balance	72,348		$	13.50
Granted	—		—
Forfeited	(1,715	)	12.48
Exercised	(48,486	)	13.65
Ending Balance	22,147		$	13.24	3.0	$	105
Vested and exercisable at March 31	22,147		$	13.24	3.0	$	105

There were 48,486 SARs exercised during the nine months ended March 31, 2016 which resulted in $216 intrinsic value of SARs exercised and is included in compensation and employee benefit expense on the income statement. There were 5,195 SARs exercised during the nine months ended March 31, 2015 and resulted in $10 intrinsic value, which is included in the income statement for the prior year. There was no unrecognized compensation cost related to nonvested SARs awards at March 31, 2016.

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



	2016				2015
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Nonvested Balance, beginning	88		$	8.48	11,694		$	11.99
Granted	—		—		—		—
Vested	(88	)	8.48		(9,939	)	11.98
Forfeited	—		—		(1,667	)	12.25
Nonvested Balance, ending	—		$	—	88		$	8.48

Pretax compensation expense recognized for nonvested shares for the nine months ended March 31, 2016 and 2015, was $53 and $92, respectively. The tax benefit for the nine months ended March 31, 2016 and 2015 was $20 and $35, respectively. As of March 31, 2016, there was no remaining unrecognized compensation cost related to nonvested shares granted under the Plan. The total fair value of shares vested during the nine months ended March 31, 2016 and 2015 was $1 and $146, respectively.

The 2002 Option Plan expired effective September 20, 2012. No plan was in effect at March 31, 2016 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, 2015, under Note 17 of “Notes to Consolidated Financial Statements.”

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

NOTE 12—ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS

Advances from the Federal Home Loan Bank of Des Moines ("FHLB") and other borrowings are summarized as follows:



	March 31, 2016				June 30, 2015
	Amount		Rate ⁽¹⁾		Amount		Rate ⁽¹⁾
Overnight federal funds purchased	$	55,185	0.39	%	$	20,336	0.29	%
Fixed-rate advances (with rates ranging from 1.15% to 1.18% at March 31, 2016 and 0.24% to 1.18% at June 30, 2015)	10,000		1.17		45,000		0.45
Other borrowings	182		—		222		—
	$	65,367	0.51	%	$	65,558	0.40	%


⁽¹⁾	Rate is the specified interest rate for the obligation or the weighted average rate if more than one obligation exists or as represented in the total.

NOTE 13—SUBORDINATED DEBENTURES PAYABLE TO TRUSTS, NET OF UNAMORTIZED DEBT ISSUANCE COSTS

The Company has issued and outstanding 24,000 shares totaling $24,000 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.

Subordinated debentures payable to trusts, net of unamortized debt issuance are summarized as follows:



	March 31, 2016		June 30, 2015

Principal amount	$	24,837	$	24,837
Less unamortized debt issuance costs	175		182
Subordinated debentures payable to trusts, net of unamortized debt issuance costs	$	24,662	$	24,655

The details of the outstanding subordinated debentures at March 31, 2016 and their related unamortized debt issuance costs are as follows:



			Unamortized Debt
Junior subordinated debentures payable to nonconsolidated trusts	Principal		Issuance Costs

Trust III, Variable rate of 3.35% plus 3 month LIBOR	$	5,155	$	83
Trust IV, Variable rate of 3.10% plus 3 month LIBOR	7,217		92
Trust V, Variable rate of 1.83% plus 3 month LIBOR	10,310		—
Trust VI, Variable rate of 1.65% plus 3 month LIBOR	2,155		—
Total	$	24,837	$	175

NOTE 14—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

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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

The Company has an outstanding interest rate swap agreement with a notional amount of $10,000 to convert one variable-rate trust preferred security into a fixed-rate instrument. The agreement has a maturity of 0.7 years and has a fixed rate of 5.68%. The fair value of the derivative was an unrealized loss of $240 at March 31, 2016 and of the derivatives was an unrealized loss of $613 at March 31, 2015. The Company pledged $424 in cash under collateral arrangements as of March 31, 2016, to satisfy collateral requirements associated with this interest rate swap contract.

The Company has borrower interest rate swap agreements with notional amounts totaling $28,448 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, 2016 and 2015. 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.

No deferred net losses on interest rate swaps in other comprehensive loss as of March 31, 2016, are expected to be reclassified into net income during the current fiscal year. See Note 15 "Accumulated Other Comprehensive Loss" for amounts reported as other comprehensive loss.

The following table summarizes the derivative financial instruments utilized as of March 31, 2016:



				Estimated Fair Value
	Balance Sheet Location	Notional Amount		Gain		Loss
Non-designated derivatives	Other assets	$	5,321	$	597	$	—
Fair value hedge	Loans and leases receivable	17,806		—		(887		)
Cash flow hedge	Accrued expenses and other liabilities	10,000		—		(240		)
Non-designated derivatives	Accrued expenses and other liabilities	5,321		—		(597		)
		$	38,448	$	597	$	(1,724	)

The following table summarizes the derivative financial instruments utilized as of June 30, 2015:



				Estimated Fair Value
	Balance Sheet Location	Notional Amount		Gain		Loss
Non-designated derivatives	Other assets	$	6,990	$	632	$	—
Fair value hedge	Loans and leases receivable	18,408		55		(398		)
Cash flow hedge	Accrued expenses and other liabilities	13,000		—		(532		)
Non-designated derivatives	Accrued expenses and other liabilities	6,990		—		(632		)
		$	45,388	$	687	$	(1,562	)

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, 2016:



	Notional Value		Average Maturity (years)	Estimated Fair Value Gain (Loss)			Receive		Pay
Liability conversion swaps	$	10,000	0.7	$	(240	)	2.47	%	5.68	%
Loan interest rate swaps	28,448		6.0	(887		)	2.29		4.45
	$	38,448		$	(1,127	)

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

There were no gains or losses included in the income statement for the periods ended March 31, 2016 or 2015.

NOTE 15—ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of other comprehensive loss balances as of the respective dates were:



	March 31,			June 30,
	2016			2015
Unrealized gain (loss) on securities available for sale net of related tax effect of ($424) and $150	$	691		$	(244	)
Unrealized (loss) on defined benefit plan net of related tax effect of $666 and $666	(1,087		)	(1,087		)
Unrealized (loss) on cash flow hedging activities net of related tax effect of $82 and $181	(158		)	(351		)
	$	(554	)	$	(1,682	)

The following tables summarize the components of other comprehensive (loss) balances at March 31, 2016 and 2015, changes and reclassifications out of accumulated other comprehensive (loss) during the three months ended March 31, 2016 and 2015. The amounts reclassified from accumulated other comprehensive income for the investment securities available for sale are included in net gain or loss on sale of investment securities on the consolidated statements of income, while the amounts reclassified from cash flow hedging activities are a component of other noninterest income on the consolidated statements of income.



	Investment Securities Available for Sale			Defined Benefit Plan			Cash Flow Hedging Activities			Accumulated Other Comprehensive Loss
Balance January 1, 2016	$	(601	)	$	(1,087	)	$	(206	)	$	(1,894	)
Other comprehensive income before reclassifications	2,085			—			72			2,157
Amounts reclassified from accumulated other comprehensive loss	—			—			—			—
Income tax (expense)	(793		)	—			(24		)	(817		)
Balance March 31, 2016	$	691		$	(1,087	)	$	(158	)	$	(554	)



	Investment Securities Available for Sale			Defined Benefit Plan			Cash Flow Hedging Activities			Accumulated Other Comprehensive Loss
Balance January 1, 2015	$	(805	)	$	(1,402	)	$	(463	)	$	(2,670	)
Other comprehensive income before reclassifications	803			—			89			892
Amounts reclassified from accumulated other comprehensive loss	1,076			—			—			1,076
Income tax (expense)	(714		)	—			(30		)	(744		)
Balance March 31, 2015	$	360		$	(1,402	)	$	(404	)	$	(1,446	)

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

The following tables summarize the components of other comprehensive income (loss) balances at March 31, 2016 and 2015, changes and reclassifications out of accumulated other comprehensive income (loss) during the nine months ended March 31, 2016 and 2015. The amounts reclassified from accumulated other comprehensive income for the investment securities available for sale are included in net gain or loss on sale of investment securities on the consolidated statements of income, while the amounts reclassified from cash flow hedging activities are a component of other noninterest income on the consolidated statements of income.



	Investment Securities Available for Sale			Defined Benefit Plan			Cash Flow Hedging Activities			Accumulated Other Comprehensive Loss
Balance July 1, 2015	$	(244	)	$	(1,087	)	$	(351	)	$	(1,682	)
Other comprehensive income before reclassifications	1,529			—			292			1,821
Amounts reclassified from accumulated other comprehensive loss	(20		)	—			—			(20		)
Income tax (expense)	(574		)	—			(99		)	(673		)
Balance March 31, 2016	$	691		$	(1,087	)	$	(158	)	$	(554	)



	Investment Securities Available for Sale			Defined Benefit Plan			Cash Flow Hedging Activities			Accumulated Other Comprehensive Loss
Balance July 1, 2014	$	(1,423	)	$	(1,402	)	$	(629	)	$	(3,454	)
Other comprehensive income before reclassifications	1,759			—			339			2,098
Amounts reclassified from accumulated other comprehensive loss	1,117			—			—			1,117
Income tax (expense)	(1,093		)	—			(114		)	(1,207		)
Balance March 31, 2015	$	360		$	(1,402	)	$	(404	)	$	(1,446	)

NOTE 16—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.

Investment 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.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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.

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



March 31, 2016			Fair Value Measurements
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	19,320	$	19,320	$	19,320	$	—	$	—
Investment securities	168,271		168,979		16		168,963		—
Correspondent bank stock	4,062		4,062		—		4,062		—
Loans held for sale	2,586		2,586		—		2,586		—
Net loans and leases receivable	880,635		880,732		—		9,602		871,130
Accrued interest receivable	5,192		5,192		—		5,192		—
Servicing rights, net	9,723		9,723		—		—		9,723
Interest rate swap contracts	597		597		—		597		—
Financial liabilities
Deposits	910,552		910,601		—		—		910,601
Interest rate swap contracts	837		837		—		837		—
Borrowed funds	65,367		65,366		—		65,366		—
Subordinated debentures payable to trusts	24,662		22,883		—		—		22,883
Accrued interest payable and advances by borrowers for taxes and insurance	18,647		18,647		—		18,647		—

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)



June 30, 2015			Fair Value Measurements
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	21,476	$	21,476	$	21,476	$	—	$	—
Investment securities	178,962		179,285		13		179,272		—
Correspondent bank stock	4,177		4,177		—		4,177		—
Loans held for sale	9,038		9,038		—		9,038		—
Net loans and leases receivable	903,189		904,724		—		10,763		893,961
Accrued interest receivable	5,414		5,414		—		5,414		—
Servicing rights, net	10,584		11,067		—		—		11,067
Interest rate swap contracts	632		632		—		632		—
Financial liabilities
Deposits	963,229		962,764		—		—		962,764
Interest rate swap contracts	1,164		1,164		—		1,164		—
Borrowed funds	65,558		65,532		—		65,532		—
Subordinated debentures payable to trusts	24,655		25,977		—		—		25,977
Accrued interest payable and advances by borrowers for taxes and insurance	15,198		15,198		—		15,198		—

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.

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, 2016:



	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	$	—	$	9,906		$	—	$	9,906
Municipal bonds	—		10,597			—		10,597
Equity securities:
Federal Ag Mortgage	16		—			—		16
Other investments	—		354			—		354
Agency residential mortgage-backed securities	—		127,480			—		127,480
Securities available for sale	16		148,337			—		148,353
Loans and leases receivable	—		(887		)	739		(148		)
Interest rate swap contracts	—		597			—		597
Total assets	$	16	$	148,047		$	739	$	148,802

Interest rate swaps contracts	$	—	$	1,724		$	—	$	1,724
Total liabilities	$	—	$	1,724		$	—	$	1,724

The table below presents the Company's balances of financial instruments measured at fair value on a recurring basis by level within the hierarchy at June 30, 2015:



	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	$	—	$	22,006		$	—	$	22,006
Municipal bonds	—		8,262			—		8,262
Equity securities:
Federal Ag Mortgage	13		—			—		13
Other investments	—		353			—		353
Agency residential mortgage-backed securities	—		128,172			—		128,172
Securities available for sale	13		158,793			—		158,806
Loans and leases receivable	—		(343		)	291		(52		)
Interest rate swap contracts	—		632			—		632
Total assets	$	13	$	159,082		$	291	$	159,386

Interest rate swaps contracts	$	—	$	1,164		$	—	$	1,164
Total liabilities	$	—	$	1,164		$	—	$	1,164

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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.

Loans and leases receivable: The fair values for loans that have been repurchased are estimated using discounted cash flow analyses, which discounts the stated rate at 20%.

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.

The following table reconciles the beginning and ending balances of the assets or liabilities of the Company that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3).



	Three Months Ended						Nine Months Ended
Net loans and leases receivable	March 31,						March 31,
	2016			2015			2016			2015
Beginning balance	$	445		$	294		$	291		$	—
Loans repurchased	324			—			483			320
Loan principle repayments	(1		)	(1		)	(4		)	(1		)
Total realized gains (losses)	(29		)	—			(31		)	(26		)
Ending Balance	$	739		$	293		$	739		$	293

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, 2016:



	Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fiscal 2016 Incurred (Gains) Losses
Impaired loans	$	—	$	9,602	$	9,473	$	(74	)
Mortgage servicing rights	—		—		9,723		407

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 June 30, 2015:



	Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fiscal 2015 Incurred (Gains)
Impaired loans	$	—	$	11,106	$	7,407	$	(101	)
Mortgage servicing rights	—		—		11,067		—

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.

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, 2016, the significant unobservable inputs used in the fair value measurements were as follows:



	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Averages)
Impaired loans	$	9,473	Discounted cash flow	Discount rate	5.0% - 8.0% (6.4%)
				Principal loss probability	0.0% - 19.2% (9.5%)

			Collateral valuation	Discount from appraised value	0.0% - 68.6% (23.5%)
				Costs to sell	5.0% - 12.5% (7.4%)

Servicing rights, net	9,723		Discounted cash flow	Constant prepayment rate	9.5%
				Discount rate	10.1%

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2015, the significant unobservable inputs used in the fair value measurements were as follows:



	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Averages)
Impaired loans	$	7,407	Discounted cash flow	Discount rate	5.0% - 18.3% (7.0%)
				Principal loss probability	0.0% - 20.0% (5.4%)

			Collateral valuation	Discount from appraised value	0.0% - 64.1% (22.9%)
				Costs to sell	5.0% - 12.5% (9.2%)

Servicing rights, net	11,067		Discounted cash flow	Constant prepayment rate	9.7%
				Discount rate	10.2%

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:


•	the pendency of the proposed merger (the “Merger”) with Great Western Bancorp, Inc. (“Great Western”) pursuant to the agreement and plan of merger (the “Merger Agreement”) between the Company and Great Western dated November 30, 2015 and the related diversion of our management’s attention;


•	the business uncertainties and contractual restrictions while the Merger is pending and the impact of these factors on employee retention;


•	the possibility that the Merger Agreement is terminated or that the Merger does not close;


•	the lawsuit that has been filed challenging the Merger and the potential for further lawsuits challenging the Merger;


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


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


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


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


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


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


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


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


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


•	the effects of FDIC deposit insurance premiums and assessments;


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


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


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


•	soundness of other financial institutions;


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


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


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


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


•	other factors and risks described under the caption "Risk Factors" in our most recent Annual Report on Form 10-K and subsequently filed quarterly reports on 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 2016 was $7.4 million, or $1.05 in basic and diluted earnings per common share, compared to $1.7 million, or $0.24 in basic and diluted earnings per common share, for the first nine months of fiscal 2015. This resulted in a return on average equity (i.e., net income divided by average equity) of 9.16% and 2.16%, respectively, in the year-over-year comparison, while the return on average assets (i.e., net income divided by average assets) was 0.84% and 0.18%, respectively.

Core diluted earnings per share, a non-GAAP measure, was $0.88 compared to $0.75 for the nine months ended March 2016 and 2015, respectively. This financial measure is adjusted from GAAP net income and diluted earnings per share for the effects of the net gains or losses on investment security sales, charges incurred from prepayment of borrowings, net gain on sale of bank branch, net gains or losses on sales of real property, merger related costs, and effects of branch closure costs. See “Reconciliation of GAAP Earnings and Core Earnings” for a reconciliation of this non-GAAP financial measure and for further discussion as to the reasons we believe this non-GAAP financial measure is useful.

During the first quarter of the 2016 fiscal year, the Bank sold its branch office in Pierre, SD with approximately $21.4 million in deposits, for a $2.8 million pre-tax net gain. Included in the sale were $24.2 million of loan receivables.

On November 30, 2015, HFFC announced its entry into the Merger Agreement with Great Western. Under the terms of the Merger Agreement, 75% of HFFC’s common stock will be converted into Great Western common stock and the remaining 25% will be exchanged for cash. HFFC stockholders will have the option to elect to receive either 0.650 shares of Great Western common stock or $19.50 in cash for each HFFC common share, subject to proration to ensure that, in the aggregate, 75% of HFFC shares will be converted into stock. The Merger has been unanimously approved by the Board of Directors of both Great Western and HFFC and is expected to close in the second quarter of calendar 2016, subject to certain conditions, including the approval by HFFC’s stockholders and customary regulatory approvals.

Net interest income for the first nine months of fiscal 2016 was $28.7 million, an increase of $2.2 million, or 8.3%, compared to the same period a year ago. For the comparative periods, average interest-earning assets and average interest-bearing liabilities decreased 5.9% and 7.5%, respectively. The average yield on interest-earning assets increased to 3.97% for the first nine months of fiscal 2016, compared to 3.64% a year ago, an increase of 33 basis points, due primarily to the 8.2% growth in average loan balances of $69.1 million, and a decrease by 43.6%, or $135.0 million in the average balances of lower-yielding investment securities. This was complemented by a 15 basis point decrease in the average rates paid on interest-bearing liabilities stemming from a reduction in rates paid and average balances for FHLB advances. The improved mix of earning assets, which featured over 83% of assets in higher-earning loan assets, and the repayment of higher-rate term borrowings in December 2014, contributed to the majority of the overall improvement in net interest margin of 45 basis points when comparing the first nine months of fiscal 2016 with the same period of the prior year. For the nine months ended March 31, 2016, cost of deposits, which include all interest-bearing and noninterest-bearing deposits, increased one basis point to 0.39%, when compared to the prior fiscal year.

The net interest margin expressed on a fully taxable equivalent basis (“Net Interest Margin, TE”) for the nine months ended March 31, 2016 was 3.56%, which is an increase of 45 basis points from the same period of the prior fiscal 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. Net interest income attributable to the improvement in the mix of earning assets and the decrease in balances of interest-bearing liabilities amounted to a net increase of $1.8 million in net interest margin for the nine month period when compared to the

same period of the prior year. Also, changes due to rates amounted to a $421,000 increase in the net interest margin. The combined effects of volume and rate changes resulted in an overall net interest income increase of $2.2 million for the nine months ended March 31, 2016 when compared to the same period of the prior year.

Average loans and leases receivable balances increased by $69.1 million, when compared to the same period of the prior year, and were funded by a reduction in average investment securities of $135.0 million and FHLB stock of $2.2 million. This decrease in investment securities also supported a net decrease in interest-bearing liabilities of $71.4 million. Average balances of interest-bearing deposits decreased $15.6 million for the year-over-year comparison, while FHLB advances and other borrowings decreased by $55.6 million, which resulted in a mix of liabilities that lessened the average rates paid on the interest-bearing liabilities compared to the same period of the prior fiscal year.

Total loans decreased by $22.2 million during the first nine months of fiscal 2016 to $892.2 million at March 31, 2016, compared to $914.4 million at June 30, 2015, primarily due to the sale of $24.2 million of loans associated with the branch sale in July 2015. When compared to the March 31, 2015 balance of $871.6 million, loans have increased by $20.6 million. During this time-frame, commercial real estate balances have increased by $51.8 million and single family loans increased by $8.8 million, which were the primary components of the increase, but were partially offset by a decrease in agricultural loans of $32.3 million. For the nine months of fiscal 2016, commercial real estate loans have increased by $28.5 million, while business and agricultural loans decreased by $12.7 million and $38.4 million, respectively. Management believes the overall increase in average loan balances was attributable to a gradual improvement in general economic conditions, resulting in the willingness of borrowers to consider incurring more debt to support growth in their businesses, while also acknowledging that we continue to operate in uncertain national economic and fiscal conditions. Management believes 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 $362,000 to $11.6 million at March 31, 2016, compared to June 30, 2015. The ratio of allowance for loan and lease losses to total loans and leases was 1.30% compared to 1.23% at June 30, 2015. The overall loan balances decreased by $22.2 million during the first nine months of fiscal 2016, while nonperforming loans increased by $2.7 million to $15.8 million. The amount of classified assets increased to $27.0 million at March 31, 2016 as compared to $22.0 million at June 30, 2015, which contributed in part to the increase in the allowance. The Company continues to pro-actively manage its problem assets through procedural guidance and dedicated personnel to create an environment of early detection and resolution of assets in this segment. This has been supported by improved conditions in the regional commercial and agricultural markets, including livestock and dairy operations. The provision for loan and lease losses, which results from adjusting the allowance for loan and lease losses to the estimated amount needed to reserve for the loan and lease portfolio, was $532,000 for the first nine months of fiscal 2016. Total nonperforming assets at March 31, 2016 were $15.9 million as compared to $13.3 million at June 30, 2015. The ratio of nonperforming assets to total assets increased to 1.40% at March 31, 2016, compared to 1.12% at June 30, 2015. Net charge-offs for the nine month period ended March 31, 2016 were $170,000 and represent 0.02% of average loans and leases for the period annualized. The allowance recorded in accordance with ASC 450 decreased by $77,000 due to adjustments based on management's assessment of the allowance using historical charge-off activity and environmental factor information and applied to applicable loan balances. The allowance recorded in accordance with ASC 310 on identified impaired loans increased by $439,000 to $718,000 at March 31, 2016, and consisted primarily of agriculture business and commercial real estate loans. 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 $99,000 at March 31, 2016, compared to $157,000 at June 30, 2015, or a decrease of $58,000. The balance at March 31, 2016 consisted primarily of residential real estate. Overall, foreclosed property assets and the related costs have continued to be minimal when compared to the overall loan portfolio.

The allowance for loan and lease losses is calculated based on loan and lease levels, loan and lease loss history over 36 month rolling 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, 2016 were $910.6 million, a decrease of $52.7 million from June 30, 2015. This decrease was primarily due to a decrease of $41.5 million from seasonal public fund deposits and a decrease in out-of-market certificates of deposits of $32.1 million. These decreases were partially offset by an increase of $21.0 million from in-market, non-public fund customer deposits. The Pierre branch sale in July 2015 included $21.4 million of deposits which were primarily in-market non-public fund deposits. Public funds have seasonal fluctuations due to semiannual tax collection and subsequent disbursement to entities. Interest rates on deposits increased one basis point at an average rate paid of 0.46% on interest-bearing deposits for the nine month period ended March 31, 2016, compared to the same period of the prior year.

On April 25, 2016, the Company announced it will pay a quarterly cash dividend of $11.25 cents per common share for the third quarter of fiscal 2016. The dividend will be paid on May 12, 2016, to stockholders of record on May 6, 2016.

The Bank total risk-based capital ratio of 13.90% at March 31, 2016, increased by 61 basis points from 13.29% at June 30, 2015. Tier I capital increased 55 basis points to 10.94% at March 31, 2016 when compared to 10.39% at June 30, 2015. The increase in total risk-based capital resulted from an increase in earnings and overall equity retained. The tier 1 capital to risk-weighted assets ratio and common equity tier 1 capital to risk-weighted assets ratio were 12.72% versus 12.16% at June 30, 2015. These ratios continue to place the Bank in the “well-capitalized” category within financial institution regulations at March 31, 2016 and are consistent with the “well-capitalized” regulatory category in which the Bank plans to operate. The Bank historically has been able to manage the size of its assets through secondary market loan sales of single-family mortgages. See Note 2 of "Notes to Consolidated Financial Statements" of this Form 10-Q for additional information on regulatory capital for the Bank and the Company.

Noninterest income was $12.3 million for the nine months ended March 31, 2016, compared to $8.5 million for the same period in the prior fiscal year, an increase of $3.8 million. This increase was due primarily to the bank branch sale which netted a pre-tax gain of $2.8 million in the first quarter of fiscal year 2016. In comparison year-over-year, the prior year net loss on the sale of securities of $1.1 million and the $461,000 loss on the disposal of closed-branch fixed assets for which no losses were incurred in the current fiscal year, provided for a large increase when compared to the prior fiscal year. A decrease in fees on deposits of $487,000 partially offset these year-over-year increases noted earlier. The mortgage banking revenue was relatively flat in the year-over-year comparison due to an increase in net gain on sale of loans of $464,000 and offset by a decrease in net loan servicing income of $470,000. Mortgage activity increased in this comparison period, however in the third fiscal quarter of 2016, a provision for a valuation allowance for servicing rights of $407,000 was recorded due in part to effects of lower market rates. Fees on deposits decreased by $487,000 for the first nine months of fiscal 2016 when compared to the same period of the prior year primarily due to decreases in NSF/Overdraft fees of $253,000, point-of-sale income reductions of $141,000, and reduced service charge income of $85,000.

Noninterest expense was $29.3 million for the nine months ended March 31, 2016, as compared to $32.0 million for the same period of the prior fiscal year, a decrease of $2.7 million, or 8.4%. The prior fiscal year included the prepayment of $84.9 million in FHLB term borrowings which resulted in a one-time pre-tax charge to other noninterest expense of $4.1 million. When excluding this charge, noninterest expense increased $1.4 million over the same nine month period of the prior fiscal year. Professional fees have increased $716,000 or 47.4% over the prior year period, primarily attributable to expenses related to the proposed merger transaction. An additional component of the increase was compensation and employee benefits expense, which increased by $658,000, or 4.0%, when compared to the same period from the prior fiscal year. Of the total change in compensation and employee benefits, health and insurance benefits increased by $409,000 resulting from specific claim incidents in addition to higher costs due to utilization. Salaries and wages and retirement plan costs decreased by $68,000 and $116,000, respectively. Average FTEs for the first nine months of fiscal 2016 totaled 281, which is six FTEs lower than the average FTEs for the same period a year earlier, and contributed to reduced salary and wage expense from the prior fiscal year. The pension plan freeze for contributions starting in July of 2015 resulted in a decrease in expense for the current fiscal year to date period. Variable commissions related to mortgage increased by $146,000 due to increased mortgage origination activity, other incentive compensation increased by $175,000 due to improved outcomes during the current fiscal year, and stock compensation expense increased $167,000 due to the appreciation and exercise of fully vested stock appreciation rights.

Reconciliation of GAAP Earnings and Core Earnings

Although core earnings are not a measure of performance calculated in accordance with GAAP, the Company believes that its core earnings are an important indication of performance from operations. The Company believes that core earnings are useful to management and investors in evaluating its operating performance, and in comparing its performance with other companies in the banking industry. Core earnings should not be considered in isolation or as a substitute for GAAP earnings. During the periods presented, the Company calculated core earnings by adding back or subtracting, net of tax, the various components indicated in the following table.



	Three Months Ended								Nine Months Ended
	March 31,		December 31,			March 31,			March 31,
	2016		2015			2015			2016			2015
	(Dollars in Thousands, except share data)
GAAP earnings before income taxes	$	3,072	$	2,171		$	842		$	11,185		$	1,869
Net (gain) loss on sale of securities	—		(15		)	1,076			(20		)	1,117
Charges incurred from prepayment of borrowings ⁽¹⁾	—		—			—			—			4,065
Gain on sale of bank branch	—		—			—			(2,847		)	—
Net (gain) on sale of property	—		—			(313		)	—			(249		)
Merger related costs ⁽²⁾	350		712			—			1,062			—
Costs incurred for branch closures ⁽³⁾	—		—			695			—			896
Core earnings before income taxes	3,422		2,868			2,300			9,380			7,698
Provision for income tax on core earnings	1,136		958			677			3,100			2,421
Core earnings	$	2,286	$	1,910		$	1,623		$	6,280		$	5,277

GAAP diluted earnings per share	$	0.29	$	0.21		$	0.10		$	1.05		$	0.24
Net (gain) loss on sale of securities, net of tax	—		—			0.10			—			0.10
Charges incurred from prepayment of borrowings, net of tax	—		—			—			—			0.36
Gain on sale of bank branch, net of tax	—		—			—			(0.25		)	—
Net (gain) on sale of property, net of tax	—		—			(0.03		)	—			(0.02		)
Merger related costs, net of tax	0.03		0.06			—			0.08			—
Costs incurred for branch closures, net of tax	—		—			0.06			—			0.07
Core diluted earnings per share	$	0.32	$	0.27		$	0.23		$	0.88		$	0.75

⁽¹⁾Charges incurred from prepayment of borrowings is included as Other noninterest expense on the income statement.

⁽²⁾Costs incurred are included as professional fees, compensation and employee benefits and other noninterest expense on the income statement.

⁽³⁾ Branch closure costs include loss on disposal of closed branch fixed assets in noninterest income and other costs

associated with the closure and are included in the respective categories within noninterest expenses.

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, 2016, the Company had total assets of $1.14 billion, a decrease of $43.3 million from the amount at June 30, 2015. Total investment securities decreased $10.7 million, while loans and leases receivable, net, decreased $22.6 million. Total liabilities decreased $49.7 million due to a decrease in deposits of $52.7 million and partially offset by an increase in advances by borrowers for taxes and insurance of $3.4 million. Stockholders' equity increased $6.4 million since June 30, 2015, due to improvements in accumulated other comprehensive loss and an increase in retained earnings. In July 2015, the Bank sold its branch office in Pierre, SD with a book value of $21.4 million in deposits on July 24, 2015, for a $2.8 million net pre-tax gain. In addition, loans receivable of $24.2 million and other assets, which included cash on hand, property and equipment, and accrued interest receivable, totaling $503,000, were included in the transaction. The resulting impact attributed to this transaction was a net decrease in assets of $21.4 million.

The decrease in loans and leases receivable, net, which excludes loans in process and deferred fees, was $22.6 million due in large part to seasonal reductions in the utilization of commercial and agricultural lines of credit. In addition, $24.2 million in loan balances were sold as part of the sale of a Bank branch in the first quarter of fiscal 2016. Commercial real estate increased $28.5 million, while agricultural and commercial business loans decreased by $38.4 million and $12.7 million, respectively.

The investment securities, which includes available for sale and held to maturity securities, decreased by $10.7 million due to the sale of available for sale investment securities, principal payments, maturities, and net of purchased investment securities during the first nine months of fiscal 2016. The book value of investment securities sold, called or matured were $19.6 million, while repayments of principal balances of investments securities totaled $18.5 million. These reductions in the balance were partially offset by the purchase of investment securities of $26.8 million. The remaining change in investment securities was the net premium amortization of investment securities and change in market value which decreased the recorded balance by $708,000 for the first nine months of fiscal 2016. The Company classifies its investment securities as available for sale and held to maturity. Investment securities available for sale decreased by $10.5 million for the nine months ended March 31, 2016, and investment securities held to maturity decreased by $238,000.

Loans held for sale decreased $6.5 million, to $2.6 million at March 31, 2016. The amount held was dependent on the timing of the sales to secondary markets versus the current loan origination activity. New home financing remains sound in the local marketplace.

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

Deposits decreased $52.7 million, to $910.6 million at March 31, 2016, due to a $41.5 million decrease in public fund deposits and a decrease in out-of-market certificates of deposits of $32.1 million. These were partially offset by an increase of $21.0 million from in-market, non-public fund customer deposits. Advances from the FHLB and other borrowings decreased $191,000, to $65.4 million at March 31, 2016 as compared to June 30, 2015, due to a reduction of overnight funding.

Stockholders' equity increased $6.4 million at March 31, 2016 when compared to June 30, 2015. Accumulated other comprehensive loss, net of related deferred tax effect, reflected a decrease of unrealized losses of $1.1 million since June 30, 2015 and improved stockholders' equity. Retained earnings increased by $5.0 million due to net income of $7.4 million and 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.



	Three Months Ended March 31,
	2016						2015
	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⁾	$	903,698	$	10,131	4.51	%	$	861,736	$	9,197	4.33	%
Investment securities⁽²⁾⁽³⁾	170,839		780		1.84		233,962		830		1.44
Correspondent bank stock	4,348		27		2.50		5,143		33		2.60
Total interest-earning assets	1,078,885		$	10,938	4.08	%	1,100,841		$	10,060	3.71	%
Noninterest-earning assets	74,301						78,432
Total assets	$	1,153,186					$	1,179,273
Interest-bearing liabilities:
Deposits:
Checking and money market	$	415,108	$	296	0.29	%	$	391,645	$	225	0.23	%
Savings	115,298		59		0.21		99,196		49		0.20
Certificates of deposit	249,763		592		0.95		294,573		572		0.79
Total interest-bearing deposits	780,169		947		0.49		785,414		846		0.44
FHLB advances and other borrowings	70,406		110		0.63		90,707		79		0.35
Subordinated debentures payable to trusts	24,661		279		4.55		24,837		286		4.67
Total interest-bearing liabilities	$	875,236	$	1,336	0.61	%	$	900,958	$	1,211	0.55	%
Noninterest-bearing deposits	136,876						141,370
Other liabilities	32,125						34,495
Total liabilities	1,044,237						1,076,823
Equity	108,949						102,450
Total liabilities and equity	$	1,153,186					$	1,179,273
Net interest income; interest rate spread⁽⁴⁾			$	9,602	3.47	%			$	8,849	3.16	%
Net interest margin⁽⁴⁾⁽⁵⁾					3.58	%					3.26	%
Net interest margin, TE⁽⁶⁾					3.64	%					3.33	%

_____________________________________


⁽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, 2016 and 2015 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.



	Nine Months Ended March 31,
	2016						2015
	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)	$	911,184	$	30,194	4.41	%	$	842,062	$	28,549	4.52	%
Investment securities(2)(3)	174,523		2,275		1.73		309,539		2,984		1.28
Correspondent bank stock	4,547		85		2.49		6,766		144		2.84
Total interest-earning assets	1,090,254		$	32,554	3.97	%	1,158,367		$	31,677	3.64	%
Noninterest-earning assets	75,612						76,064
Total assets	$	1,165,866					$	1,234,431
Interest-bearing liabilities:
Deposits:
Checking and money market	$	394,784	$	775	0.26	%	$	395,476	$	701	0.24	%
Savings	107,045		164		0.20		118,616		180		0.20
Certificates of deposit	277,135		1,781		0.86		280,474		1,780		0.85
Total interest-bearing deposits	778,964		2,720		0.46		794,566		2,661		0.45
FHLB advances and other borrowings	75,542		294		0.52		131,175		1,632		1.66
Subordinated debentures payable to trusts	24,658		845		4.56		24,837		885		4.75
Total interest-bearing liabilities	$	879,164	$	3,859	0.58	%	$	950,578	$	5,178	0.73	%
Noninterest-bearing deposits	147,821						148,988
Other liabilities	31,340						32,262
Total liabilities	1,058,325						1,131,828
Equity	107,541						102,603
Total liabilities and equity	$	1,165,866					$	1,234,431
Net interest income; interest rate spread(4)			$	28,695	3.39	%			$	26,499	2.91	%
Net interest margin(4)(5)					3.50	%					3.05	%
Net interest margin, TE(6)					3.56	%					3.11	%

_____________________________________


⁽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, 2016 and 2015 have been annualized.


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

⁽⁶⁾

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,
	2016			2015			2016			2015
	(Dollars in Thousands)
Net interest income	$	9,602		$	8,849		$	28,695		$	26,499
Taxable equivalent adjustment	162			183			504			561
Adjusted net interest income	9,764			9,032			$	29,199		$	27,060
Average interest-earning assets	1,078,885			1,100,841			1,090,254			1,158,367
Net interest margin, TE	3.64		%	3.33		%	3.56		%	3.11		%

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,
	2016 vs 2015									2016 vs 2015
	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⁾	$	493		$	441		$	934		$	2,386		$	(741	)	$	1,645
Investment securities⁽²⁾	(223		)	173			(50		)	(1,299		)	590			(709		)
Correspondent bank stock	(5		)	(1		)	(6		)	(47		)	(12		)	(59		)
Total interest-earning assets	$	265		$	613		$	878		$	1,040		$	(163	)	$	877
Interest-bearing liabilities:
Deposits:
Checking and money market	$	12		$	59		$	71		$	(1	)	$	75		$	74
Savings	7			3			10			(16		)	—			(16		)
Certificates of deposit	(84		)	104			20			(20		)	21			1
Total interest-bearing deposits	(65		)	166			101			(37		)	96			59
FHLB advances and other borrowings	(18		)	49			31			(692		)	(646		)	(1,338		)
Subordinated debentures payable to trusts	(2		)	(5		)	(7		)	(6		)	(34		)	(40		)
Total interest-bearing liabilities	$	(85	)	$	210		$	125		$	(735	)	$	(584	)	$	(1,319	)

Net interest income increase	$	350		$	403		$	753		$	1,775		$	421		$	2,196

_____________________________________


⁽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.

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.

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

Investment securities classified as held to maturity are those debt securities that management has the positive intent and ability to hold to maturity, and are reported at amortized cost, adjusted for amortization of premiums and accretion of discounts, using a method that approximates level yield. Investment securities classified as available for sale are those debt securities that the Company intends to hold for an indefinite period of time, but may not hold necessarily to maturity, and all equity securities. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Investment securities available for sale are carried at fair value and unrealized gains or losses are reported as increases or decreases in other comprehensive income net of the related deferred tax effect. Sales of securities available for sale are recorded on a trade date basis.

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

Investment Securities 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 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 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, 2016, the Company does not have other-than-temporarily impaired 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.

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

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, and consumer overdraft and reserves. 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.

As part of the Company's ongoing risk management practices, management attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately. In a situation where an economic concession has been granted to a borrower that is experiencing financial difficulty, the Company identifies and reports that loan as a troubled debt restructuring ("TDR"). Management considers regulatory guidelines when restructuring loans to ensure that prudent lending practices are followed. As such, qualification criteria and payment terms consider the borrower's current and prospective ability to comply with the modified terms of the loan. Additionally, the Company structures loan modifications with the intent of strengthening repayment prospects.

The Company considers whether a borrower is experiencing financial difficulties, as well as whether a concession has been granted to a borrower determined to be troubled, when determining whether a modification meets the criteria of being a TDR under ASC 310-40. For such purposes, evidence which may indicate that a borrower is troubled includes, among other factors, the borrower's default on debt, the borrower's declaration of bankruptcy or preparation for the declaration of bankruptcy, the borrower's forecast that entity-specific cash flows will be insufficient to service the related debt, or the

borrower's inability to obtain funds from sources other than existing creditors at an effective interest rate equal to the current market interest rate for similar debt for a non-troubled debtor. If a borrower is determined to be troubled based on such factors or similar evidence, a concession will be deemed to have been granted if a modification of the terms of the debt occurred that management would not otherwise consider. Such concessions may include, among other modifications, a reduction of the stated interest for the remaining original life of the debt, an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk, a reduction of accrued interest, or a reduction of the face amount or maturity amount of the debt. Quarterly, TDRs are reviewed and classified as compliant or non-compliant. Non-compliant TDRs are restructured contracts that have not complied with the restructured terms of the agreement or whereby the Company has begun its collection process. The Company considers payments or maturities of loans that are greater than 90 days past due as being non-compliant with the terms of the restructured agreement.

A modification of loan terms that management would generally not consider to be a TDR could be a temporary extension of maturity to allow a borrower to complete an asset sale whereby the proceeds of such transaction are to be paid to satisfy the outstanding debt. Additionally, a modification that extends the term of a loan, but does not involve reduction of principal or accrued interest, in which the interest rate is adjusted to reflect current market rates for similarly situated borrowers is not considered a TDR. Nevertheless, each assessment will take into account any modified terms and will be comprehensive to ensure appropriate impairment assessment.

Loans that are reported as 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.

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 and lease 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.

The time period considered for historical loss experience is a rolling 36 month period.

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


•	Periodic inspections of the loan collateral;


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


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

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

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

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

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

At each balance sheet date, the MSRs are analyzed for impairment, which occurs when the fair value of the MSRs is lower than the amortized book value. A portion of the Company's MSRs in the portfolio were 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 an 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 $407,000 has been recorded for temporary impairment at March 31, 2016.

Self-Insurance. The Company has a self-insured healthcare plan and a self-insured dental plan for its employees up to certain limits. To mitigate a portion of the risks involved with a self-insurance health plan, the Company has a stop-loss insurance policy through a commercial insurance carrier for coverage in excess of $75,000 per individual occurrence. The estimate of self-insurance liability for each plan 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 $2.7 million during the fiscal year to $15.9 million at March 31, 2016. The ratio of nonperforming assets to total assets, which is one indicator of credit risk exposure, increased to 1.40% at March 31, 2016, from 1.12% at June 30, 2015.

Nonaccruing loans and leases increased to $15.8 million at March 31, 2016 compared to $13.1 million at June 30, 2015. Included in nonaccruing loans and leases at March 31, 2016 was one consumer residential relationship of $107,000, four commercial business relationships totaling $1.3 million, five commercial real estate relationships totaling $5.7 million, seven agricultura

l real estate relationships totaling $3.2 million, one agricultural business relationship of $5.5 million, and eight consumer relationships totaling $134,000.

There were $15,000 of accruing loans and leases delinquent more than 90 days at March 31, 2016 compared to none at June 30, 2015.

The Company's nonperforming loans and leases, which represent nonaccrual loans and leases plus those past due over 90 days and still accruing were $15.8 million, an increase of $2.7 million from the levels at June 30, 2015. Dairy related loans included in the nonperforming loans at March 31, 2016 were less than one-third of the total nonperforming loans, which is less when compared to June 30, 2015. 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, 2016, the Company had $99,000 of foreclosed assets which was consumer related and primarily comprised of residential real estate collateral.

At March 31, 2016, the Company had designated $27.0 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 $2.7 million of unused lines of credit for those borrowers that have classified assets. At March 31, 2016, the Company had $29.6 million in commercial real estate and commercial business loans purchased, of which $5.2 million was classified as substandard. 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 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, 2016 will be adequate in the future.

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

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



	March 31, 2016			June 30, 2015
	(Dollars in Thousands)
Nonaccruing loans and leases:
One- to four-family	$	107		$	112
Commercial business	1,277			2,398
Commercial real estate	481			359
Multi-family real estate	5,207			—
Agricultural real estate	3,153			4,482
Agricultural business	5,461			5,474
Consumer direct	26			45
Consumer home equity	108			237
Total nonaccruing loans and leases	15,820			13,107
Accruing loans and leases delinquent more than 90 days:
One- to four-family	15			—
Total accruing loans and leases delinquent more than 90 days	15			—
Foreclosed assets:
One- to four-family	95			111
Consumer direct	4			—
Consumer home equity	—			46
Total foreclosed assets⁽¹⁾	99			157
Total nonperforming assets⁽²⁾	$	15,934		$	13,264
Ratio of nonperforming assets to total assets⁽³⁾	1.40		%	1.12		%
Ratio of nonperforming loans and leases to total loans and leases⁽⁴⁾	1.77		%	1.43		%
Accruing troubled debt restructures	$	795		$	2,767

_____________________________________


⁽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 consolidated assets of the Company.


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

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,
	2016			2015
	(Dollars in Thousands)
Balance at beginning of period	$	11,230		$	10,502
Charge-offs:
Commercial business	—			(32		)
Agricultural business	(96		)	(462		)
Consumer direct	(4		)	(25		)
Consumer home equity	(249		)	(159		)
Consumer OD & reserve	(92		)	(164		)
Total charge-offs	(441		)	(842		)
Recoveries:
Commercial business	64			45
Equipment finance leases	1			6
Commercial real estate	—			4
Agricultural real estate	—			2
Agricultural business	125			—
Consumer direct	6			12
Consumer home equity	35			25
Consumer OD & reserve	33			56
Consumer indirect	7			1
Total recoveries	271			151
Net (charge-offs)	(170		)	(691		)
Additions charged to operations	532			1,201
Allowance related to assets acquired (sold), net	—			—
Balance at end of period	$	11,592		$	11,012
Ratio of net charge-offs during the period to average loans and leases outstanding during the period ⁽²⁾	0.02		%	0.11		%
Ratio of allowance for loan and lease losses to total loans and leases at end of period	1.30		%	1.26		%
Ratio of allowance for loan and lease losses to nonperforming loans and leases at end of period⁽¹⁾	73.2		%	84.4		%

_____________________________________


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


⁽²⁾	Percentages for the nine months ended March 31, 2016 and 2015 have been annualized.

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, 2016				June 30, 2015
	(Dollars in Thousands)
Residential	$	273	$	25	$	269	$	32
Commercial business	726		3		788		7
Commercial real estate	5,180		213		4,757		4
Agricultural	3,720		362		4,037		—
Consumer	975		115		1,100		236
Total	$	10,874	$	718	$	10,951	$	279



	Number of Loan Customers	Loan Balance		Impaired Loan Valuation Allowance		Number of Loan Customers	Loan Balance		Impaired Loan Valuation Allowance
Loan Type	March 31, 2016					June 30, 2015
	(Dollars in Thousands)
Residential	3	$	157	$	25	2	$	148	$	32
Commercial business	4	1,277		3		8	2,731		7
Commercial real estate	6	5,832		213		5	712		4
Agricultural	10	11,625		362		15	14,009		—
Consumer	33	902		115		44	1,192		236
Total	56	$	19,793	$	718	74	$	18,792	$	279

The allowance for loan and lease losses was $11.6 million at March 31, 2016, as compared to $11.2 million at June 30, 2015. The general valuation allowance decreased by $77,000 due to changes in historical loss data, portfolio performance attributes and loan balances for the nine months ended March 31, 2016 when compared to the beginning of the fiscal year. The specific valuation allowance increased by $439,000 to $718,000 and primarily was impacted by an increase in an agriculture business relationship and two commercial real estate relationships. The ratio of the allowance for loan and lease losses to total loans and leases was 1.30% at March 31, 2016, compared to 1.23% at June 30, 2015. 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, 2016, the Company also had an allowance for credit losses on off-balance sheet credit exposures of $93,000. 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 other liabilities in the Consolidated Statements of Financial Condition.

Losses on mortgage loans previously sold are recorded when the Bank indemnifies or repurchases mortgage loans previously sold. The representations and warranties in our loan sale agreements provide that we repurchase or indemnify the investors for losses or costs on loans we sell under certain limited conditions. At March 31, 2016, the Company recorded a $43,000 recourse liability for mortgage loans sold, which is an increase of $1,000 since June 30, 2015.

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, 2015, 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, 2016 and March 31, 2015

General. The Company's net income was $2.1 million or $0.29 for basic and diluted earnings per common share for the quarter ended March 31, 2016, a $1.4 million increase compared to of $719,000 or $0.10 for basic and diluted earnings per common share for the quarter ended March 31, 2015. The third quarter of fiscal 2016 resulted in a return on average equity (i.e., net income divided by average equity) of 7.64%, compared to 2.85% for the same quarter of the prior year, while the return on average assets (i.e., net income divided by average assets) was 0.72% compared to 0.25%, respectively. As discussed in more detail below, the increases were due primarily to the net loss on the sale on securities of $1.1 million and the loss on the disposition of closed-branch fixed assets recorded in the prior fiscal year's quarter; no entries related to these types of transactions were recorded in the current quarter of fiscal 2016. Noninterest expense decreased by $910,000 in the third quarter of fiscal 2016 when compared to the same period a year ago due primarily to reductions in compensation and employee benefits expense and other costs which have been influenced as the Company prepares for the proposed merger. The overall net increase in pre-tax income resulted in additional provision for income taxes of $880,000 for the current quarter when compared to the same quarter one year earlier.

Interest, Dividend and Loan Fee Income. Interest, dividend and loan fee income was $10.9 million for the quarter ended March 31, 2016, as compared to $10.1 million for the same quarter of the prior year, an increase of $878,000 or 8.7%. Interest earned on loans and leases receivable totaled $10.1 million for the current quarter which is an increase of $934,000 when compared to the same quarter of the prior fiscal year. The average balance of loans and leases receivable was $903.7 million for the quarter ended March 31, 2016, an increase of 4.9%, but the average yield increased by 18 basis points to 4.51% in the quarter-over-quarter comparison. Interest earned on investment securities and interest-earning deposits decreased by $56,000, to $807,000 for the current quarter compared to $863,000 for the quarter ended March 31, 2015. The average yield on investment securities and interest-earning deposits increased by 39 basis points to 1.85%, but the average balance decreased by $63.9 million to $175.2 million for the quarter ended March 31, 2016. Overall, the average balance of total interest-earning assets decreased by 2.0%, however the change in average balance mix from investments to loans and leases receivable resulted in an increase in total interest and dividend revenue of $265,000. The average yield on interest-earning assets increased by 37 basis points due to the shift in the mix to the higher yielding loan and lease receivable balances and resulted in an increase to interest and dividend revenue of $613,000 attributable to yields when compared to the same quarter a year earlier.

As mentioned above, the average yield on interest-earning assets increased, when compared to the same quarter a year earlier, primarily due to the higher percentage of loans and leases receivable in the interest-earning asset portfolio. Loans and leases receivable comprised 84% of the interest-earning assets for the quarter ended March 31, 2016 compared to 78% for the quarter one year earlier. Since the average rate earned on loans and leases receivable is higher than the other interest-earning assets, the overall yield on interest-earning assets increased. This balance sheet repositioning occurred in the second and third quarters of fiscal 2015 when the Company liquidated lower-yielding available-for-sale investment securities to reduce FHLB term borrowings and improve overall net interest margin.

Interest Expense. Interest expense was $1.3 million for the quarter ended March 31, 2016, as compared to $1.2 million for the same quarter of the prior year, an increase of $125,000 or 10.3%. Interest expense related to interest-bearing deposits increased by $101,000 due to a $166,000 increase from higher rates and partially offset by a $65,000 decrease attributable to lower average balances. The average rate on interest-bearing deposits increased by five basis points to 0.49% for the quarter ended March 31, 2016. Interest expense related to the FHLB advances and other borrowings increased by $31,000 due to an increase in the rate paid but offset by a reduction in average balances. The average rate paid increased by 28 basis points when comparing the current quarter to the same quarter a year ago and resulted in an interest expense increase of $49,000, while the average balance decrease of $20.3 million resulted in interest savings of $18,000.

Net Interest Income. Net interest income for the third quarter of fiscal 2016 was $9.6 million, an increase of $753,000 or 8.5%, compared to fiscal 2015, due primarily to an increase in loan and lease receivable interest income of $878,000, or an 8.7% increase in this comparison. The net interest margin was 3.58%, compared to 3.26% for the same quarter of the prior fiscal year, an increase of 32 basis points, while the Company's net interest margin on a fully taxable equivalent basis was 3.64% as compared to 3.33%. This increase in NIM, TE was strategically executed in the second fiscal quarter of 2015 when the Company prepaid $84.9 million of FHLB term advances and recognized a pre-tax charge of $4.1 million to reposition the balance sheet and improve net interest margins moving forward. The Company also sold available-for-sale investment securities that had lower yielding rates to fund these prepayments, which resulted in a loss on sale of securities in the third quarter of 2015. In the third quarter of fiscal 2016, fees received from prepayment of a loan amounted to $224,000 of income recognized and enhanced the net interest margin percentage by 8 basis points.The yield on interest-earning assets increased 37 basis points to 4.08% for the third quarter of fiscal 2016, while the average rate paid on interest-bearing liabilities increased 6 basis points to 0.61%. Average balances decreased when compared to the same quarter from the prior fiscal year for interest-earning assets and interest-bearing liabilities by 2.0% and 2.9%, respectively, due in part to the balance sheet restructuring mentioned earlier. 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 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 $162,000 for the quarter ended March 31, 2016, as compared to $282,000 in the prior year's quarter. Factors impacting the provision recorded during the third quarter were net charge-offs of $29,000, loan and lease receivable decreases of $13.3 million, and valuation allowance on impaired loans increases of $474,000 since December 31, 2015. In addition, nonperforming assets increased by $4.8 million while classified assets increased by $4.6 million during the recent quarter. In comparing the third quarter of fiscal 2016 to fiscal 2015, net charge-offs decreased to $29,000 from $203,000 in the prior year period and loan and lease balances increased by $16.5 million in the third quarter of fiscal 2015 compared to the reduction in loan balances exhibited during the current quarter. The increase in loan balances in the prior year's quarter and the greater amount of net charge offs was the primary factor in the larger provision in the prior year's quarter. In addition, the valuation allowance on impaired loans was $718,000 at March 31, 2016, compared to $521,000 a year ago and classified assets decreased by $3.2 million to $27.0 million. Nonperforming assets increased by $2.9 million to $15.9 million at March 31, 2016, when compared to March 31, 2015.

The allowance for losses on loans and leases at March 31, 2016, was $11.6 million. The allowance increased from the March 31, 2015 balance of $11.0 million due to an increase in the general allowance stemming from the increase in loan balances over the time between period-ends and adjusted for changes in environmental factors and loan loss history and specific valuation allowance recorded on impaired loans. The ratio of allowance for loan and lease losses to nonperforming loans and leases at March 31, 2016, was 73.2% compared to 84.4% at March 31, 2015. The allowance for loan and lease losses to total loans and leases ratio at March 31, 2016, was 1.30% compared to 1.26% at March 31, 2015. Management believes that the March 31, 2016, 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 $2.5 million for the quarter ended March 31, 2016, an increase of $447,000 as compared to the quarter ended March 31, 2015. For the third quarter of fiscal 2016, increases from the prior fiscal year's third quarter included a net change from prior year period loss on sale of investment securities of $1.1 million. Overall, this net increase was partially offset by a decrease in fees on deposits and loan servicing income of $165,000 and $419,000, respectively.

No sale of securities occurred in the current quarter and resulted in a net increase of $1.1 million change for the third quarter of fiscal 2016, as compared to a net loss recognized in the third quarter of fiscal 2015. For the quarter ended March 31, 2015, gross proceeds received totaled $118.7 million and resulted in a net loss of $1.1 million. The larger amount of sales in the previous year's quarter were due to the balance sheet repositioning where the lower interest earning investments were sold to help fund the extinguishment of debt.

Net gain on the sale of loans totaled $497,000, an increase of $40,000 for the three months ended March 31, 2016, as compared to the prior fiscal year's quarter. This increase was due to increased new home purchase and refinance originations

when compared to the same quarter a year ago. Origination activity for residential lending continues to remain sound due to the local economic climate and favorable interest rates relative to historical levels.

Fees on deposits decreased by $165,000 for the third quarter of fiscal 2016 when compared to the same period of the prior year primarily due to decreases in NSF/overdraft fees of $86,000 and point-of-sale income reductions of $64,000. NSF/overdraft fee decreases were attributed to reduced volume of transactions and point-of-sale income decreases were primarily due to reduced volume and interchange fees per transaction.

Loan servicing income decreased by $419,000 to a loss in noninterest income of $100,000 for the third quarter of fiscal 2016. A provision for a valuation allowance for mortgage servicing rights of $407,000 was recorded during the current quarter due in part to effects of lower market rates. No provision or valuation allowance was recorded in the same quarter a year ago. In the quarter-over-quarter comparison, servicing fee income decreased by $48,000 due to a decreasing servicing asset base and an overall lesser net servicing fee percentage which is based on investor mix and modified for delinquencies. Amortization expense, which is a component of net loan servicing income, was $356,000 for the third quarter of fiscal 2016 and represented a decrease in expense of $36,000 when compared to the third quarter of fiscal 2015 due to an assessment of prepayment speeds and lower asset base.

Noninterest Expense. Noninterest expense was $8.9 million for the quarter ended March 31, 2016, as compared to $9.8 million for the quarter ended March 31, 2015, a decrease of $910,000, or 9.3%. This decrease was due primarily to the reduction in compensation costs of $761,000 and complemented by a decrease in occupancy and equipment of $243,000 and a reduction in marketing and community investment costs of $222,000. This decrease was partially offset by an increase in professional fees of $197,000, when compared to the same period of the prior year. For the third quarter of fiscal 2016, there was approximately $350,000 of merger-related costs related to the pending merger with Great Western Bancorp, Inc. announced on November 30, 2015.

Compensation and employee benefits were $4.9 million for the three months ended March 31, 2016, a decrease of $761,000, or 13.4% when compared to the quarter ended March 31, 2015. Decreases in base salary compensation, retirement plan costs, and health insurance benefit expense were the primary components to the decrease in compensation expense as compared to the the third quarter of fiscal 2015 as they decreased by $652,000 and $103,000, respectively. Total base salaries and wages were impacted by a decrease in average FTEs of 12.4%, or about 36 FTE, to an average of 257 FTEs for the three months ended March 31, 2016 when compared to the same quarter of the prior fiscal year. Retirement plan costs were reduced due to the freezing of contributions to the pension plan effective July of 2015, whereas the prior year's quarter included service costs related to the pension plan. Partially offsetting the decreases was an increase in expense of $145,000 related to appreciated gains recognized for exercised stock appreciation rights. As the Company's stock price increased beyond the exercise price, rights which have been fully vested previously were used to acquire Company stock. This appreciation above the exercise price was expensed in the stock acquisition transaction for various transactions processed in the quarter.

Occupancy and equipment decreased by $243,000, or 18.3%, to $1.1 million for the quarter ended March 31, 2016 when compared to the same period of the prior year. This was due in part to a reduction in the number of branch offices, as well as reduced purchases of equipment and the minimizing of capital expenditure expenses during the period.

Marketing and community investment was $222,000 for the quarter ended March 31, 2016, which is a decrease of $222,000 when compared to the third quarter of fiscal 2015. This reduction was due to reduced branding activity and efforts as the Company prepared to finalize the upcoming merger.

Professional fees were $644,000 for the three months ended March 31, 2016, an increase of $197,000 when compared to the same quarter ended March 31, 2015. The increase was due primarily to merger-related activities.

Income tax expense. The Company's income tax expense for the quarter ended March 31, 2016, increased to $1.0 million compared to $123,000 for the same period of the prior fiscal year. The effective tax rates were 32.6% and 14.6% for the quarter ended March 31, 2016 and 2015, respectively. The previous year's tax rate is lower than the current year's rate due to a higher percentage of permanent tax items to pretax net income in the prior year where earnings were substantially less. This reduced the effective tax rate to a lower than anticipated amount in the previous year.

Comparison of the Nine Months Ended March 31, 2016 and March 31, 2015

General. The Company's net income was $7.4 million or $1.05 for basic and diluted earnings per common share for the nine months ended March 31, 2016, a $5.7 million increase in net income compared to $1.7 million or $0.24 for basic and diluted earnings per common share for the same period of the prior year. For the first nine months of fiscal 2016, the return on average equity (i.e., net income divided by average equity) was 9.16%, compared to 2.16% in the same period of the prior year, while the return on average assets (i.e., net income divided by average assets) was 0.84% and 0.18%, respectively. During the second and third quarters of fiscal 2015, the Company implemented a balance sheet repositioning initiative to improve net interest margins. In the second fiscal quarter of fiscal 2015, the prepayment of FHLB term advances resulted in a charge of $4.1 million to noninterest expense, or a $2.5 million impact net of tax. In addition, the Company recorded a gain on the sale of a bank branch which resulted in a net pre-tax gain of $2.8 million during the first quarter of fiscal 2016. Other significant changes when comparing to the first nine months of fiscal 2016 to the same period a year earlier included: interest expense on borrowings decreased by $1.3 million, the provision for loans and leases decreased by $669,000, compensation and employee benefits increased by $658,000, and professional fees increased by $716,000.

Interest, Dividend and Loan Fee Income. Interest, dividend and loan fee income was $32.6 million for the nine months ended March 31, 2016, as compared to $31.7 million for the same period of the prior year, an increase of $877,000. Interest earned on loans and leases receivable totaled $30.2 million for the first nine months of fiscal 2016 which is a net increase of $1.6 million, when compared to the same period of the prior fiscal year, due primarily to an increase in the average loan balances. The average balance of loans and leases receivable increased by $69.1 million, or 8.2% for the first nine months of fiscal 2016 as compared to the same period in fiscal 2015. This change was partially offset by a decrease in the average yield on interest earned from loans and leases receivable, which decreased by 11 basis points to 4.41% in the year-over-year comparison. The previous fiscal year's yield was aided by the net recovery of $569,000 of nonaccrued interest during the year, which improved the yield by approximately 6 basis points. The current fiscal year's yield was aided by the net recovery of $252,000 of nonaccrued interest through the first nine months, which improved the yield by approximately 3 basis points. Interest earned on investment securities and interest-earning deposits decreased by $768,000 in the year-over-year comparison to $2.4 million for the nine month period ended March 31, 2016, due primarily to the reduction in mortgage-backed securities balances from the sale of investment securities during the third quarter of fiscal 2015, which resulted in reduced average balances of investment securities for fiscal 2016. The average balance of investment securities and interest-earning deposits decreased by $137.2 million, or 43.4%, to $179.1 million for the nine month period ended March 31, 2016, while the average yield increased by 43 basis points to 1.75%. Overall, the average balance of total interest-earning assets decreased by 5.9% but resulted in an increase to revenue of $1.0 million in comparison due to the large increase in loans and leases receivable within the earning asset mix. This increase to revenue was offset by the net reduction of interest income of $163,000 as a result of the decrease in yield on loans and leases receivable. Even though the yield earned on loans and leases receivable decreased by 11 basis points, the average yield on interest-earning assets increased by 33 basis points due to the higher composition of loans and leases receivable within total earning assets.

Interest Expense. Interest expense was $3.9 million for the nine months ended March 31, 2016, as compared to $5.2 million for the same period of the prior year, a decrease of $1.3 million or 25.5%. Interest expense related to FHLB advances and other borrowings decreased by $1.3 million due to the reduction of term borrowings from the FHLB which were prepaid in the second fiscal quarter of fiscal 2015. The average balance decrease resulted in reduced interest expense of $692,000, while the average rate decrease of 114 basis points resulted in a reduction in interest expense of $646,000. Interest expense on subordinated debentures decreased by $40,000 for the nine months ended March 31, 2016, when compared to the prior fiscal year, due primarily to the maturity of two interest rate contracts totaling $5.0 million in notional value which paid a weighted average rate of 6.58% while they were effective. Interest expense related to interest-bearing deposits increased by $59,000. A $96,000 increase was the result of reduced rates paid and partially offset by a $37,000 decrease due to average balance changes. The average rate on interest-bearing deposits was 0.46% for the nine months ended March 31, 2016, as compared to 0.45% for the same period of the prior year. Noninterest-bearing deposits decreased by $1.2 million to an average balance of $147.8 million for the nine months ended March 31, 2016, as compared to the prior year.

Net Interest Income. Net interest income for fiscal 2016 was $28.7 million, an increase of $2.2 million, or 8.3%, compared to fiscal 2015, due to a decrease in interest expense of $1.3 million or 25.5% and an increase in interest income of $877,000. The net interest margin for the first nine months of fiscal 2016 was 3.50% as compared to 3.05% for the prior fiscal year, an increase of 45 basis points. The Company's net interest margin on a fully taxable equivalent basis was 3.56% for the nine months ended March 31, 2016, as compared to 3.11% for the prior fiscal year. The yield on interest-earning assets increased 33 basis points to 3.97% for fiscal 2016, while the average rate paid on interest-bearing liabilities decreased 15 basis points to 0.58% in fiscal 2016. In fiscal 2016, the average balances decreased from a year ago for interest-earning assets and interest-bearing liabilities by 5.9% and 7.5%, respectively. The average yield on interest-earning assets increased primarily due to the higher yielding mix of assets related to the increased average loan balances. 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 i

nterest 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 $669,000, to $532,000 for the nine months ended March 31, 2016, as compared to $1.2 million for the same period in the prior year. The decrease in the provision as compared to the same nine month period of the prior fiscal year, is primarily due to the change in net loan growth when comparing the current fiscal year's nine month period to the same period of the prior year. The allowance for loan and lease losses was impacted by an increase in the specific valuation on impaired loans, while a decrease in net charge-offs reduced the amount of provision needed in fiscal 2016. For the nine months ended March 31, 2016, total loans decreased by $22.2 million from June 30, 2015, compared to loan growth of $59.7 million for the same period of the prior fiscal year. Net charge-offs for the current year-to-date period totaled $170,000, compared to the $691,000 of net charge-offs in the prior year period. The specific valuation allowance on impaired loans in accordance with ASC 310 increased by $439,000 since June 30, 2015, while the allowance in accordance with ASC 450 decreased $77,000, which was primarily due to the reduction in total loan and lease balances. In the prior year, the specific valuation allowance increased $38,000 from the previous fiscal year end and the general valuation allowance increased $472,000. Total nonperforming loans increased by $2.7 million during the nine month period ended March 31, 2016, as compared to a $4.3 million decrease for the same period of the prior fiscal year.

The allowance for losses on loans and leases at March 31, 2016 was $11.6 million, which is higher than the amount reported at March 31, 2015 of $11.0 million. The ratio of allowance for loan and lease losses to total loans and leases was 1.30% at March 31, 2016, compared to 1.26% at March 31, 2015. The specific valuation allowance of $718,000, which is comprised primarily of agriculture and commercial real estate loans, increased by $197,000 from March 31, 2015. At March 31, 2016 the general valuation allowance of $10.9 million is an increase of $383,000 since March 31, 2015, and was evaluated primarily based upon a review of historical loss and environmental factors and applied to loan and lease balances outstanding, which increased since the year ago period. The balance of total loans and leases at March 31, 2016 was $892.2 million, and was an increase of $20.6 million from March 31, 2015. The ratio of allowance for loan and lease losses to nonperforming loans and leases at March 31, 2016, was 73.2% compared to 84.4% at March 31, 2015. The Bank's management believes that the March 31, 2016 recorded allowance for loan and lease losses is adequate to provide for probable losses on the related loans and leases, based on its evaluation of the collectability of loans and leases and prior loss experience.

Noninterest Income. Noninterest income was $12.3 million for the nine months ended March 31, 2016, as compared to $8.5 million for the same period of the prior fiscal year, which represents an increase of $3.8 million or 44.3%. This increase was due primarily to the bank branch sale which netted a pre-tax gain of $2.8 million in the first quarter of fiscal year 2016. In addition, net gain on sale of loans and net gain or loss on sale of investment securities increased by $464,000 and $1.1 million, respectively. The $461,000 charge for disposal of closed-branch fixed assets in the same period of the prior fiscal year also contributed to the overall increase in noninterest income for the current fiscal year. These increases were partially offset by the decreases in fees on deposits of $487,000 and net loan servicing income of $470,000.

Net gain on the sale of loans totaled $1.9 million, an increase of $464,000 for the nine months ended March 31, 2016, as compared to the same period of the prior fiscal year. This increase was due to increased home purchase and refinance originations when compared to the same nine month period a year ago. Origination activity for residential lending continues to remain sound due to the local economic climate and favorable interest rates relative to historical levels.

Net gain on the sale of securities totaled $20,000, for the nine months ended March 31, 2016 and is an increase of $1.1 million from the net loss reported for the same period of the prior fiscal year. The Company received proceeds of $12.5 million for net gains of $20,000 for the first nine months of fiscal 2016 as compared to proceeds received of $140.3 million for net losses of $1.1 million for the first nine months of fiscal 2015.

A retail branch office was closed in the first fiscal quarter of 2015 which resulted in a loss on disposal of closed-branch fixed assets of $461,000, which reduced other income. The closure was made in the continued efforts to increase efficiencies through reduced operating expenses.

Loan servicing income, net, decreased by $470,000 to $564,000 for the first nine months of fiscal 2016. A provision for a valuation allowance for mortgage servicing rights of $407,000 was recorded due in part to effects of lower market rates.

Amortization expense, which is a component of net loan servicing income, decreased by $63,000 while servicing fees received decreased by $126,000. Servicing fees decreased primarily due to a decreasing servicing asset base.

Fees on deposits decreased by $487,000 for the first nine months of fiscal 2016 when compared to the same period of the prior year primarily due to decreases in NSF/overdraft fees, point-of-sale income and net service charge fees of $253,000, $141,000 and $85,000, respectively. NSF/overdraft fee decreases were attributed to reduced transactions and point-of-sale incentive income decreases were primarily due to reduced interchange fees per transaction.

Noninterest Expense. Noninterest expense was $29.3 million for the nine months ended March 31, 2016, compared to $32.0 million for the nine months ended March 31, 2015, a decrease of $2.7 million, or 8.4%. During the second quarter of fiscal 2015, a total of $84.9 million in long-term FHLB advances were prepaid, which resulted in a one-time pre-tax charge to other noninterest expense of $4.1 million. When excluding this charge, noninterest expense increased $2.3 million over the same nine month period of the prior fiscal year. The primary drivers of the increase in expense were compensation and employee benefits increases of $658,000, professional fees of $716,000 and other noninterest expense of $471,000. In addition, check and data processing increased by $205,000. Partially offsetting these increases were a decrease in marketing and community investment of $351,000 and a decrease in equipment and occupancy costs of $165,000, respectively.

Compensation and employee benefits were $17.1 million for the nine months ended March 31, 2016, an increase of $658,000, or 4.0% when compared to the same period ended March 31, 2015. Increases in variable pay, stock compensation related to stock appreciation rights and health insurance benefit expense were the primary components to the increase in compensation expense as compared to the first nine months of fiscal 2015 as they increased by $306,000, $167,000 and $409,000, respectively. Compared to the prior year period, salaries and wages and retirement plan costs decreased by $68,000 and $116,000, respectively. Variable pay was higher than the prior year period due to increased mortgage commissions of $146,000 and other incentive pay of $175,000. Mortgage commissions increased due to increased mortgages closed during the first nine months of fiscal 2016 when compared to the same period of fiscal 2015. Incentive pay increased due to improved outcomes during the current fiscal year. Stock compensation expense increased by $167,000 due to the appreciation and exercise of fully vested stock appreciation rights. Health and insurance benefit increases resulted from specific claim incidents in addition to higher costs due to utilization. Average FTEs for the first nine months of fiscal 2016 totaled 281, which is six FTEs lower than the average FTEs for the same period a year earlier, which contributed to reduced salary and wage expense from the prior fiscal year. The pension plan freeze for contributions starting in July of 2015 resulted in a decrease in expense for the current fiscal year to date period.

Professional fees were $2.2 million for the nine months ended March 31, 2016, an increase of $716,000 when compared to the same period ended March 31, 2015. The increase was due primarily to merger-related costs incurred as a result of the pending merger with Great Western Bancorp, Inc. announced on November 30, 2015.

Other noninterest expense increased by $471,000 for the first nine months of fiscal 2016 when compared to the same period of the prior year primarily due to increased loan servicing costs, website expense, repossessed assets and postage. Loan servicing costs increased by $171,000 primarily related to increased mortgage volumes. Website expense was $90,000 higher as a result of the Company's investment into the improvement of its mobile banking platform. Repossessed and foreclosed assets cost increased by $83,000 over the same period of the prior fiscal year. There was also $49,000 in one-time cost in postage and materials incurred for customer communication of the pending merger agreement.

Marketing and community investment costs decreased by $351,000 to $841,000 for nine months ended March 31, 2016 due to reduced marketing activity.

Income tax expense. The Company's income tax expense for the nine months ended March 31, 2016 increased by $3.6 million to $3.8 million when compared to the same period of the prior fiscal year. The effective tax rates were 33.8% and 11.0% for the nine months ended March 31, 2016 and 2015, respectively. The previous year's tax rate is lower than the current year's rate due to a higher percentage of permanent tax items to pretax net income in the prior year where earnings were substantially less. This reduced the effective tax rate to a lower than anticipated amount in the previous year.

Liquidity and Capital Resources

The Company's liquidity is comprised of three primary classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash used in financing activities of $49.4 million was partially offset by net cash provided by operating and investing activities for the nine months ended March 31, 2016 of $15.6 million and $31.6 million, respectively. For the same period ended March 31, 2015, net cash used in financing activities of $139.9 million was partially offset by cash provided by operating and investing activities of $9.0 million and $126.6 million, respectively. The results were a decrease in cash and cash equivalents of $2.2 million for the nine months ended March 31, 2016 compared to a decrease in cash and cash equivalents of $4.3 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 investment 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, 2016, the Bank decreased its borrowings with the FHLB and other borrowings by $191,000.

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. At March 31, 2016, 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;


•	$52.8 million of available credit from the Federal Reserve Bank; and


•	$260.1 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, 2016. 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 4.00% 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, 2016, the Bank had $41.9 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, 2016, the Bank had outstanding commitments to originate and purchase mortgage and commercial loans of $20.8 million and to sell mortgage loans of $2.6 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, 2016, the Bank had no outstanding commitments to purchase investment securities 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, 2016. The line of credit was renewed on October 1, 2015 and is available through October 1, 2016. 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 capital.

The Company is subject to various regulatory capital requirements both at the Holding Company and at the Bank level administered by the Federal Reserve and the South Dakota Division of Banking, respectively. 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. At March 31, 2016, the Bank met all current capital requirements.

In July 2013, the Federal Reserve and other regulatory agencies issued final rules establishing a new comprehensive capital framework for U.S. banking organizations that would implement the Basel III capital framework and certain provisions of the Dodd-Frank Act. Under the final rules, compliance was required beginning January 1, 2015 for the Holding Company and Home Federal Bank, and included new minimum capital ratio requirements and modified regulatory capital adjustments and deductions. In addition, a transition period of the final rules is included for the capital conservation buffer which will become effective beginning January 1, 2016 through January 1, 2019, and will increase each risk-weighted asset minimum ratio requirements by 2.50% during the four year transition in equal increments annually. We believe we will continue to exceed all estimated well-capitalized regulatory requirements under these new rules on a fully phased-in basis. The Bank had a tier I capital ratio of 10.94% at March 31, 2016, which was higher than both the adequate-capitalized minimum ratio required of 4.00% and the well-capitalized minimum ratio requirement of 5.00%. The minimum total risk-based capital ratio requirement for well-capitalized institutions is 10.00% of risk-weighted assets. The Bank had a total risk-based capital ratio of 13.90% at March 31, 2016. For further details on capital and capital ratios for the Bank and the Company, see Note 2 of “Notes to Consolidated Financial Statements” of this Form 10-Q for additional information.

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, 2016, the total notional amount of interest rate swap contracts was $38.4 million with a fair value net loss of $1.1 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 14 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 a recourse liability on the repurchase of mortgage loans previously sold. Off-balance sheet arrangements 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 2015, under Note 20 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 13 in the "Notes to Consolidated Financial Statements" of this Form 10-Q.

Recent Accounting Pronouncements

In June 2014, FASB issued ASU 2014-12 “Compensation-Stock Compensation” (ASC Topic 718), regarding when the terms of an award provide that a performance target could be achieved after the requisite service period. The guidance is effective for fiscal years beginning after December 15, 2015, and the interim periods within those fiscal years. Early adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The Company anticipates to adopt this update in the first quarter of fiscal 2017 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 August 2014, FASB issued ASU 2014-13 “Consolidation” (ASC Topic 810), measuring the financial assets and the financial liabilities of a consolidated collateralized financing entity. For entities that consolidate a collateralized financing entity within the scope of this update, an option to elect to measure the financial assets and the financial liabilities of that collateralized financing entity using either the measurement alternative included in this Update or Topic 820 on fair value measurement is provided. The guidance is effective for fiscal years beginning after December 15, 2015, and the interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period. The Company anticipates to adopt this update in the first quarter of fiscal 2017 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 August 2014, FASB issued ASU 2014-14 “Receivables-Troubled Debt Restructurings by Creditors” (ASC Subtopic 310-40), require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The guidance is effective for fiscal years beginning after December 15, 2014, and the interim periods within those fiscal years. An entity should adopt the amendments in this Update using either a prospective transition method or a modified retrospective transition method. Early adoption, including adoption in an interim period, is permitted if the entity already has adopted Update 2014-04. The Company adopted this update in the first quarter of fiscal 2016 and did not have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

In September 2014, FASB issued ASU 2014-15 “Presentation of Financial Statements-Going Concern” (ASC Topic 205-40), disclosing the uncertainties about an Entity's ability to continue as a going concern. There may be conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. Financial statements should be presented using the going concern basis of accounting, but the amendment in this update should be followed to determine whether to disclose information about the relevant conditions and events. The guidance is effective for fiscal years ending after December 15, 2016, and for annual period and interim periods thereafter. Early application is permitted. The Company anticipates to apply this update in the annual report for fiscal 2017 and does not expect the application to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

In January 2015, FASB issued ASU 2015-01 “Income Statement-Extraordinary and Unusual Items” (Subtopic 225-20), eliminating the presentation of extraordinary items from income statement presentation. While this update removes the presentation and the need to evaluate the existence of extraordinary items for presentation on the income statement, presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and required to be reported within the document accordingly. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted provided that the guideline is applied from the beginning of the fiscal year of adoption. The Company adopted this update in the first quarter of fiscal 2016 and did not have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

In January 2015, FASB issued ASU 2015-03 “Interest-Imputation of Interest” (Subtopic 835-30), simplifying the presentation of debt issuance costs. This update is designed to simplify reporting on debt issuance costs incurred and is requiring the presentation of the unamortized debt issue costs to be a direct deduction from the carrying amount of the debt, rather than a separate asset which provides no future economic benefit. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted for financial statements that have not been previously issued. Entities will apply the new guidance on a retrospective basis, wherein the balance sheet of

each period represented should be adjusted accordingly and applicable disclosures for a change in accounting principle will be needed. The Company adopted this update in the first quarter of fiscal 2016 and did not have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

In January 2016, FASB issued ASU 2016-01 “Financial Instruments-Overall” (ASC Topic 825-10), amending certain recognition guidelines pertaining to entities who hold financial assets or owe financial liabilities. The amendments supercede the guidance in the treatment and reporting of equity securities, with the fair value changes reported through net income. The guidance is effective for fiscal years beginning after December 15, 2017, including the interim periods within those periods. Early application is not permitted. The Company anticipates to apply this update in the first quarter for fiscal 2019 and does not expect the application to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

In February 2016, FASB issued ASU 2016-02 “Leases” (ASC Topic 842), disclosing the treatment and recognition of lease accounting for the lessee and lessor, whereby the lease creates a right-of-use asset for the lessee and a related lease liability for the lessee. Leases shorter than 12 months are not required in the application of this update. The guidance is effective for fiscal years beginning after December 15, 2018, including the interim periods within those periods. Early application is permitted. The Company anticipates that this will have a material impact to the Company's consolidated financial condition and results of operations and will further determine the impact on the related financial statements.

In March 2016, FASB issued ASU 2016-04 “Liabilities-Extinguishments of Liabilities” (Subtopic 405-20), providing guidance for consistency in determining and recording breakage costs related to prepaid store-valued products, such as vendor rewards programs where points are earned and used for purchasing goods. The guidance is effective for fiscal years beginning after December 15, 2017, including the interim periods within those periods. Early application is permitted. The Company anticipates to apply this update in the first quarter for fiscal 2019 and does not expect the application to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

In March 2016, FASB issued ASU 2016-05 “Derivatives and Hedging” (Topic 815), providing guidance for which a change in counterparties to a hedging arrangement. This guidance provides that a change in counterparty itself does not de-designate the hedging instrument. The guidance is effective for fiscal years beginning after December 15, 2016, including the interim periods within those periods. Early application is permitted. The Company anticipates to apply this update in the first quarter for fiscal 2018 and does not expect the application to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

In March 2016, FASB issued ASU 2016-09 “Compensation-Stock Compensation” (Topic 718), providing updated accounting guidance and rules in recording share-based payment transactions, including income tax consequences to the Company's employees. The guidance is effective for fiscal years beginning after December 15, 2016, including the interim periods within those periods. Early application is permitted. The Company anticipates to apply this update in the first quarter for fiscal 2018 and does not expect the application to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

Since January 1, 2016, the FASB issued ASU No. 2016-01 through 2016-10. Those not specifically detailed above were determined to not be applicable or have any impact on the Company's financial statements.

Subsequent Event

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk Management

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

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

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

As set forth below, the volatility of a rate change, the change in asset or liability mix of the Company or other factors may produce a decrease in net interest margin in an upward moving rate environment even as the net portfolio value (“NPV”) estimate indicates an increase in net value. The inverse situation may also occur. One approach used by the Company to quantify interest rate risk is an NPV analysis. This analysis calculates the difference between the present value of the liabilities and the present value of expected cash flows from assets and off-balance sheet contracts. The following tables set forth, at March 31, 2016 and June 30, 2015, 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 2015 or that the Company's primary market risk exposures and how those exposures were managed during the nine months ended March 31, 2016 changed significantly when compared to June 30, 2015.

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, 2016
			Estimated Increase (Decrease) in NPV
Change in Interest Rates	Estimated NPV Amount		Amount			Percent
	(Dollars in Thousands)
Basis Points
+300	$	235,522	$	32,204		16	%
+200	228,458		25,140			12
+100	218,080		14,762			7
—	203,318		—			—
-100	163,458		(39,860		)	(20	)



June 30, 2015
			Estimated Increase (Decrease) in NPV
Change in Interest Rates	Estimated NPV Amount		Amount			Percent
	(Dollars in Thousands)
Basis Points
+300	$	245,413	$	19,823		9	%
+200	242,176		16,586			7
+100	235,938		10,348			5
—	225,590		—			—
-100	188,195		(37,395		)	(17	)

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.

The Bank utilizes a third party to perform interest rate risk analysis, which utilizes a modeling program to measure the

Bank’s exposure to potential interest rate changes. Measuring and managing interest rate risk is a dynamic process that

management performs continually with the objective of maintaining a stable net interest margin. This process relies on the

simulation of net interest income over multiple interest rate scenarios or “shocks.” Management considers net interest income

simulation as the best method to evaluate shorter-term interest rate risk (12-24 month time frame). The modeled scenarios begin

with a base case in which rates are unchanged and include parallel and nonparallel rate shocks. The results of these shocks are

measured in two forms: first, the impact on the net interest margin and earnings over one and two year timeframes; and second,

the impact on the market value of equity otherwise known as NPV.

The following table shows the anticipated effect on net interest income from instantaneous parallel shocks (up and down)

in interest rates over the subsequent twelve month and twenty-four month period. As of March 31, 2016, the effect of an

immediate and sustained 200 basis point increase in interest rates would be a decrease in net interest income of approximately

$1.7 million, or 4.5% in the first year, while the subsequent twelve month period is modeled to increase in net interest income by approximately $51,000, or 0.1%. Although unlikely in the current low interest rate environment, a 100 basis point decrease in rates would decrease net interest income by approximately $278,000, or 0.7% in the first year, while the subsequent twelve

month period is modeled to decrease in net interest income by approximately $1.1 million or 2.9%.



March 31, 2016
	Year 1							Year 2
Change in Interest Rates	Estimated Net Interest Income		Net Interest Income Impact			Percent		Estimated Net Interest Income		Net Interest Income Impact			Percent
Basis Points	(Dollars in Thousands)
+300	$	34,346	$	(2,748	)	(7	)%	$	36,694	$	(534	)	(1	)%
+200	35,436		(1,658		)	(4	)	37,279		51			—
+100	36,340		(754		)	(2	)	37,480		252			1
—	37,094		—			—		37,228		—			—
-100	36,816		(278		)	(1	)	36,152		(1,076		)	(3	)

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31, 2016, 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, 2016.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2016, 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

On December 14, 2015, Shiva Y. Stein, a purported stockholder of the Company, filed a putative stockholder class action and derivative complaint in the Circuit Court of Minnehaha County, South Dakota captioned Stein v. HF Financial Corp., et al., No. 15-3373. The complaint was subsequently amended on March 7, 2016. The lawsuit names as defendants the Company, each of the current members of the Company’s Board of Directors and Great Western. The complaint asserts that the director defendants breached their fiduciary duties by purportedly failing to take adequate steps to enhance the Company’s stockholder value as a merger candidate by not acting independently to protect the interests of the Company’s stockholders and by failing to make adequate disclosure in the Registration Statement on Form S-4 as filed on March 3, 2016. The complaint further asserts that the Company and Great Western aided and abetted the purported breaches of fiduciary duty. The complaint seeks (i) a declaration that the action may be maintained as a class action; (ii) injunctive relief to prevent the consummation of the Merger; (iii) in the event the Merger is consummated, rescission of the transaction or rescissionary damages; (iv) an order directing the defendants to account to the plaintiff for damages because of alleged wrongdoing; (v) an award to plaintiff of costs and disbursements including attorneys’ and experts’ fees; and (vi) other relief as may be just and proper. On April 5, 2016, the plaintiff filed its Memorandum of Law in Support of Plaintiff's Motion for Preliminary Injunction. The Court set a hearing date for April 27, 2016.

On April 22, 2016, the defendants to the aforementioned litigation entered into a memorandum of understanding (the “MOU”) with counsel for the plaintiff, pursuant to which the Company agreed to make certain additional disclosures concerning the Merger, which were set forth in a Form 8-K filed with the SEC on April 27, 2016. In accordance with the terms of the MOU, the plaintiff agreed to stay the proceeding and to withdraw its request for a preliminary injunction. In addition, the MOU contemplates that, subject to the completion of confirmatory discovery by plaintiff’s counsel, the parties will enter into a stipulation of settlement. The stipulation of settlement contemplated by the parties will be subject to customary conditions, including court approval following notice to the Company’s stockholders. In the event that the parties enter into a stipulation of settlement, a hearing will be scheduled at which the Court will consider the fairness, reasonableness and adequacy of the settlement. If the settlement is finally approved by the Court, it will resolve and release all claims that were or could have been brought in any actions challenging any aspect of the Merger, the Merger Agreement and any disclosure made in connection therewith, pursuant to terms that will be disclosed to the Company’s stockholders prior to the Court’s final approval of the settlement. The MOU will not affect the amount of the consideration to be received by any of the Company’s stockholder in the Merger. There can be no assurance that the parties will ultimately enter into a stipulation of settlement, or that the Court will approve the settlement even if the parties were to enter into such stipulation. The MOU may be rendered null and void, if, among other reasons, (i) the Court fails to enter a final order and judgment approving the settlement, or (ii) the Merger Agreement is terminated by the parties thereto or the Merger is not consummated for any reason. On April 27, 2016, the Court entered an order vacating the preliminary injunction hearing and setting the schedule for completion of the settlement.

The Company cannot predict the outcome of or estimate the possible loss or range of loss from this matter. In addition to the above described lawsuit, 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, 2015, 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. With the exception of the risks described below, there have been no material changes to the risk factors set forth in the above-referenced filing as of March 31, 2016.

The pendency of the Merger and the related diversion of our management’s attention from the operation of our business may adversely affect our business and results of operations.

The Company’s management and Board of Directors have devoted and will continue to devote a significant amount of time and attention to the Merger. In addition, in connection with the Merger, we have incurred and will continue to incur expenses, which could prove to be significant. Our business and our operating and financial results may be materially adversely affected by the diversion of management’s time and attention and the expenses incurred in connection with the Merger.

We will be subject to business uncertainties and contractual restrictions while the Merger is pending.

Uncertainty about the effect of the Merger on employees and clients has had and may continue to have an adverse effect on us. These uncertainties have impaired and may continue to impair our ability to attract, retain and motivate key personnel until the Merger is completed, and could cause clients and others that deal with us to seek to change their existing business relationships with us. Retention of employees has been and may continue to be challenging during the pendency of the Merger as employees experience uncertainty about their future roles. If the Merger were substantially delayed or terminated, the Company may need to hire additional personnel, and our business could be materially adversely affected. Further, if key employees depart because of issues relating to the uncertainty or a desire not to remain with the business, our business could be negatively affected. In addition, the Merger Agreement restricts us from making certain acquisitions and taking other specified actions without the consent of Great Western until the Merger occurs. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the Merger.

The Merger Agreement may be terminated in accordance with its terms, and the Merger may not be completed.

Completion of the Merger is subject to certain conditions, including, among others, (i) the approval of the Merger Agreement by the Company’s stockholders; (ii) the absence of governmental orders prohibiting or seeking to prohibit the Merger; (iii) the receipt of certain governmental and regulatory approvals; (iv) the absence of an event that would have or could reasonably be expected to have a material adverse effect on the Company; and (v) the receipt by the Company of certain third-party consents.

The Merger Agreement may be terminated in certain circumstances, including, among others, (i) in the event that the Merger has not been effected on or prior to December 31, 2016, as extended in certain circumstances; (ii) in the event that the Company’s stockholders do not approve the Merger Agreement; (iii) in the event that the Company receives a superior proposal to acquire more than half of its outstanding voting securities; and (iv) in the event that Great Western’s stock price declines by more than 20% from its initial trading values prior to the execution of the Merger Agreement and relative to the performance of the SNL Mid Cap U.S. Bank Index.

Termination of the Merger Agreement could negatively affect us.

If the Merger Agreement is terminated, our business may be adversely affected by the failure to pursue other beneficial opportunities due to the focus of management on the Merger. In addition, if the Merger Agreement is terminated, the market price of our common stock might decline to the extent that the current market price reflects a market assumption that the Merger will be completed. If the Merger Agreement is terminated and our Board of Directors seeks another merger or business combination, stockholders cannot be certain that we will be able to find a party willing to offer equivalent or more attractive consideration than the consideration Great Western has agreed to provide in the Merger. If the Merger Agreement is terminated under certain circumstances, we may be required to pay a termination fee of $5,000,000 plus certain of Great Western’s

expenses up to a maximum of $1,000,000 to Great Western. Further, if the Merger Agreement is terminated, we may need to hire additional personnel to replace employees that have left following the entry into the Merger Agreement.

A lawsuit has been filed against the Company challenging the Merger, and additional lawsuits are possible.

Other potential plaintiffs may also file similar lawsuits challenging the proposed transaction. If the above-referenced case, and any potential additional cases, are not resolved, it could prevent or delay completion of the Merger and result in significant cost to the Company, including costs associated with the indemnification of directors and officers.

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."

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 5, 2016	By:	/s/ STEPHEN M. BIANCHI
			Stephen M. Bianchi, President and Chief Executive Officer (Principal Executive Officer)


Date:	May 5, 2016	By:	/s/ BRENT R. OLTHOFF
			Brent R. Olthoff, Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)

Exhibit Index



Exhibit Number		Description
2.1		Agreement and Plan of Merger between Great Western Bancorp, Inc. and HF Financial Corp. dated as of November 30, 2015 (incorporated by reference to Exhibit 2.1 from the Company's Current Report on Form 8-K dated November 30, 2015, file no. 033-44383).
10.1		Renewal Addendum No. 3 to Employment Agreement between Jon M. Gadberry and Home Federal Bank, dated March 30, 2016 (incorporated herein by reference to Exhibit 10.1 from the Company's Current Report on Form 8-K dated April 5, 2016).
10.2		Renewal Addendum No. 3 to Employment Agreement between Brent R. Olthoff and Home Federal Bank, dated March 30, 2016 (incorporated herein by reference to Exhibit 10.2 from the Company's Current Report on Form 8-K dated April 5, 2016).
10.3		Renewal Addendum No. 3 to Employment Agreement between Michael Westberg and Home Federal Bank, dated March 30, 2016 (incorporated herein by reference to Exhibit 10.3 from the Company's Current Report on Form 8-K dated April 5, 2016).
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.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Bad

HF Financial (HFFC) Inactive 10-Q2016 Q3 Quarterly report

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