Quarterly Report (10-q)

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, 2015
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 1, 2015, there were 7,054,451 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, 2015 and June 30, 2014	3

	Consolidated Statements of Income Three and Nine Months Ended March 31, 2015 and 2014	4

	Consolidated Statements of Comprehensive Income Three and Nine Months Ended March 31, 2015 and 2014	5

	Consolidated Statements of Cash Flows Nine Months Ended March 31, 2015 and 2014	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	65

Item 4.	Controls and Procedures	67

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	67

Item 1A.	Risk Factors	67

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67

Item 3.	Defaults upon Senior Securities	67

Item 4.	Mine Safety Disclosures	68

Item 5.	Other Information	68

Item 6.	Exhibits	68

Form 10-Q	Signature Page	69

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(DOLLARS IN THOUSANDS, except share data)



	March 31, 2015			June 30, 2014
	(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents	$	19,933		$	24,256
Investment securities available for sale	160,951			348,878
Investment securities held to maturity	20,234			19,507
Correspondent bank stock	3,203			6,367
Loans held for sale	4,460			6,173

Loans and leases receivable	871,613			811,946
Allowance for loan and lease losses	(11,012		)	(10,502		)
Loans and leases receivable, net	860,601			801,444

Accrued interest receivable	4,970			5,407
Office properties and equipment, net of accumulated depreciation	14,882			13,805
Foreclosed real estate and other properties	27			180
Cash value of life insurance	21,150			20,644
Servicing rights, net	10,671			11,218
Goodwill and intangible assets, net	4,749			4,830
Other assets	12,535			12,020
Total assets	$	1,138,366		$	1,274,729
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits	$	934,318		$	999,174
Advances from Federal Home Loan Bank and other borrowings	41,201			120,643
Subordinated debentures payable to trusts	24,837			24,837
Advances by borrowers for taxes and insurance	20,418			13,683
Accrued expenses and other liabilities	14,548			14,740
Total liabilities	1,035,322			1,173,077
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, 9,137,906 and 9,138,895 shares issued at March 31, 2015 and June 30, 2014, respectively	91			91
Additional paid-in capital	46,320			46,218
Retained earnings, substantially restricted	88,976			89,694
Accumulated other comprehensive (loss), net of related deferred tax effect	(1,446		)	(3,454		)
Less cost of treasury stock, 2,083,455 shares at March 31, 2015 and June 30, 2014	(30,897		)	(30,897		)
Total stockholders' equity	103,044			101,652
Total liabilities and stockholders' equity	$	1,138,366		$	1,274,729

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,
	2015			2014		2015			2014
Interest, dividend and loan fee income:
Loans and leases receivable	$	9,197		$	8,781	$	28,549		$	25,740
Investment securities and interest-earning deposits	863			1,716		3,128			4,099
	10,060			10,497		31,677			29,839
Interest expense:
Deposits	846			960		2,661			2,996
Advances from Federal Home Loan Bank and other borrowings	365			1,212		2,517			3,955
	1,211			2,172		5,178			6,951
Net interest income	8,849			8,325		26,499			22,888
Provision for losses on loans and leases	282			260		1,201			279
Net interest income after provision for losses on loans and leases	8,567			8,065		25,298			22,609
Noninterest income:
Fees on deposits	1,375			1,472		4,524			4,727
Loan servicing income, net	319			703		1,034			2,132
Gain on sale of loans	457			344		1,476			1,759
Earnings on cash value of life insurance	204			201		619			613
Trust income	234			229		682			642
Commission and insurance income	438			404		1,224			1,035
Gain (loss) on sale of securities, net	(1,076		)	233		(1,117		)	591
Loss on disposal of closed-branch fixed assets	(298		)	—		(461		)	—
Other	402			98		540			295
	2,055			3,684		8,521			11,794
Noninterest expense:
Compensation and employee benefits	5,675			5,298		16,434			16,025
Occupancy and equipment	1,330			1,058		3,381			3,140
FDIC insurance	221			220		627			661
Check and data processing expense	815			784		2,463			2,297
Professional fees	447			502		1,512			1,633
Marketing and community investment	444			315		1,192			935
Foreclosed real estate and other properties, net	24			50		61			306
Loss on early extinguishment of debt	—			—		4,065			—
Other	824			691		2,215			2,027
	9,780			8,918		31,950			27,024
Income before income taxes	842			2,831		1,869			7,379
Income tax expense	123			858		206			2,257
Net income	$	719		$	1,973	$	1,663		$	5,122

Basic earnings per common share	$	0.10		$	0.28	$	0.24		$	0.73
Diluted earnings per common share	0.10			0.28		0.24			0.73
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,
	2015			2014			2015			2014
Net income	$	719		$	1,973		$	1,663		$	5,122
Other comprehensive income (loss), net of tax:
Investment securities available for sale:
Change in unrealized losses on other securities	803			1,013			1,759			(792		)
Reclassification adjustment:
Investment security (gains) losses recognized in earnings	1,076			(233		)	1,117			(591		)
Income tax (expense) benefit	(714		)	(297		)	(1,093		)	525
Other comprehensive income (loss) on investment securities available for sale	1,165			483			1,783			(858		)
Cash flow hedging activities-interest rate swap contracts:
Net unrealized gains	89			156			339			408
Reclassification adjustment:
Income tax (expense)	(30		)	(53		)	(114		)	(139		)
Other comprehensive income on cash flow hedging activities-interest rate swap contracts	59			103			225			269
Total other comprehensive income (loss)	1,224			586			2,008			(589		)
Comprehensive income	$	1,943		$	2,559		$	3,671		$	4,533

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,
	2015			2014
Cash Flows From Operating Activities
Net income	$	1,663		$	5,122
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for losses on loans and leases	1,201			279
(Benefit) for allowance on servicing rights	—			(1,249		)
Depreciation	1,234			1,297
Amortization of intangible assets	81			81
Amortization of discounts and premiums on investment securities and other	4,010			5,416
Amortization of stock-based compensation	92			80
Net change in loans held for resale	3,189			7,724
(Gain) on sale of loans	(1,476		)	(1,759		)
Realized (gain) loss on sale of investment securities, net	1,117			(591		)
(Gain) loss and provision for losses on foreclosed real estate and other properties, net	16			48
Loss on disposal of office properties and equipment, net	212			8
Change in other assets and liabilities	(2,306		)	(2,118		)
Net cash provided by operating activities	9,033			14,338
Cash Flows From Investing Activities
Net change in loans and leases outstanding	(60,389		)	(60,370		)
Purchases of investment securities	(6,593		)	(127,372		)
Proceeds from sales, maturities and repayments of investment securities	192,715			139,104
Purchases of correspondent bank stock	(17,392		)	(21,107		)
Proceeds from redemption of correspondent bank stock	20,556			22,604
Purchases of office properties and equipment	(3,818		)	(686		)
Proceeds from sale of office properties and equipment	1,295			—
Proceeds from sale of foreclosed real estate and other properties	204			627
Net cash provided by (used in) investment activities	126,578			(47,200		)
Cash Flows From Financing Activities
Net increase (decrease) in deposits	(64,856		)	53,602
Proceeds of advances from Federal Home Loan Bank and other borrowings	1,065,250			545,800
Payments on advances from Federal Home Loan Bank and other borrowings	(1,144,692		)	(565,527		)
Increase in advances by borrowers	6,735			6,563
Proceeds from issuance of common stock	10			—
Cash dividends paid	(2,381		)	(2,380		)
Net cash provided by (used in) financing activities	(139,934		)	38,058
Increase (decrease) in cash and cash equivalents	(4,323		)	5,196
Cash and Cash Equivalents
Beginning	24,256			21,352
Ending	$	19,933		$	26,548

Supplemental Disclosure of Cash Flows Information
Cash payments for interest	$	5,384		$	7,497
Cash payments for income and franchise taxes	1,439			3,136

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, 2014 (“fiscal 2014”), filed with the SEC.

The accompanying consolidated balance sheet as of June 30, 2014, 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, 2015 are not necessarily indicative of the results that may be expected for the year ending June 30, 2015.

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 8, 2015, the date of the filing of the consolidated financial statements with the Securities and Exchange Commission.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

NOTE 2—REGULATORY CAPITAL

At March 31, 2015 and June 30, 2014, 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, 2015
Tier I capital (to average assets)
Bank	$	120,149	10.23	%	$	46,989	4.00	%	$	58,736	5.00	%
Consolidated	124,370		10.57		47,066		4.00		58,833		5.00
Tier I capital (to risk-weighted assets)
Bank	120,149		12.50		57,678		6.00		76,904		8.00
Consolidated	124,370		12.92		57,746		6.00		76,995		8.00
Common equity tier I capital (to risk-weighted assets)
Bank	120,149		12.50		43,258		4.50		62,484		6.50
Consolidated	100,370		10.43		43,310		4.50		62,559		6.50
Risk-based capital (to risk-weighted assets)
Bank	131,110		13.64		76,904		8.00		96,130		10.00
Consolidated	135,331		14.06		76,995		8.00		96,244		10.00

June 30, 2014
Tier I capital (to average assets)
Bank	$	120,431	9.49	%	$	50,783	4.00	%	$	63,479	5.00	%
Tier I capital (to risk-weighted assets)
Bank	120,431		13.38		50,783		4.00		54,020		6.00
Risk-based capital (to risk-weighted assets)
Bank	130,882		14.54		72,027		8.00		90,034		10.00

The Bank was categorized as "well capitalized" at March 31, 2015 and June 30, 2014.

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.

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:

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)



	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2015		2014		2015		2014
Net income	$	719	$	1,973	$	1,663	$	5,122

Basic EPS:
Weighted average number of common shares outstanding	7,054,197		7,055,440		7,054,662		7,055,256
Basic earnings per common share	$	0.10	$	0.28	$	0.24	$	0.73

Diluted EPS:
Weighted average number of common shares outstanding	7,054,197		7,055,440		7,054,662		7,055,256
Common share equivalents—Stock Options / Stock Appreciation Rights (SARs) under employee compensation plans/warrant	6,838		2,513		5,143		2,640
Weighted average number of common shares and common share equivalents	7,061,035		7,057,953		7,059,805		7,057,896
Diluted earnings per common share	$	0.10	$	0.28	$	0.24	$	0.73

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, 2015
	Adjusted Carrying Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Investment securities available for sale:
Debt securities:
U.S. government agencies	$	10,585	$	139	$	(7	)	$	10,717
Municipal bonds	8,387		52		(14		)	8,425
	18,972		191		(21		)	19,142
Equity securities:
FNMA⁽¹⁾	—		—		—			—
Federal Ag Mortgage	7		5		—			12
Other investments	353		—		—			353
	360		5		—			365
Agency residential mortgage-backed securities	141,039		1,099		(694		)	141,444
Total investment securities available for sale	$	160,371	$	1,295	$	(715	)	$	160,951

Investment securities held to maturity:
Municipal bonds	$	18,386	$	501	$	(2	)	$	18,885
Agency residential mortgage-backed securities	1,848		74		—			1,922
Total investment securities held to maturity	$	20,234	$	575	$	(2	)	$	20,807

___________________________________________________________

⁽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, 2014
	Adjusted Carrying Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Investment securities available for sale:
Debt securities:
U.S. government agencies	$	12,041	$	118	$	(45	)	$	12,114
Municipal bonds	9,026		83		(18		)	9,091
	21,067		201		(63		)	21,205
Equity securities:
FNMA⁽¹⁾	—		—		—			—
Federal Ag Mortgage	7		7		—			14
Other investments	253		—		—			253
	260		7		—			267
Agency residential mortgage-backed securities	329,847		1,053		(3,494		)	327,406
Total investment securities available for sale	$	351,174	$	1,261	$	(3,557	)	$	348,878

Investment securities held to maturity:
Municipal bonds	$	17,536	$	344	$	(9	)	$	17,871
Agency residential mortgage-backed securities	1,971		27		—			1,998
Total investment securities held to maturity	$	19,507	$	371	$	(9	)	$	19,869

___________________________________________________________

⁽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, 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	$	1,493	$	(7	)	$	—	$	—		$	1,493	$	(7	)
Municipal bonds	701		(2		)	896		(12		)	1,597		(14		)
	2,194		(9		)	896		(12		)	3,090		(21		)
Agency residential mortgage-backed securities	9,234		(59		)	51,138		(635		)	60,372		(694		)
Total investment securities available for sale	$	11,428	$	(68	)	$	52,034	$	(647	)	$	63,462	$	(715	)

Investment securities held to maturity:
Municipal bonds	$	688	$	(2	)	$	115	$	—		$	803	$	(2	)
Total investment securities held to maturity	$	688	$	(2	)	$	115	$	—		$	803	$	(2	)



	June 30, 2014
	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	$	—	$	—		$	1,455	$	(45	)	$	1,455	$	(45	)
Municipal bonds	—		—			1,381		(18		)	1,381		(18		)
	—		—			2,836		(63		)	2,836		(63		)
Agency residential mortgage-backed securities	70,141		(290		)	152,308		(3,204		)	222,449		(3,494		)
Total investment securities available for sale	$	70,141	$	(290	)	$	155,144	$	(3,267	)	$	225,285	$	(3,557	)

Investment securities held to maturity:
Municipal bonds	$	1,328	$	(9	)	$	—	$	—		$	1,328	$	(9	)
Total investment securities held to maturity	$	1,328	$	(9	)	$	—	$	—		$	1,328	$	(9	)

The unrealized losses reported for U.S. government agencies relate to one security issued by the Federal Home Loan Bank ("FHLB"). The unrealized losses are primarily attributable to changes in interest rates and the contractual cash flows of these investments which are guaranteed by an agency of the U.S. government. Management does not believe the unrealized losses at March 31, 2015 represent an other-than-temporary impairment for this investment. The Company does not have the intent to sell this security (has not made a decision to sell) and has assessed that it is not more likely than not that the Company will be required to sell this security before anticipated recovery of fair value.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

The unrealized losses reported for municipal bonds relate to eight available for sale and four 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, 2015, represent an other-than-temporary impairment for these investments. The Company does not have the intent to sell these securities (has not made a decision to sell) and has assessed that it is not more likely than not that the Company will be required to sell these securities before anticipated recovery of fair value.

The unrealized losses reported for agency residential mortgage-backed securities relate to 40 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, 2015, 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,
	2015		2014
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, 2015, 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	$	1,245	$	1,248	$	66	$	66
Due after one year through five years	13,126		13,269		4,410		4,471
Due after five years through ten years	4,302		4,320		11,996		12,345
Due after ten years	299		305		1,914		2,003
	18,972		19,142		18,386		18,885
Agency residential mortgage-backed securities	141,039		141,444		1,848		1,922
	$	160,011	$	160,586	$	20,234	$	20,807

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

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

Proceeds from the sale of securities available for sale for the three months ended March 31, 2015 were $118,661 and resulted in gains of $235 and losses of $1,311. Proceeds from the sale of securities available for sale for the three months ended March 31, 2014 were $26,914 and resulted in gains of $239 and losses of $6.

Proceeds from the sale of securities available for sale for the first nine months of fiscal 2015 were $140,728 and resulted in gains of $332 and losses of $1,449. Proceeds from the sale of securities available for sale for the first nine months of fiscal 2014 were $61,708 and resulted in gains of $604 and losses of $13.

NOTE 5—LOANS AND LEASES RECEIVABLE

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



	March 31, 2015				June 30, 2014
	Amount		Percent		Amount		Percent
Residential:
One-to four-family	$	50,681	5.8	%	$	47,886	5.9	%
Construction	5,880		0.7		3,838		0.5
Commercial:
Commercial business ⁽¹⁾	71,648		8.2		82,459		10.2
Equipment finance leases	224		—		847		0.1
Commercial real estate:
Commercial real estate	309,204		35.5		294,388		36.3
Multi-family real estate	103,345		11.9		87,364		10.7
Construction	49,226		5.6		22,946		2.8
Agricultural:
Agricultural real estate	93,265		10.7		79,805		9.8
Agricultural business	121,493		13.9		115,397		14.2
Consumer:
Consumer direct	14,869		1.7		17,449		2.1
Consumer home equity	49,171		5.7		56,666		7.0
Consumer overdraft & reserve	2,607		0.3		2,901		0.4
Total loans and leases receivable ⁽²⁾	$	871,613	100.0	%	$	811,946	100.0	%

_____________________________________


⁽¹⁾	Includes $1,512 and $1,645 tax exempt leases at March 31, 2015 and June 30, 2014, respectively.


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

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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



March 31, 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

March 31, 2014
	Residential			Commercial			Commercial Real Estate			Agricultural				Consumer				Total
Balance at beginning of period	$	268		$	1,279		$	2,626		$	4,576			$	1,856			$	10,605
Charge-offs	—			(7		)	(31		)	(393		)		(132		)		(563		)
Recoveries	—			17			—			—				27				44
Provisions	(30		)	(255		)	969			(184		)		(240		)		260
Balance at end of period	$	238		$	1,034		$	3,564		$	3,999			$	1,511			$	10,346

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



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

March 31, 2014
	Residential			Commercial			Commercial Real Estate			Agricultural			Consumer			Total
Balance at beginning of period	$	203		$	1,558		$	2,373		$	4,637		$	1,972		$	10,743
Charge-offs	(7		)	(125		)	(41		)	(491		)	(430		)	(1,094		)
Recoveries	1			313			—			13			91			418
Provisions	41			(712		)	1,232			(160		)	(122		)	279
Balance at end of period	$	238		$	1,034		$	3,564		$	3,999		$	1,511		$	10,346

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, 2015
	Residential		Commercial		Commercial Real Estate		Agricultural		Consumer		Total
Allowance for loan and lease losses:
Individually evaluated for impairment	$	34	$	16	$	4	$	188	$	279	$	521
Collectively evaluated for impairment	271		763		4,518		3,922		1,017		10,491
Total allowance for loan and lease losses	$	305	$	779	$	4,522	$	4,110	$	1,296	$	11,012
Loans and leases receivable:
Individually evaluated for impairment	$	150	$	2,976	$	6,855	$	13,449	$	1,317	$	24,747
Collectively evaluated for impairment	56,411		68,896		454,920		201,309		65,330		846,866
Total loans and leases receivable	$	56,561	$	71,872	$	461,775	$	214,758	$	66,647	$	871,613

	June 30, 2014
	Residential		Commercial		Commercial Real Estate		Agricultural		Consumer		Total
Allowance for loan and lease losses:
Individually evaluated for impairment	$	41	$	38	$	4	$	15	$	385	$	483
Collectively evaluated for impairment	242		894		3,815		3,827		1,241		10,019
Total allowance for loan and lease losses	$	283	$	932	$	3,819	$	3,842	$	1,626	$	10,502
Loans and leases receivable:
Individually evaluated for impairment	$	164	$	4,233	$	7,304	$	14,742	$	1,826	$	28,269
Collectively evaluated for impairment	51,560		79,073		397,394		180,460		75,190		783,677
Total loans and leases receivable	$	51,724	$	83,306	$	404,698	$	195,202	$	77,016	$	811,946

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, 2015								June 30, 2014
	Pass		Special Mention		Substandard		Doubtful		Pass		Special Mention		Substandard		Doubtful
Commercial:
Commercial business	$	65,776	$	1,303	$	5,727	$	—	$	77,835	$	407	$	4,431	$	—
Equip. finance leases	224		—		—		—		847		—		—		—
Commercial real estate:
Commercial real estate	300,684		3,867		4,673		—		287,066		1,443		5,879		—
Multi-family real estate	96,112		950		6,294		—		79,901		982		6,481		—
Construction	47,340		1,886		—		—		22,946		—		—		—
Agricultural:
Agricultural real estate	83,829		4,183		5,258		—		70,971		279		8,555		—
Agricultural business	110,132		5,902		5,393		188		111,655		2,209		1,522		15
	$	704,097	$	18,091	$	27,345	$	188	$	651,221	$	5,320	$	26,868	$	15

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



	March 31, 2015				June 30, 2014
	Performing		Nonperforming		Performing		Nonperforming
Residential:
One-to four- family	$	50,456	$	225	$	47,761	$	125
Construction	5,880		—		3,838		—
Consumer:
Consumer direct	14,825		44		17,400		49
Consumer home equity	48,883		288		55,725		941
Consumer OD & reserves	2,607		—		2,901		—
	$	122,651	$	557	$	127,625	$	1,115

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, 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	$	178	$	—	$	111	$	289	$	50,392	$	—	$	225	$	225
Construction	—		—		—		—		5,880		—		—		—
Commercial:
Commercial business	18		250		235		503		71,145		—		2,443		2,443
Equipment finance leases	—		—		—		—		224		—		—		—
Commercial real estate:
Commercial real estate	—		—		66		66		309,138		—		531		531
Multi-family real estate	—		—		—		—		103,345		—		—		—
Construction	—		—		—		—		49,226		—		—		—
Agricultural:
Agricultural real estate	—		87		—		87		93,178		—		3,356		3,356
Agricultural business	1,333		17		124		1,474		120,019		—		6,156		6,156
Consumer:
Consumer direct	—		—		4		4		14,865		—		44		44
Consumer home equity	170		46		204		420		48,751		—		288		288
Consumer OD & reserve	4		—		—		4		2,603		—		—		—
Total	$	1,703	$	400	$	744	$	2,847	$	868,766	$	—	$	13,043	$	13,043

_____________________________________


⁽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, 2014	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	$	430	$	125	$	—	$	555	$	47,331	$	—	$	125	$	125
Construction	208		—		—		208		3,630		—		—		—
Commercial:
Commercial business	—		—		431		431		82,028		—		3,462		3,462
Equipment finance leases	—		—		—		—		847		—		—		—
Commercial real estate:
Commercial real estate	96		11		—		107		294,281		—		972		972
Multi-family real estate	—		—		27		27		87,337		—		27		27
Construction	—		—		—		—		22,946		—		—		—
Agricultural:
Agricultural real estate	—		—		—		—		79,805		—		7,933		7,933
Agricultural business	194		—		316		510		114,887		—		3,797		3,797
Consumer:
Consumer direct	21		8		6		35		17,414		—		49		49
Consumer home equity	59		79		271		409		56,257		—		941		941
Consumer OD & reserve	4		—		—		4		2,897		—		—		—
Total	$	1,012	$	223	$	1,051	$	2,286	$	809,660	$	—	$	17,306	$	17,306

_____________________________________


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


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

At March 31, 2015, the Company had identified $24,747 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.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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



	March 31, 2015						June 30, 2014
	Recorded Investment		Unpaid Principal Balance⁽¹⁾		Related Allowance		Recorded Investment		Unpaid Principal Balance⁽¹⁾		Related Allowance
With no related allowance recorded:
Commercial business	$	2,809	$	2,809	$	—	$	4,032	$	4,032	$	—
Commercial real estate	731		731		—		983		983		—
Multi-family real estate	6,101		6,101		—		6,296		6,296		—
Agricultural real estate	6,435		6,435		—		10,945		10,945		—
Agricultural business	6,653		6,653		—		3,481		3,481		—
Consumer direct	4		19		—		10		25		—
Consumer home equity	631		631		—		926		926		—
	23,364		23,379		—		26,673		26,688		—
With an allowance recorded:
One-to four-family	150		150		34		164		164		41
Commercial business	167		167		16		201		201		38
Commercial real estate	23		23		4		25		25		4
Agricultural business	360		360		188		316		316		15
Consumer direct	40		40		40		47		47		31
Consumer home equity	642		642		239		843		843		354
	1,383		1,383		521		1,596		1,596		483
Total:
One-to four-family	150		150		34		164		164		41
Commercial business	2,976		2,976		16		4,233		4,233		38
Commercial real estate	754		754		4		1,008		1,008		4
Multi-family real estate	6,101		6,101		—		6,296		6,296		—
Agricultural real estate	6,436		6,436		—		10,945		10,945		—
Agricultural business	7,013		7,013		188		3,797		3,797		15
Consumer direct	44		59		40		57		72		31
Consumer home equity	1,273		1,273		239		1,769		1,769		354
	$	24,747	$	24,762	$	521	$	28,269	$	28,284	$	483

_____________________________________


⁽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,
	2015				2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
One-to four-family	$	152	$	1	$	166	$	1
Commercial business	3,161		15		4,492		7
Commercial real estate	671		1		1,164		1
Multi-family real estate	6,130		69		27		—
Agricultural real estate	6,266		44		11,279		473
Agricultural business	6,313		14		3,848		—
Consumer direct	56		—		16		—
Consumer home equity	1,335		19		1,509		11
	$	24,084	$	163	$	22,501	$	493



	Nine Months Ended March 31,
	2015				2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
One-to four-family	$	156	$	2	$	232	$	2
Commercial business	3,569		44		4,752		23
Commercial real estate	749		2		1,166		5
Multi-family real estate	6,194		139		27		—
Agricultural real estate	8,319		136		11,492		473
Agricultural business	4,947		14		3,862		—
Consumer direct	61		—		15		—
Consumer home equity	1,554		47		1,439		26
	$	25,549	$	384	$	22,985	$	529

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 2015, new TDRs consisted of one commercial real estate loan, four agricultural loans, and 15 consumer loans. Of these new TDRs, 19 were evaluated for impairment based on collateral adequacy and one was evaluated based on discounted cash flows.

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, 2015	Number of Contracts⁽¹⁾	Pre-Modification Recorded Balance		Post-Modification Outstanding Recorded Balance⁽¹⁾
Residential	2	$	150	$	150
Commercial business	7	2,495		2,495
Commercial real estate	4	624		624
Agricultural	10	6,977		6,977
Consumer	42	1,206		1,221
	65	$	11,452	$	11,467

June 30, 2014	Number of Contracts⁽²⁾	Pre-Modification Recorded Balance		Post-Modification Outstanding Recorded Balance⁽²⁾
Residential	2	$	164	$	164
Commercial business	8	3,666		3,666
Commercial real estate	4	665		665
Agricultural	5	10,981		10,981
Consumer	31	1,686		1,686
	50	$	17,162	$	17,162

_____________________________________


⁽¹⁾	Includes 19 customers, which are in compliance with their restructured terms, that are not accruing interest and have a recorded investment balance of $8,664.


⁽²⁾	Includes 21 customers, which are in compliance with their restructured terms, that are not accruing interest and have a recorded investment balance of $15,445.

Excluded from above, at March 31, 2015, the Company had one consumer loan with a recorded balance of $52 that was originally restructured in fiscal 2014. The consumer loan is not in compliance with its restructured terms and is in nonaccrual status. At June 30, 2014, the Company had one commercial real estate loan with a recorded balance of $10 that was originally restructured in fiscal 2014 and two consumer loans with a recorded balance of $6 that were originally restructured in fiscal 2014. 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:



	2015					2014
	Number of Contracts	Pre-Modification Recorded Balance		Post-Modification Outstanding Recorded Balance		Number of Contracts	Pre-Modification Recorded Balance		Post-Modification Outstanding Recorded Balance
Residential	—	$	—	$	—	1	$	126	$	126
Commercial business	—	—		—		3	152		152
Commercial real estate	1	200		200		1	11		11
Agricultural	4	1,001		1,001		—	—		—
Consumer	15	437		437		17	702		702
	20	$	1,638	$	1,638	22	$	991	$	991

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

20 TDRs were added during the first nine months of fiscal 2015. 17 TDRs were negotiated to extend a loan maturity without reducing the interest rate below market rate and three were due to bankruptcy. None of the new TDRs defaulted during the first nine months of fiscal 2015. 22 TDRs were added during the first nine months of fiscal 2014. 18 TDRs were negotiated to extend a loan maturity without reducing the interest rate below market rate and four were due to bankruptcy. Four TDRs defaulted during the first nine months of fiscal 2014.

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,
	2015			2014			2015			2014
Mortgage servicing rights, beginning	$	10,876		$	11,739		$	11,218		$	12,236
Additions	187			135			618			638
Amortization⁽¹⁾	(392		)	(416		)	(1,165		)	(1,416		)
Mortgage servicing rights, ending	$	10,671		$	11,458		$	10,671		$	11,458

Valuation allowance, beginning	$	—		$	(374	)	$	—		$	(1,249	)
(Additions) / reductions ⁽¹⁾	—			374			—			1,249
Valuation allowance, ending	$	—		$	—		$	—		$	—

Mortgage servicing rights, net	$	10,671		$	11,458		$	10,671		$	11,458

Servicing fees received	$	711		$	745		$	2,199		$	2,299
Balance of loans serviced at:
Beginning of period	1,014,468			1,086,992			1,048,671			1,123,012
End of period	992,417			1,071,627			992,417			1,071,627

___________________________________


⁽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, 2015 and 2014, the constant prepayment rates (CPR) used to calculate the amortization were 9.4% and 9.4%, respectively. For valuation purposes, management utilized a discount rate of 10.5% and 10.0% at March 31, 2015 and 2014, respectively. Prepayment speeds utilized at March 31, 2015 and 2014 were 9.6% and 8.6%, respectively, which are used in the calculation of the amortization expense for the subsequent quarter. Prepayment speeds are analyzed and adjusted each quarter.

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,
	2015		2014		2015		2014
Goodwill⁽¹⁾	$	4,366	$	4,366	$	4,366	$	4,366

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

Accumulated amortization, beginning	188		81		134		26
Amortization expense	27		26		81		81
Accumulated amortization, ending	215		107		215		107

Amortizable intangible assets, net⁽²⁾	$	383	$	491	$	383	$	491

Goodwill and intangible assets, net	$	4,749	$	4,857	$	4,749	$	4,857

^{_______________________________________________________________}

⁽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,
	2015									2014
	Banking			Other			Total			Banking			Other			Total
Net interest income	$	9,107		$	(258	)	$	8,849		$	8,638		$	(313	)	$	8,325
(Provision) for losses on loans and leases	(282		)	—			(282		)	(260		)	—			(260		)
Noninterest income	1,614			441			2,055			3,291			393			3,684
Intersegment noninterest income	76			(72		)	4			73			(69		)	4
Noninterest expense	(9,111		)	(669		)	(9,780		)	(8,381		)	(537		)	(8,918		)
Intersegment noninterest expense	—			(4		)	(4		)	—			(4		)	(4		)
Income (loss) before income taxes	$	1,404		$	(562	)	$	842		$	3,361		$	(530	)	$	2,831
Total assets at March 31⁽¹⁾⁽²⁾	$	1,136,156		$	2,210		$	1,138,366		$	1,255,298		$	2,946		$	1,258,244


⁽¹⁾	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.

⁽²⁾ Included in total assets were goodwill and intangible assets, net totaling $4,366 and $491 for the banking segment and other segment, respectively, at March 31, 2014.



	Nine Months Ended March 31,
	2015									2014
	Banking			Other			Total			Banking			Other			Total
Net interest income	$	27,365		$	(866	)	$	26,499		$	23,920		$	(1,032	)	$	22,888
(Provision) for losses on loans and leases	(1,201		)	—			(1,201		)	(279		)	—			(279		)
Noninterest income	7,293			1,228			8,521			10,770			1,024			11,794
Intersegment noninterest income	228			(217		)	11			216			(204		)	12
Noninterest expense	(29,928		)	(2,022		)	(31,950		)	(25,246		)	(1,778		)	(27,024		)
Intersegment noninterest expense	—			(11		)	(11		)	—			(12		)	(12		)
Income (loss) before income taxes	$	3,757		$	(1,888	)	$	1,869		$	9,381		$	(2,002	)	$	7,379
Total assets at March 31⁽¹⁾⁽²⁾	$	1,136,156		$	2,210		$	1,138,366		$	1,255,298		$	2,946		$	1,258,244


⁽¹⁾	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.

⁽²⁾ Included in total assets were goodwill and intangible assets, net totaling $4,366 and $491 for the banking segment and other segment, respectively, at March 31, 2014.

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 who were hired prior to July 1, 2013, have attained the age of 21, and have completed 1,000 hours in a plan year. The benefits are based on 6% of each eligible participant's annual compensation, plus income earned in the accounts at a rate determined annually based on 30-year Treasury note rates. The Company's funding policy is to make the minimum annual required contribution plus such amounts as the Company may determine to be appropriate from time to time. 100% vesting occurs after three years with a retirement age of the later of age 65 or three years of participation.

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



	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2015			2014			2015			2014
Net periodic benefit cost
Service cost	$	169		$	168		$	509		$	505
Interest cost	186			180			558			540
Expected return on plan assets	(164		)	(153		)	(474		)	(437		)
Amortization of prior losses	31			53			94			158
Net periodic benefit cost	$	222		$	248		$	687		$	766

The Company previously disclosed in its consolidated financial statements for fiscal 2014, which are included in Part II, Item 8 “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K, that it contributed $455 in fiscal 2014 to fund its qualified pension plan. During the second quarter of fiscal 2015, the Company contributed $410 to fund its qualified pension plan. The Company does not anticipate funding any additional contributions for fiscal 2015.

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.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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



	Fiscal Years Ended
	June 30,
	2015		2014
Quarter ended September 30	$	309	$	264
Quarter ended December 31	430		257
Quarter ended March 31	420		384
Quarter ended June 30	---		501
Net healthcare costs	$	1,159	$	1,406

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, 2015 and 2014.

Stock option activity for the nine months ended March 31, 2015, was as follows:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Beginning Balance	24,532		$	15.32
Granted	—		—
Forfeited	—		—
Expired	(19,995	)	14.88
Exercised	(4,537	)	17.27
Ending Balance	—		$	—	0.0	$	—
Vested and exercisable at March 31	—		$	—	0.0	$	—

Stock appreciation rights activity for the nine months ended March 31, 2015, was as follows:



	SARs		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Beginning Balance	89,397		$	13.52
Granted	—		—
Forfeited	(11,854	)	14.12
Exercised	(5,195	)	12.48
Ending Balance	72,348		$	13.50	3.9	$	107
Vested and exercisable at March 31	72,348		$	13.50	3.9	$	107

There were 5,195 and 6,526 SARs exercised during the nine months ended March 31, 2015 and 2014, respectively, which resulted in $10 and $6 of intrinsic value of SARs exercised for the respective periods. No options were exercised during these same periods. In addition, there were no cashless option exercises or related tax benefit realized for the nine months ended March 31, 2015 and 2014. There was no unrecognized compensation cost related to nonvested SARs awards at March 31, 2015.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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



	2015				2014
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Nonvested Balance, beginning	11,694		$	11.99	30,019		$	12.15
Granted	—		—		—		—
Vested	(9,939	)	11.98		(13,825	)	12.09
Forfeited	(1,667	)	12.25		—		—
Nonvested Balance, ending	88		$	8.48	16,194		$	12.20

Pretax compensation expense recognized for nonvested shares for the nine months ended March 31, 2015 and 2014, was $92 and $85, respectively. The tax benefit for the nine months ended March 31, 2015 and 2014 was $35 and $32, respectively. As of March 31, 2015, there was $54 of total unrecognized compensation cost related to nonvested shares granted under the Plan. That cost is expected to be recognized over a weighted-average period of 0.5 years. The total fair value of shares vested during the nine months ended March 31, 2015 and 2014 was $146 and $179, respectively.

The 2002 Option Plan expired effective September 20, 2012. No plan was in effect at March 31, 2015 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, 2014, under Note 17 of “Notes to Consolidated Financial Statements.”

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, 2015				June 30, 2014
	Amount		Rate ⁽¹⁾		Amount		Rate ⁽¹⁾
Overnight federal funds purchased	$	36,970	0.29	%	$	10,575	0.28	%
Term fixed-rate advance	4,000		1.15		109,793		2.99
Other borrowings	231		—		275		—
	$	41,201	0.37	%	$	120,643	2.74	%


⁽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

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.

NOTE 14—INTEREST RATE CONTRACTS

Interest rate swap contracts are entered into primarily as an asset/liability management strategy of the Company to modify

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

interest rate risk. The primary risk associated with all swaps is the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contract. The Company is exposed to losses if the counterparty fails to make its payments under a contract in which the Company is in a receiving status. The Company minimizes its risk by monitoring the credit standing of the counterparties. The Company anticipates the counterparties will be able to fully satisfy their obligations under the remaining agreements. These contracts are typically designated as cash flow hedges.

The Company has outstanding interest rate swap agreements with notional amounts totaling $13,000 to convert two variable-rate trust preferred securities into fixed-rate instruments. The agreements have a weighted average maturity of 1.4 years and have fixed rates ranging from 5.68% to 6.58% with a weighted average rate of 5.89%. The fair value of the derivatives was an unrealized loss of $613 at March 31, 2015 and an unrealized loss of $1,038 at March 31, 2014. The Company pledged $794 in cash under collateral arrangements as of March 31, 2015, to satisfy collateral requirements associated with these interest rate swap contracts.

The Company has borrower interest rate swap agreements with notional amounts totaling $34,948 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, 2015 and 2014. 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, 2015, 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, 2015:



				Estimated Fair Value
	Balance Sheet Location	Notional Amount		Gain		Loss
Non-designated derivatives	Other assets	$	7,180	$	726	$	—
Fair value hedge	Loans and leases receivable	20,588		17		(633		)
Cash flow hedge	Accrued expenses and other liabilities	13,000		—		(613		)
Non-designated derivatives	Accrued expenses and other liabilities	7,180		—		(726		)
		$	47,948	$	743	$	(1,972	)

The following table summarizes the derivative financial instruments utilized as of June 30, 2014:



				Estimated Fair Value
	Balance Sheet Location	Notional Amount		Gain		Loss
Non-designated derivatives	Other assets	$	7,730	$	739	$	—
Fair value hedge	Loans and leases receivable	21,267		172		(273		)
Cash flow hedge	Accrued expenses and other liabilities	15,000		—		(952		)
Non-designated derivatives	Accrued expenses and other liabilities	7,730		—		(739		)
		$	51,727	$	911	$	(1,964	)

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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, 2015:



	Notional Value		Average Maturity (years)	Fair Value Gain (Loss)			Receive		Pay
Liability conversion swaps	$	13,000	1.4	$	(613	)	2.44	%	5.89	%
Loan interest rate swaps	34,948		7.1	(616		)	2.14		4.45
	$	47,948		$	(1,229	)

There were no gains or losses included in the income statement for the periods ended March 31, 2015 or 2014. -

NOTE 15—ACCUMULATED OTHER COMPREHENSIVE LOSS

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



	March 31,			June 30,
	2015			2014
Unrealized gain (loss) on securities available for sale net of related tax effect of ($220) and $873	$	360		$	(1,423	)
Unrealized (loss) on defined benefit plan net of related tax effect of $859 and $859	(1,402		)	(1,402		)
Unrealized (loss) on cash flow hedging activities net of related tax effect of $209 and $323	(404		)	(629		)
	$	(1,446	)	$	(3,454	)

The following tables summarize the components of other comprehensive income (loss) balances at March 31, 2015 and 2014, changes and reclassifications out of accumulated other comprehensive income (loss) during the three months ended March 31, 2015 and 2014. 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, 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)



	Investment Securities Available for Sale			Defined Benefit Plan			Cash Flow Hedging Activities			Accumulated Other Comprehensive Loss
Balance January 1, 2014	$	(2,726	)	$	(1,946	)	$	(788	)	$	(5,460	)
Other comprehensive income before reclassifications	1,013			—			156			1,169
Amounts reclassified from accumulated other comprehensive loss	(233		)	—			—			(233		)
Income tax (expense)	(297		)	—			(53		)	(350		)
Balance March 31, 2014	$	(2,243	)	$	(1,946	)	$	(685	)	$	(4,874	)

The following tables summarize the components of other comprehensive income (loss) balances at March 31, 2015 and 2014, changes and reclassifications out of accumulated other comprehensive income (loss) during the nine months ended March 31, 2015 and 2014. 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, 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	)



	Investment Securities Available for Sale			Defined Benefit Plan			Cash Flow Hedging Activities			Accumulated Other Comprehensive Loss
Balance July 1, 2013	$	(1,385	)	$	(1,946	)	$	(954	)	$	(4,285	)
Other comprehensive income (loss) before reclassifications	(792		)	—			408			(384		)
Amounts reclassified from accumulated other comprehensive loss	(591		)	—			—			(591		)
Income tax (expense) benefit	525			—			(139		)	386
Balance March 31, 2014	$	(2,243	)	$	(1,946	)	$	(685	)	$	(4,874	)

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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.

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

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

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

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

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

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

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

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

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

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

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

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



March 31, 2015			Fair Value Measurements
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	19,933	$	19,933	$	19,933	$	—	$	—
Investment securities	181,185		181,758		12		181,746		—
Correspondent bank stock	3,203		3,203		—		3,203		—
Loans held for sale	4,460		4,460		—		4,460		—
Net loans and leases receivable	860,601		862,134		—		16,914		845,220
Accrued interest receivable	4,970		4,970		—		4,970		—
Servicing rights, net	10,671		10,873		—		—		10,873
Interest rate swap contracts	726		726		—		726		—
Financial liabilities
Deposits	934,318		934,117		—		—		934,117
Interest rate swap contracts	1,339		1,339		—		1,339		—
Borrowed funds	41,201		41,221		—		41,221		—
Subordinated debentures payable to trusts	24,837		26,176		—		—		26,176
Accrued interest payable and advances by borrowers for taxes and insurance	21,388		21,388		—		21,388		—



June 30, 2014			Fair Value Measurements
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	24,256	$	24,256	$	24,256	$	—	$	—
Investment securities	368,385		368,747		14		368,733		—
Correspondent bank stock	6,367		6,367		—		6,367		—
Loans held for sale	6,173		6,173		—		6,173		—
Net loans and leases receivable	801,444		802,104		—		22,251		779,853
Accrued interest receivable	5,407		5,407		—		5,407		—
Servicing rights, net	11,218		12,092		—		—		12,092
Interest rate swap contracts	739		739		—		739		—
Financial liabilities
Deposits	999,174		999,233		—		—		999,233
Interest rate swap contracts	1,691		1,691		—		1,691		—
Borrowed funds	120,643		127,104		—		127,104		—
Subordinated debentures payable to trusts	24,837		29,028		—		—		29,028
Accrued interest payable and advances by borrowers for taxes and insurance	14,859		14,859		—		14,859		—

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

Fair Value Measurement

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

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

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

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

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

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

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, 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	$	—	$	10,717	$	—	$	10,717
Municipal bonds	—		8,425		—		8,425
Equity securities:
Federal Ag Mortgage	12		—		—		12
Other investments	—		353		—		353
Agency residential mortgage-backed securities	—		141,444		—		141,444
Securities available for sale	12		160,939		—		160,951
Loans and leases receivable	—		—		293		293
Interest rate swap contracts	—		743		—		743
Total assets	$	12	$	161,682	$	293	$	161,987

Interest rate swaps contracts	$	—	$	1,972	$	—	$	1,972
Total liabilities	$	—	$	1,972	$	—	$	1,972

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 Company had no assets or liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during fiscal years 2015 and 2014 and thus, no reconciliation is presented.

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

The table below presents the Company's balances of financial instruments measured at fair value on a nonrecurring basis by level within the hierarchy at March 31, 2015:



	Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fiscal 2015 Incurred Losses
Impaired loans	$	—	$	16,914	$	7,312	$	14
Mortgage servicing rights	—		—		10,873		—

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, 2014:



	Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fiscal 2014 Incurred Losses (Gains)
Impaired loans	$	—	$	22,352	$	5,434	$	(2,042	)
Mortgage servicing rights	—		—		12,092		(1,249		)
Foreclosed real estate and other properties	—		—		111		13

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.

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

HF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN THOUSANDS, except share data)

(Unaudited)

appraisal or valuation, or have updated appraisals with valuation changes since its inclusion as a foreclosed asset are included as a nonrecurring valuation.

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of March 31, 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	$	7,312	Discounted cash flow	Discount rate	5.0% - 9.0% (6.6%)
				Principal loss probability	0.0% - 19.7% (5.3%)

			Collateral valuation	Discount from appraised value	0.0% - 68.6% (22.6%)
				Costs to sell	6.0% - 12.5% (9.0%)

Servicing rights, net	10,873		Discounted cash flow	Constant prepayment rate	9.6%
				Discount rate	10.5%

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2014, the significant unobservable inputs used in the fair value measurements were as follows:



	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Averages)
Impaired loans	$	5,434	Discounted cash flow	Discount rate	3.3% - 10.0% (6.5%)
				Principal loss probability	0.0% - 18.0% (6.7%)

			Collateral valuation	Discount from appraised value	0.0% - 62.1% (31.0%)
				Costs to sell	5.2% - 18.3% (12.5%)

Servicing rights, net	12,092		Discounted cash flow	Constant prepayment rate	8.6%
				Discount rate	10.5%

Foreclosed real estate and other properties	111		Collateral valuation	Costs to sell	9.0%

NOTE 17—COMMITMENTS

In March 2015, the Company completed a sale-leaseback transaction related to one retail branch office located in Sioux Falls, SD. The transaction included the sale of the land, building and improvements associated with the full service branch office for total proceeds of $790. The location will be leased under an operating lease with a term of seven years with the option to renew the lease for an additional five years . Related to this transaction, the buyer has financed the purchase with a loan from the Company in the ordinary course of business, which will mature in 10 years. Since the Company will be at-risk for 10 years, the minimum lease term applicable would include the original lease term plus one renewal term, or 12 years total minimum lease term. The proceeds from the sale-leaseback were utilized to provide additional cash resources for the Company. In connection with the sale, closing costs represented $52, which reduced the net proceeds to $738. The cost basis related to the assets sold were $201, which represents a total gain of $537 for the transaction. Under GAAP guidelines, the present value of the minimum lease payments was $224 and is recorded as a deferred gain which will be amortized over the minimum lease term as defined above. The remaining portion of the gain, or $313 was recorded as a gain on sale of property in other noninterest income for the third quarter of fiscal 2015.

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

Forward-Looking Statements

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

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


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


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


•	forecasts of future economic performance.


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

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


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


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


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


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


•	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 2015 was $1.7 million, or $0.24 in basic and diluted earnings per common share, compared to $5.1 million, or $0.73 in basic and diluted earnings per common share, for the first nine months of fiscal 2014. This resulted in a return on average equity (i.e., net income divided by average equity) of 2.16% and 7.02%, respectively, in the year-over-year comparison, while the return on average assets (i.e., net income divided by average assets) was 0.18% and 0.55%, respectively.

Core diluted earnings per share, a non-GAAP measure, was $0.75 compared to $0.67 for the nine months ended March 2015 and 2014, respectively. This financial measure is adjusted from GAAP net income and diluted earnings per share for the effects of the one-time charges related to prepayment of FHLB term borrowings, gains or losses on investment security sales, gains or losses on sales of real property, 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 second fiscal quarter, $84.9 million of FHLB term borrowings were prepaid which resulted in a one-time pre-tax charge to noninterest expense of $4.1 million. The longer-term funds which carried a weighted average interest cost of 3.09% were initially replaced on a net basis with less expensive short-term funding at a significantly lower rate. In the third fiscal quarter, $122.9 million of FHLB short-term funding was repaid through the sale of investment securities. Management believes this strategy will further improve the net interest margin.

Net interest income for the first nine months of fiscal 2015 was $26.5 million, an increase of $3.6 million, or 15.8%, compared to the same period a year ago. For the comparative time-frames, average interest-earning assets and average interest-bearing liabilities decreased 1.0% and 0.2%, respectively. The average yield on interest-earning assets increased to 3.64% for the first nine months of fiscal 2015, compared to 3.40% a year ago, an increase of 24 basis points, due primarily to the 13.4% growth in average loan balances, a net recovery of non-accrued interest, and a decrease in the average balances of lower-yielding investment securities of 26.2%. This was complemented by a 24 basis point decrease in the average rates paid on interest-bearing liabilities. The net recovery of non-accruing interest during fiscal 2015 of $569,000 improved the net interest margin by 6 basis points on a year-to-date basis. The improved mix of earning assets, which features increased higher-earning loan assets versus investment securities assets was also a component of the increase when compared to the same period of the prior fiscal year. The repayment of term borrowings contributed to an 83 basis point decrease in FHLB advances and other

borrowings interest cost when comparing the first nine months of fiscal 2015 with the prior year period. For the nine months ended March 31, 2015, cost of deposits, which include all interest-bearing and noninterest-bearing deposits, decreased by 5 basis points to 0.38%, compared to 0.43% for the same period of 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, 2015 was 3.11%, which is an increase of 45 basis points from the same period of the prior fiscal year. Net interest income attributable to the increases in average balances of interest-earning assets and interest-bearing liabilities amounted to a net increase of $2.8 million for the nine month period when compared to the same period of the prior year, while the net interest income increases attributed to yield were $849,000. Interest-earning asset average balance repositioning to loans from investments contributed to an increase of $2.4 million in interest revenue, while the decline in average rates paid for FHLB advances and other borrowings of 83 basis points primarily drove net interest expense savings of $823,000. These interest expense savings were complemented by the 16.7% reduction in average balances of borrowings which generated interest expense savings of $489,000 for the year-over-year comparison. Average balances of borrowings declined due to the generation of cash through the sales of investments which were used to reduce borrowings. The yield on loans and leases receivable decreased by 10 basis points and resulted in a decrease of net interest income of $635,000, while the rate paid on interest-bearing liabilities decreased 24 basis points and resulted in a decrease in interest expense of $1.4 million, which included the savings due to the reduced rates from the FHLB advances, reduced rates on interest-bearing deposits, and reduced rates paid on subordinated debentures. The combined effects of volume and rate changes resulted in an overall net interest income increase of $3.6 million for the nine months ended March 31, 2015 when compared to the same period of the prior year.

Average loans and leases receivable balances increased by $99.7 million, when compared to the same period of the prior year, and were funded by a reduction in average investment securities of $109.8 million and a net decrease in interest-bearing liabilities of $2.2 million. Average balances of interest-bearing deposits increased $23.8 million for the year-over-year comparison, while FHLB advances and other borrowings decreased by $26.0 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. Net Interest Margin, TE is a non-GAAP financial measure. See “Analysis of Net Interest Income” for a calculation of this non-GAAP financial measure and for further discussion as to the reasons we believe this non-GAAP financial measure is useful.

Total loans increased by $59.7 million during the first nine months of fiscal 2015 to $871.6 million at March 31, 2015, compared to $811.9 million at June 30, 2014 and $754.8 million at March 31, 2014. Commercial real estate and agricultural lending portfolios increased by $57.1 million and $19.6 million, respectively, since the prior fiscal year end, while sound underwriting standards remain in place. Commercial business loans decreased by $11.4 million in the first nine months of fiscal 2015, while consumer loans in total decreased by $5.5 million during this period. We believe 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. We believe that the operating environment has resulted in increased competition among financial institutions for loan demand from credit-worthy borrowers.

The allowance for loan and lease losses increased by $510,000 to $11.0 million at March 31, 2015, compared to June 30, 2014. The ratio of allowance for loan and lease losses to total loans and leases was 1.26% compared to 1.29% at June 30, 2014. The overall loan balances increased by $59.7 million during the first nine months of fiscal 2015, while nonperforming loans decreased by $4.3 million to $13.0 million. The amount of classified assets increased slightly to $30.2 million at March 31, 2015 as compared to June 30, 2014. 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 improving 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 $1.2 million for the first nine months of fiscal 2015. Total nonperforming assets at March 31, 2015 were $13.1 million as compared to $17.5 million at June 30, 2014. The ratio of nonperforming assets to total assets decreased to 1.15% at March 31, 2015, compared to 1.37% at June 30, 2014. Net charge-offs for the nine month period ended March 31, 2015 were $691,000 and represent 0.11% of average loans and leases for the period. The allowance recorded in accordance with ASC 450 increased by $472,000 due primarily to increases in the applicable loan balances since the prior fiscal year end and adjusted based on management's assessment of the allowance using historical charge-off activity and environmental factor information. The allowance recorded in accordance with ASC 310 on identified impaired loans increased by $38,000 to $521,000 at March 31, 2015, and consisted primarily of consumer loans and to a lesser degree, agricultural 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 $27,000 at March 31, 2015, compared to $180,000 at June 30, 2014, or a decrease of $153,000. The balance at March 31, 2015 was a consumer loan that was foreclosed and remained unsold at quarter end.

The allowance for loan and lease losses is calculated based on loan and lease levels, loan and lease loss history over 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, 2015 were $934.3 million, a decrease of $64.9 million from June 30, 2014. This decrease was primarily due to a decrease of $72.7 million from public fund deposits and a decrease of $6.0 million from in-market, non-public fund customer deposits. These decreases were partially offset by an increase in out-of-market certificates of deposits of $13.9 million. Public funds have seasonal fluctuations due to semiannual tax collection and subsequent disbursement to entities. Interest rates on deposits decreased to the average rate paid of 0.45% on interest-bearing deposits for the nine month period ended March 31, 2015, compared to 0.52% for the same period of the prior year.

On April 27, 2015, the Company announced it will pay a quarterly cash dividend of $11.25 cents per common share for the third quarter of fiscal 2015. The dividend will be paid on May 15, 2015, to stockholders of record on May 8, 2015.

On February 26, 2015, the Company announced that its operating subsidiary, Home Federal Bank (the “Bank”), had successfully completed its conversion from a federally-chartered savings association to a South Dakota state-chartered banking corporation. The Bank was previously regulated primarily by the Office of the Comptroller of the Currency ("OCC"). After the Bank’s conversion, the Bank became subject to primary regulation by the Division of Banking of the South Dakota Department of Labor and Regulation ("DOB") and the FDIC. In connection with the Bank’s conversion, the Company has also successfully completed its conversion from a savings and loan holding company to a bank holding company and will continue to be subject to the regulation and supervision of the Board of Governors of the Federal Reserve.

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. The final rules seek to strengthen the components of regulatory capital, increase total risk-based capital requirements, and make selected changes to the calculation of risk-weighted assets. The final rules became effective January 1, 2015 for most banking organizations including the Holding Company and Home Federal Bank, subject to a transition period for several aspects of the final rules.

The total risk-based capital ratio of 13.64% at March 31, 2015, decreased by 90 basis points from 14.54% at June 30, 2014. Tier I capital increased 74 basis points to 10.23% at March 31, 2015 when compared to 9.49% at June 30, 2014. The decrease in total risk-based capital stems in part from updated regulation as mentioned above which requires modification to the risk-weighting assignment of various assets. High Volatility Commercial Real Estate ("HVCRE") and nonaccrual loan balances were assigned a 150% risk-weighting effective for implementation for the March 31, 2015 regulatory reporting. The impact of these modifications reduced the risk-based capital ratio by 35 basis points. The Tier I capital ratio increased during the quarter by 95 basis points primarily due to the sale of investment securities during the quarter which reduced total assets. These ratios continue to place the Company in the “well-capitalized” category within financial institution regulations at March 31, 2015 and are consistent with the “well-capitalized” regulatory category in which the Company plans to operate. The Company historically has been able to manage the size of its assets through secondary market loan sales of single-family mortgages.

Noninterest income was $8.5 million for the nine months ended March 31, 2015, compared to $11.8 million for the same period in the prior fiscal year, a decrease of $3.3 million. This decrease was due to decreases in mortgage banking revenue, net loss on sale of investment securities and a loss on the disposal of closed-branch fixed assets. Net loan servicing income and net gain on sale of loans decreased by $1.1 million and $283,000, respectively, due to a prior year recovery of servicing valuation allowance of $1.2 million for which there was no allowance remaining to recover in the current fiscal year; and an overall

reduction in mortgage originations due in part to reduced refinance activity. Gain and loss on sale of investment securities decreased by $1.7 million due to the sale of $140.7 million of investment securities which produced net losses of $1.1 million in the first nine months of fiscal 2015. The sale of investment securities enabled the Company to use these lower-earning assets to reduce borrowings and to provide funds for loan advances. In addition, the closure of four in-store retail branch offices and one traditional branch office during the current fiscal year resulted in a loss on disposal of closed branch fixed assets of $461,000, which reduced noninterest income. These branch closures resulted from the continued efforts to improve operating efficiencies. Of the four in-store retail branch closures, one was relocated to a new traditional branch office in close proximity of the original site in an effort to maintain coverage within the marketplace. Partially offsetting the decreases to noninterest income were commission and insurance income which increased by $189,000 when comparing the current nine month period to the same period of the prior fiscal year. This increase is due primarily to an increase in managed funds fee income. Fees on deposits decreased by $203,000 for the first nine months of fiscal 2015 when compared to the same period of the prior year primarily due to decreases in NSF/Overdraft fees of $127,000 and point-of-sale income reductions of $160,000. NSF/Overdraft fee decreases were attributed to reduced transactions and point-of-sale income decreases were due to a lower earnings structure. Partially offsetting these decreases were net service charges and ATM service fees increases of $45,000 and $46,000, respectively in the year-over-year comparison. Other noninterest income increased by $245,000 due primarily to a gain on the sale of a branch property of $313,000 in a sale-leaseback transaction in the third quarter of fiscal 2015 and partially offset by a charge recorded of $64,000 from the sale of land previously held for future branch expansion in the second quarter of fiscal 2015.

Noninterest expense was $32.0 million for the nine months ended March 31, 2015, as compared to $27.0 million for the same period of the prior fiscal year, an increase of $4.9 million, or 18.2%. The increase was attributed primarily to the prepayment of long-term FHLB advances of $84.9 million, which resulted in a loss on early extinguishment of debt of $4.1 million in the second fiscal quarter of 2015 and branch closure costs included in noninterest expense of $397,000. Other noteworthy increases in noninterest expense were an increase in compensation and employee benefits of $409,000, which included $63,000 of retention and severance pay for branch closures. Occupancy and equipment expense increased $241,000, which included $336,000 of expense related to branch closures. Check and data processing expense increased $166,000, which included data communication termination charges for the branch closures of $36,000. Marketing and community investment increased $257,000 due to efforts to enhance marketing exposure. Compensation costs increased primarily due to increased healthcare costs of $254,000, which resulted from increased high dollar claim activity when compared to the prior fiscal year. In addition, variable and incentive pay and base salary wages contributed with increases of $123,000 and $330,000, respectively, however base wages included $63,000 of retention and severance pay related to branch closures. Deferred loan costs partially offset these increases with an increased deferral amount of $248,000, which reduced compensation expense. Foreclosed real estate and other properties partially reduced the noninterest expense increases with a $245,000 decrease in the year-over-year comparison. This was due to fewer properties held in foreclosure and sold when compared to the prior fiscal year.

On April 15, 2015 the Company issued a press release announcing that it had entered into a definitive agreement to sell our Pierre, SD branch location as part of our ongoing strategy to increase our focus on customer service and organic growth in our core banking markets of eastern South Dakota, and our newer metropolitan markets in Fargo, ND and the Twin Cities. Under the terms of this agreement we are selling loans, deposits and branch facilities and equipment. We are confident the

buyer, First Dakota National Bank, will continue to provide excellent service to our clients and contribute positively to the Pierre community. A closing is expected in July, 2015, subject to regulatory approval.

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 through ongoing operations. The Company believes that core earnings are useful to management and investors in evaluating its ongoing 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, net gains or losses recorded on the sale of securities, the charges incurred from the prepayment of borrowings, net gains or losses on the sale of property, and costs incurred for branch closures.



	Three Months Ended									Nine Months Ended
	March 31,			December 31,			March 31,			March 31,
	2015			2014			2014			2015			2014
	(Dollars in Thousands, except share data)
GAAP earnings before income taxes	$	842		$	(1,601	)	$	2,831		$	1,869		$	7,379
Net loss (gain) on sale of securities	1,076			75			(233		)	1,117			(591		)
Charges incurred from prepayment of borrowings (1)	—			4,065			—			4,065			—
Net (gain) loss on sale of property	(313		)	64			—			(249		)	—
Costs incurred for branch closures (2)	695			2			—			896			—
Core earnings before income taxes	2,300			2,605			2,598			7,698			6,788
Provision for income taxes for core earnings	677			865			769			2,421			2,032
Core earnings	$	1,623		$	1,740		$	1,829		$	5,277		$	4,756

GAAP diluted earnings per share	$	0.10		$	(0.12	)	$	0.28		$	0.24		$	0.73
Net loss (gain) on sale of securities, net of tax	0.10			—			(0.02		)	0.10			(0.06		)
Charges incurred from prepayment of borrowings, net of tax	—			0.36			—			0.36			—
Net (gain) loss on sale of property, net of tax	(0.03		)	0.01			—			(0.02		)	—
Costs incurred for branch closures, net of tax	0.06			—			—			0.07			—
Core diluted earnings per share	$	0.23		$	0.25		$	0.26		$	0.75		$	0.67

⁽¹⁾ Charges were incurred for the prepayment of $84.9 million of FHLB term borrowings and are included in noninterest expense as a loss on early extinguishment of debt on the income statement for the period ended December 31, 2014.

⁽²⁾ Branch closure costs include a loss on the disposition of closed branch fixed assets and other costs associated with the closure. The loss on the disposition of closed branch fixed assets is included as a reduction in noninterest income and other costs associated with the closure 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, 2015, the Company had total assets of $1.14 billion, a decrease of $136.4 million from the amount at June 30, 2014. Total investment securities decreased $187.2 million, while total loans and leases receivable increased $59.7 million. Total liabilities decreased $137.8 million due to a decrease in deposits of $64.9 million and a decrease in advances from FHLB and other borrowings of $79.4 million. Stockholders' equity increased $1.4 million since June 30, 2014, due to improvements in accumulated other comprehensive loss and offset by a decrease in retained earnings.

The increase in loans and leases receivable, net, which excludes loans in process and deferred fees, was $59.2 million due to the increase in loan balances. Commercial real estate and agricultural loans increased $57.1 million and $19.6 million, respectively, while commercial business loans decreased by $11.4 million.

The investment securities, which includes available for sale and held to maturity securities, decreased by $187.2 million due primarily to the sale of available for sale investment securities, and was also impacted by principal payments, maturities, and purchased investment securities during the first nine months of fiscal 2015. The book value of investment securities sold, called or matured were $144.3 million, and were primarily utilized to reduce borrowings from the FHLB during the third fiscal quarter. Repayments of principal balances of investments securities totaled $48.4 million. These reductions in the balance were partially offset by the purchase of investment securities of $6.6 million. The remaining change in investment securities was the net premium amortization of investment securities and partially offset by increases in market value which decreased the recorded balance by $1.1 million for the first nine months of fiscal 2015. The Company classifies its investment securities as available for sale and held to maturity. Investment securities available for sale decreased by $187.9 million for the nine month ended March 31, 2015, while investment securities held to maturity increased by $727,000.

Loans held for sale decreased $1.7 million, to $4.5 million at March 31, 2015, due to mortgage loan sales to secondary markets which exceeded residential mortgage loan origination activity in held for sale balances since the prior year end. New home financing remains strong 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 $64.9 million, to $934.3 million at March 31, 2015, due to a $72.7 million decrease in public fund deposits and a decrease of $6.0 million from in-market, non-public fund customer deposits. These were partially offset by an increase in out-of-market certificates of deposits of $13.9 million. Advances from the FHLB and other borrowings decreased $79.4 million, to $41.2 million at March 31, 2015 as compared to June 30, 2014, due to the sale of investment securities to reduce borrowings and the related interest expense.

Stockholders' equity increased $1.4 million at March 31, 2015 when compared to June 30, 2014. Accumulated other comprehensive loss, net of related deferred tax effect, reflected a decrease of unrealized losses of $2.0 million since June 30,

2014 and improved stockholders' equity. Retained earnings decreased by $718,000 due to the payment of cash dividends of $2.4 million which exceeded net income of $1.7 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,
	2015						2014
	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⁾	$	861,736	$	9,197	4.33	%	$	739,044	$	8,781	4.82	%
Investment securities⁽²⁾⁽³⁾	233,962		830		1.44		421,329		1,670		1.61
Correspondent bank stock	5,143		33		2.60		6,644		46		2.81
Total interest-earning assets	1,100,841		$	10,060	3.71	%	1,167,017		$	10,497	3.65	%
Noninterest-earning assets	78,432						74,254
Total assets	$	1,179,273					$	1,241,271
Interest-bearing liabilities:
Deposits:
Checking and money market	$	391,645	$	225	0.23	%	$	378,006	$	234	0.25	%
Savings	99,196		49		0.20		166,425		103		0.25
Certificates of deposit	294,573		572		0.79		251,795		623		1.00
Total interest-bearing deposits	785,414		846		0.44		796,226		960		0.49
FHLB advances and other borrowings	90,707		79		0.35		128,575		907		2.86
Subordinated debentures payable to trusts	24,837		286		4.67		24,837		305		4.98
Total interest-bearing liabilities	$	900,958	$	1,211	0.55	%	$	949,638	$	2,172	0.93	%
Noninterest-bearing deposits	141,370						158,368
Other liabilities	34,495						34,549
Total liabilities	1,076,823						1,142,555
Equity	102,450						98,716
Total liabilities and equity	$	1,179,273					$	1,241,271
Net interest income; interest rate spread⁽⁴⁾			$	8,849	3.16	%			$	8,325	2.72	%
Net interest margin⁽⁴⁾⁽⁵⁾					3.26	%					2.89	%
Net interest margin, TE⁽⁶⁾					3.33	%					2.95	%

_____________________________________


⁽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, 2015 and 2014 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,
	2015						2014
	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)	$	842,062	$	28,549	4.52	%	$	742,320	$	25,740	4.62	%
Investment securities(2)(3)	309,539		2,984		1.28		419,338		3,925		1.25
Correspondent bank stock	6,766		144		2.84		7,882		174		2.94
Total interest-earning assets	1,158,367		$	31,677	3.64	%	1,169,540		$	29,839	3.40	%
Noninterest-earning assets	76,064						73,184
Total assets	$	1,234,431					$	1,242,724
Interest-bearing liabilities:
Deposits:
Checking and money market	$	395,476	$	701	0.24	%	$	362,809	$	708	0.26	%
Savings	118,616		180		0.20		143,448		255		0.24
Certificates of deposit	280,474		1,780		0.85		264,470		2,033		1.02
Total interest-bearing deposits	794,566		2,661		0.45		770,727		2,996		0.52
FHLB advances and other borrowings	131,175		1,632		1.66		157,187		2,944		2.49
Subordinated debentures payable to trusts	24,837		885		4.75		24,837		1,011		5.42
Total interest-bearing liabilities	$	950,578	$	5,178	0.73	%	$	952,751	$	6,951	0.97	%
Noninterest-bearing deposits	148,988						162,141
Other liabilities	32,262						30,642
Total liabilities	1,131,828						1,145,534
Equity	102,603						97,190
Total liabilities and equity	$	1,234,431					$	1,242,724
Net interest income; interest rate spread(4)			$	26,499	2.91	%			$	22,888	2.43	%
Net interest margin(4)(5)					3.05	%					2.61	%
Net interest margin, TE(6)					3.11	%					2.66	%

_____________________________________


⁽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, 2015 and 2014 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,
	2015			2014			2015			2014
	(Dollars in Thousands)
Net interest income	$	8,849		$	8,325		$	26,499		$	22,888
Taxable equivalent adjustment	183			176			561			486
Adjusted net interest income	9,032			8,501			$	27,060		$	23,374
Average interest-earning assets	1,100,841			1,167,017			1,158,367			1,169,540
Net interest margin, TE	3.33		%	2.95		%	3.11		%	2.66		%

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,
	2015 vs 2014									2015 vs 2014
	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⁾	$	1,457		$	(1,041	)	$	416		$	3,444		$	(635	)	$	2,809
Investment securities⁽²⁾	(742		)	(98		)	(840		)	(1,012		)	71			(941		)
Correspondent bank stock	(10		)	(3		)	(13		)	(25		)	(5		)	(30		)
Total interest-earning assets	$	705		$	(1,142	)	$	(437	)	$	2,407		$	(569	)	$	1,838
Interest-bearing liabilities:
Deposits:
Checking and money market	$	9		$	(18	)	$	(9	)	$	58		$	(65	)	$	(7	)
Savings	(42		)	(12		)	(54		)	(42		)	(33		)	(75		)
Certificates of deposit	104			(155		)	(51		)	118			(371		)	(253		)
Total interest-bearing deposits	71			(185		)	(114		)	134			(469		)	(335		)
FHLB advances and other borrowings	(267		)	(561		)	(828		)	(489		)	(823		)	(1,312		)
Subordinated debentures payable to trusts	—			(19		)	(19		)	—			(126		)	(126		)
Total interest-bearing liabilities	$	(196	)	$	(765	)	$	(961	)	$	(355	)	$	(1,418	)	$	(1,773	)

Net interest income increase	$	901		$	(377	)	$	524		$	2,762		$	849		$	3,611

_____________________________________


⁽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, 2015, 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, no valuation reserve was recorded for temporary impairment at March 31, 2015, and no allowance was reversed during fiscal 2015.

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) decreased $4.4 million during the fiscal year to $13.1 million at March 31, 2015. The ratio of nonperforming assets to total assets, which is one indicator of credit risk exposure, decreased to 1.15% at March 31, 2015, from 1.37% at June 30, 2014.

Nonaccruing loans and leases decreased to $13.0 million at March 31, 2015 compared to $17.3 million at June 30, 2014. Included in nonaccruing loans and leases at March 31, 2015 were two consumer residential relationships totaling $225,000, seven commercial business relationships totaling $2.4 million, four commercial real estate relationships totaling $531,000, seven agricultural real estate relationships totaling $3.4 million, nine agricultural business relationships totaling $6.2 million, and 12 consumer relationships totaling $332,000.

There were no accruing loans and leases delinquent more than 90 days at March 31, 2015 and at June 30, 2014.

The Company's nonperforming loans and leases, which represent nonaccrual loans and leases plus those past due over 90 days and still accruing were $13.0 million, a decrease of $4.3 million from the levels at June 30, 2014. Dairy related loans included in the nonperforming loans at March 31, 2015 were less than one-half of the total nonperforming loans, which is a decrease from June 30, 2014 when dairy related loans comprised about two-thirds of the nonperforming loans. 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, 2015, the Company had $27,000 of foreclosed assets which was consumer home equity collateral.

At March 31, 2015, the Company had designated $30.2 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 $1.3 million of unused lines of credit for those borrowers that have classified assets. At March 31, 2015, the Company had $18.8 million in commercial real estate and commercial business loans purchased, of which none of the amounts were currently classified. These loans and leases were considered in determining the adequacy of the allowance for loan and lease losses. The allowance for loan and lease losses is established based on management's evaluation of the risks probable in the loan and lease portfolio and changes in the nature and volume of loan and lease activity. Such evaluation, which includes a review of all loans and leases for which full collectability may not be reasonably assured, considers the estimated fair market value of the underlying collateral, present value of expected principal and interest payments, economic conditions, historical loss experience and other factors that warrant recognition in providing for an adequate loan and lease loss allowance.

Although the Company's management believes that the March 31, 2015, 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, 2015 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, 2015			June 30, 2014
	(Dollars in Thousands)
Nonaccruing loans and leases:
One- to four-family	$	225		$	125
Commercial business	2,443			3,462
Commercial real estate	531			972
Multi-family real estate	—			27
Agricultural real estate	3,356			7,933
Agricultural business	6,156			3,797
Consumer direct	44			49
Consumer home equity	288			941
Total nonaccruing loans and leases	13,043			17,306
Accruing loans and leases delinquent more than 90 days:
Total accruing loans and leases delinquent more than 90 days	—			—
Foreclosed assets:
One- to four-family	—			178
Consumer direct	—			2
Consumer home equity	27			—
Total foreclosed assets⁽¹⁾	27			180
Total nonperforming assets⁽²⁾	$	13,070		$	17,486
Ratio of nonperforming assets to total assets⁽³⁾	1.15		%	1.37		%
Ratio of nonperforming loans and leases to total loans and leases⁽⁴⁾	1.50		%	2.13		%
Accruing troubled debt restructures	$	2,788		$	1,727

_____________________________________


⁽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,
	2015			2014
	(Dollars in Thousands)
Balance at beginning of period	$	10,502		$	10,743
Charge-offs:
One- to four-family	—			(7		)
Commercial business	(32		)	(103		)
Equipment finance leases	—			(22		)
Commercial real estate	—			(41		)
Agricultural business	(462		)	(491		)
Consumer direct	(25		)	(16		)
Consumer home equity	(159		)	(263		)
Consumer OD & reserve	(164		)	(151		)
Total charge-offs	(842		)	(1,094		)
Recoveries:
One- to four-family	—			1
Commercial business	45			284
Equipment finance leases	6			29
Commercial real estate	4			—
Agricultural real estate	2			5
Agricultural business	—			8
Consumer direct	12			10
Consumer home equity	25			7
Consumer OD & reserve	56			67
Consumer indirect	1			7
Total recoveries	151			418
Net (charge-offs)	(691		)	(676		)
Additions charged to operations	1,201			279
Allowance related to assets acquired (sold), net	—			—
Balance at end of period	$	11,012		$	10,346
Ratio of net charge-offs during the period to average loans and leases outstanding during the period ⁽²⁾	0.11		%	0.12		%
Ratio of allowance for loan and lease losses to total loans and leases at end of period	1.26		%	1.37		%
Ratio of allowance for loan and lease losses to nonperforming loans and leases at end of period⁽¹⁾	84.4		%	55.8		%

_____________________________________


⁽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, 2015 and 2014 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, 2015				June 30, 2014
	(Dollars in Thousands)
Residential	$	271	$	34	$	242	$	41
Commercial business	763		16		894		38
Commercial real estate	4,518		4		3,815		4
Agricultural	3,922		188		3,827		15
Consumer	1,017		279		1,241		385
Total	$	10,491	$	521	$	10,019	$	483



	Number of Loan Customers	Loan Balance		Impaired Loan Valuation Allowance		Number of Loan Customers	Loan Balance		Impaired Loan Valuation Allowance
Loan Type	March 31, 2015					June 30, 2014
	(Dollars in Thousands)
Residential	2	$	150	$	34	2	$	164	$	41
Commercial business	9	2,976		16		10	4,233		38
Commercial real estate	7	6,855		4		8	7,304		4
Agricultural	23	13,449		188		9	14,742		15
Consumer	47	1,317		279		36	1,826		385
Total	88	$	24,747	$	521	65	$	28,269	$	483

The allowance for loan and lease losses was $11.0 million at March 31, 2015, as compared to $10.5 million at June 30, 2014. The general valuation allowance increased by $472,000 due primarily to an increase in loan balances of $59.7 million since June 30, 2014. In addition, changes in historical loss data and portfolio performance attributes impacted the amount of allowance recorded, but for the nine months ended March 31, 2015 it had minimally impact on the change since the prior fiscal year end. The specific valuation allowance increased slightly by $38,000 to $521,000. The consumer segment represented 53.6% of the specific reserve in the portfolio. The ratio of the allowance for loan and lease losses to total loans and leases was 1.26% at March 31, 2015, compared to 1.29% at June 30, 2014. 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, 2015, the Company also had an allowance for credit losses on off-balance sheet credit exposures of $98,000. 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, 2015, the Company recorded a $40,000 recourse liability for mortgage loans sold, which is an increase of $5,000 since June 30, 2014.

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, 2014, 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, 2015 and March 31, 2014

General. The Company's net income was $719,000 or $0.10 for basic and diluted earnings per common share for the quarter ended March 31, 2015, a $1.3 million decrease compared to $2.0 million or $0.28 for basic and diluted earnings per common share for the quarter ended March 31, 2014. The third quarter of fiscal 2015 resulted in a return on average equity (i.e., net income divided by average equity) of 2.85%, compared to 8.11% for the same quarter of the prior year, while the return on average assets (i.e., net income divided by average assets) was 0.25% compared to 0.64%, respectively. As discussed in more detail below, the decreases were due primarily to the net loss on the sale of securities of $1.1 million during the quarter and is a reduction of $1.3 million when compared to the net gain recorded in the same quarter of the prior year. In addition, branch closure costs from the disposition of closed branch fixed assets of $298,000 in noninterest income and $397,000 of expenses recorded in noninterest expense during the quarter reduced earnings. Other factors affecting the quarterly results were an increase in net interest income of $524,000 which improved when compared to the same quarter of a year ago due to the lower costs of funding. This was partially offset by higher compensation costs exclusive of closed branch retention and severance pay of $314,000 recorded in noninterest expense. These net reductions in pre-tax income resulted in savings of $735,000 in the provision for income taxes 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 $10.1 million for the quarter ended March 31, 2015, as compared to $10.5 million for the same quarter of the prior year, a decrease of $437,000 or 4.2%. Interest earned on loans and leases receivable totaled $9.2 million for the quarter which is an increase of $416,000 when compared to the same quarter of the prior fiscal year. The average balance of loans and leases receivable was $861.7 million for the quarter ended March 31, 2015, or an increase of 16.6%, while the average yield decreased by 49 basis points to 4.33% in the quarter-over-quarter comparison. Interest earned on investment securities and interest-earning deposits decreased by $853,000, to $863,000 for the current quarter compared to $1.7 million for quarter ended March 31, 2014. The average yield on investment securities and interest-earning deposits decreased by 17 basis points to 1.46%, while the average balance decreased by $188.9 million to $239.1 million for the quarter ended March 31, 2015. Overall, the average balance of total interest-earning assets decreased by 5.7%, but the changing average balance mix from investments to loans and leases receivable resulted in an increase in interest and dividend revenue of $705,000. The average yield on interest-earning assets increased by 6 basis points because of the increase in the higher yielding loan and lease receivables as a percentage of earning assets, but due to the declining average rates earned on the loans and leases a decrease to interest and dividend revenue of $1.1 million was recorded due to yield differences when compared to the same quarter one 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 78% of the interest-earning assets for the quarter ended March 31, 2015 compared to 63% for the quarter one year earlier. Since the average rate earned on loans and leases receivable are 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 available for sale investment securities to reduce FHLB borrowings and improve overall net interest margin.

Interest Expense. Interest expense was $1.2 million for the quarter ended March 31, 2015, as compared to $2.2 million for the same quarter of the prior year, a decrease of $961,000 or 44.2%. Interest expense related to the FHLB advances and other borrowings decreased by $828,000 due primarily to a decrease in the rate paid, which was impacted by the prepayment of term FHLB advances in the second fiscal quarter of fiscal 2015. The average rate decrease of 251 basis points when comparing the current quarter to the same quarter a year ago resulted in interest savings of $561,000, while the average balance decrease resulted in additional interest savings of $267,000. FHLB borrowing balances were reduced during the second and third fiscal quarters as available-for-sale investment securities were sold. Interest expense related to interest-bearing deposits

decreased by $114,000. Interest paid on deposits was impacted by a $185,000 decrease resulting from declining rates primarily on certificates of deposits and partially offset by a $71,000 increase due to average balance changes. The average rate on interest-bearing deposits was 0.44% for the quarter ended March 31, 2015, as compared to 0.49% for the prior year's third quarter, or a decrease of 5 basis points. The increase in interest expense due to average balance changes was attributed to the flow of balances from savings accounts to certificates of deposits and to a lesser degree the money market accounts. Overall deposit balances decreased by 1.4% when compared to the same quarter of the prior year. Interest expense on subordinated debentures decreased by $19,000 for the three months ended March 31, 2015, when compared to the prior fiscal year, due to the expiration in the second quarter of fiscal 2015 of one interest rate contract totaling $2.0 million in notional value which paid a weighted average rate of 6.58% while it was effective. The interest rate contract was not replaced.

Net Interest Income. Net interest income for the third quarter of fiscal 2015 was $8.8 million, an increase of $524,000 or 6.3%, compared to fiscal 2014, due to a decrease in interest expense of $961,000 or 44.2%. This interest expense decrease was partially offset by a decrease in interest income of $437,000 or 4.2%. The net interest margin was 3.26%, compared to 2.89% for the same quarter of the prior fiscal year, an increase of 37 basis points. The Company's net interest margin on a fully taxable equivalent basis was 3.33% for the quarter ended March 31, 2015, as compared to 2.95% for the same quarter a year ago. This increase in NIM, TE was strategically implemented in the second fiscal quarter when the Company prepaid $84.9 million of FHLB term advances and recognized a loss 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 reduce the borrowings from the FHLB in the second and third fiscal quarters. The yield on interest-earning assets increased 6 basis points to 3.71% for the third quarter of fiscal 2015, while the average rate paid on interest-bearing liabilities decreased 38 basis points to 0.55% during the quarter. Average balances decreased when compared to the same quarter from the prior fiscal year for interest-earning assets and interest-bearing liabilities by 5.7% and 5.1%, respectively, but was expected as part of the balance sheet repositioning 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 increased to $282,000 for the quarter ended March 31, 2015, as compared to $260,000 in the prior year's quarter. During the third quarter, net charge-offs were $203,000, while loans and leases increased by $16.5 million and the valuation allowance on impaired loans increased by $61,000 from December 31, 2014. These factors, among others, contributed to the estimation of the allowance for loan and lease losses and the provision for loan and lease losses for the quarter. In addition, nonperforming assets increased by $135,000, while classified assets decreased by $1.3 million during the quarter. In comparing the third quarter of fiscal 2015 to fiscal 2014, net charge-offs decreased to $203,000 from $519,000 and loan and lease balances increased by 15.5% to $871.6 million. The valuation allowance on impaired loans was $521,000 at March 31, 2015, compared to $718,000 a year ago and classified assets decreased by $1.9 million to $30.2 million in comparison. In addition, nonperforming assets decreased by $5.7 million to $13.1 million at March 31, 2015, when compared to March 31, 2014. Dairy-related credits within the agricultural sector remain the largest segment within nonperforming assets at March 31, 2015, but have decreased to 43% of nonperforming assets.

The allowance for losses on loans and leases at March 31, 2015, was $11.0 million. The allowance increased from the March 31, 2014, balance of $10.3 million due to an increase in the general allowance from the increase in loan balances and adjusted for changes in environmental factors and loan loss history and partially offset by a decrease in the specific valuation allowance recorded on impaired loans. The ratio of allowance for loan and lease losses to nonperforming loans and leases at March 31, 2015, was 84.4% compared to 55.8% at March 31, 2014. The allowance for loan and lease losses to total loans and leases ratio at March 31, 2015, was 1.26% compared to 1.37% at March 31, 2014. Management believes that the March 31, 2015, 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 $2.1 million for the quarter ended March 31, 2015, a decrease of $1.6 million or 44.2% as compared to the quarter ended March 31, 2014. For the third quarter of fiscal 2015, decreases from the prior fiscal year's third quarter included loan servicing income and net gain or loss on sale of securities of $384,000 and $1.3 million, respectively. In addition, as plans were disclosed in the second fiscal quarter of 2015, the Company closed three retail branches and relocated another and in doing so incurred a loss on disposition of closed-branch fixed assets of $298,000 during

the third fiscal quarter of 2015 which reduced the total noninterest income. Discussed in further detail below, the Company also incurred branch closure costs that impacted noninterest expense. In a non-related event, the Company also sold a traditional branch property as part of a sale-leaseback transaction. This transaction resulted in a gain on sale of property of $313,000, which was recorded as other noninterest income. This transaction also resulted in $224,000 of deferred gain, which will be recognized over the term of the new lease. Overall, these net decreases were partially offset by an increase in gain on sale of loans and an increase in commission and insurance income of $113,000 and $34,000, respectively, when comparing the third quarter of fiscal 2015 to the same quarter of fiscal 2014.

Loan servicing income decreased by $384,000 to $319,000 for the third quarter of fiscal 2015. In the third quarter of the prior fiscal year, a recovery of valuation allowance was recognized for $374,000, while no valuation provision or benefit was recorded in the third quarter of fiscal 2015. Amortization expense, which is a component of net loan servicing income, was $392,000 for the third quarter of fiscal 2015 and represented a decrease in expense of $24,000 when compared to the third quarter of fiscal 2014 due to an assessment of declining prepayment speeds and lower asset base. In the quarter-over-quarter comparison, servicing income decreased by $34,000 due to a decreasing asset base and an overall lesser net servicing fee percentage which is based on investor mix and modified for delinquencies.

Net gain on the sale of loans totaled $457,000, an increase of $113,000 for the three months ended March 31, 2015, as compared to the prior fiscal year's quarter. This increase was due to increased new home purchase 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.

Net gain or loss on sale of securities from gross proceeds of $118.7 million netted a $1.1 million loss, a decrease of $1.3 million for the third quarter of fiscal 2015, as compared to the third quarter of fiscal 2014. For the quarter ended March 31, 2014, gross proceeds received totaled $26.9 million and resulted in a net gain of $233,000.

Fees on deposits decreased by $97,000 for the third quarter of fiscal 2015 when compared to the same period of the prior year primarily due to decreases in NSF/Overdraft fees of $21,000 and point-of-sale incentive income reductions of $74,000. NSF/Overdraft fee decreases were attributed to reduced transactions and point-of-sale incentive income decreases were due to scheduled changes in the potential incentive earnings structure.

Commission and insurance income was $438,000 for the quarter ended March 31, 2015, an increase of $34,000 when compared to the third quarter of fiscal 2014. This increase is due primarily to an increased book of business within the investment services line of business and from an increased asset base from which commissions are earned, when compared to the same period of the prior fiscal year. In conjunction with the increased revenue, variable pay for the current quarter, which is included in compensation expense, increased by $33,000 in the quarter-over-quarter comparison.

Noninterest Expense. Noninterest expense was $9.8 million for the quarter ended March 31, 2015, as compared to $8.9 million for the quarter ended March 31, 2014, an increase of $862,000, or 9.7%. Compensation and employee benefits, occupancy and equipment, marketing and community investment and other noninterest expenses increased by $377,000 $272,000, $129,000, and $133,000, respectively. As discussed previously, the Company incurred charges for branch closures of $695,000, of which $298,000 was reported as a loss on disposition of closed-branch fixed assets and is reported in other noninterest income. The remaining $397,000 of expense related to the branch closures was reported in compensation and employee benefits, occupancy and equipment, and check and data processing of $63,000, $314,000, and $20,000, respectively.

Compensation and employee benefits were $5.7 million for the three months ended March 31, 2015, an increase of $377,000, or 7.1% when compared to the quarter ended March 31, 2014. Increases in base salaries, variable and incentive pay, and health insurance benefit expense were the primary components to the increase in compensation expense as compared to the the third quarter of fiscal 2014 as they increased by $310,000, $74,000 and $36,000, respectively. Deferred loan costs, which reduce compensation expense, helped to offset the increases with a $52,000 decrease in expense. Total base salaries and wages were impacted by the branch closures, and the Company incurred related retention and severance pay costs of $63,000 during the current quarter. In addition, the average FTEs increased by 1.0%, or about 3 FTE, to an average of 294 FTEs for the three months ended March 31, 2015 when compared to the same quarter of the prior fiscal year. There has also been an emphasis on filling open positions with higher earning producers in an effort to bolster revenue. Lastly, salary expenses increased since the third quarter of the previous fiscal year due to annual salary raises. Variable pay increased due to increased commission expense paid on commission and insurance income of $33,000 and increased mortgage commissions of $54,000. The commission expense increase was directly derived from commission and insurance income increases in noninterest income. Mortgage commissions increased due to increased mortgages closed during the third quarter of fiscal 2015 when compared to the third quarter of fiscal 2014. The prior fiscal year results reflected a very productive first quarter and continued declines in the second and third quarters whereas the first nine months of fiscal 2015 has exhibited relatively steady production levels. Compensation expense deferment under ASC 310-20 increased when compared to the prior year due to a combination of higher deferred loan

costs and increased loan originations and renewals on commercial and residential loans, which produced compensation expense savings.

Occupancy and equipment increased $272,000 to $1.3 million for the three months ended March 31, 2015, due primarily to the $314,000 costs associated with the branch closures when compared to the same quarter of the prior fiscal year. Excluding these one-time costs, occupancy costs decreased by $42,000, or 4.0% when comparing the third fiscal quarters of 2015 to 2014.

Marketing and community investment increased $129,000 to $444,000 for the quarter ended March 31, 2015 as compared to the same period of the prior fiscal year as part of a larger strategic focus on marketing and advertising.

Income tax expense. The Company's income tax expense for the quarter ended March 31, 2015, decreased to $123,000 compared to $858,000 for the same period of the prior fiscal year. The effective tax rates were 14.6% and 30.3% for the quarter ended March 31, 2015 and 2014, respectively. The provision for the current quarter is lower than anticipated due to the large portion of taxable income that is offset by the amount of permanent tax deductions. Permanent tax net deductions as a percentage of pretax income were 52.3% and 15.8%, respectively, for the third quarters of fiscal 2015 and 2014, which was impacted almost entirely by the change in pretax income.

Comparison of the Nine Months Ended March 31, 2015 and March 31, 2014

General. The Company's net income was $1.7 million or $0.24 for basic and diluted earnings per common share for the nine months ended March 31, 2015, a $3.5 million decrease in net income compared to $5.1 million or $0.73 for basic and diluted earnings per common share for the same period of the prior year. For the first nine months of fiscal 2015, the return on average equity (i.e., net income divided by average equity) was 2.16%, compared to 7.02% in the same period of the prior year, while the return on average assets (i.e., net income divided by average assets) was 0.18% and 0.55%, respectively. As discussed in more detail below, 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. Starting in December 2014 and through the current quarter, the sales of lower yielding available-for-sale investment securities resulted in losses of $1.2 million, or $747,000 net of applicable taxes, with proceeds utilized to fund the repayment of shorter-term borrowings from the FHLB. This strategy enabled the Company to reduce the higher-rate term borrowings from the FHLB and reduce lower-rate earning asset balances to improve the net interest margin. During fiscal 2015, other significant changes when comparing to the first nine months of fiscal 2015 to the same period a year earlier included: interest, dividend and loan fee income increased by $1.8 million, interest expense decreased by $1.8 million, the provision for loans and leases increased by $922,000, net loan servicing income decreased by $1.1 million, and charges related to branch closures in fiscal 2015 totaled $896,000.

Interest, Dividend and Loan Fee Income. Interest, dividend and loan fee income was $31.7 million for the nine months ended March 31, 2015, as compared to $29.8 million for the same period of the prior year, an increase of $1.8 million or 6.2%, due to increased average loan balances and complemented by a net recovery of nonaccrued interest. Interest earned on loans and leases receivable totaled $28.5 million for the first nine months of fiscal 2015 which is a net increase of $2.8 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 $99.7 million, or 13.4% for the first nine months of fiscal 2015 as compared to the same period in fiscal 2014. This change was partially offset by a decrease in the average yield on interest earned from loans and leases receivable, which decreased by 10 basis points to 4.52% in the year-over-year comparison. The current 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. Interest earned on investment securities and interest-earning deposits decreased by $971,000 in the year-over-year comparison to $3.1 million for the nine month period ended March 31, 2015, due primarily to the reduction in mortgage-backed securities balances from the sale of investment securities in the recent months which resulted in reduced average balances of investment securities. The average balance of investment securities and interest-earning deposits decreased by $110.9 million, or 26.0%, to $316.3 million for the nine month period ended March 31, 2015, while the average yield increased by 4 basis points to 1.32%. Overall, the average balance of total interest-earning assets decreased by 1.0% but resulted in an increase to revenue of $2.4 million in comparison due to the large increase in loans and leases receivable within the earning asset mix. This increase to revenue was partially offset by the loss of revenue of $635,000 due to the reduction in yield on loans and leases receivable. Even though the yield earned on loans and leases receivable decreased by 10 basis points, the average yield on interest-earning assets increased by 24 basis points due to the higher composition of loans and leases receivable within total earning assets.

Interest Expense. Interest expense was $5.2 million for the nine months ended March 31, 2015, as compared to $7.0 million for the same period of the prior year, a decrease of $1.8 million or 25.5%. Interest expense related to interest-bearing deposits decreased by $335,000. A $469,000 decrease was the result of reduced rates paid and partially offset by a $134,000

increase due to average balance changes. The average rate on interest-bearing deposits was 0.45% for the nine months ended March 31, 2015, as compared to 0.52% for the same period of the prior year. The average balance of interest-bearing deposits increased by 3.1%, but a change in the mix of average balances from lower-cost savings accounts to the higher-cost certificates of deposits increased the amount of interest expense by $134,000. Noninterest-bearing deposits decreased by $13.2 million to an average balance of $149.0 million for the nine months ended March 31, 2015, as compared to the prior year. 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 for a recognized loss on early extinguishment of debt of $4.1 million and funded through the sale of investment securities in the second and third fiscal quarters. The average balance decrease resulted in reduced interest expense of $489,000, while the average rate decrease of 83 basis points resulted in a reduction in interest expense of $823,000. Interest expense on subordinated debentures decreased by $126,000 for the nine months ended March 31, 2015, when compared to the prior fiscal year, due in part to the maturity of one interest rate contract totaling $2.0 million in notional value which paid a weighted average rate of 6.58% while it was effective, and was not replaced.

Net Interest Income. Net interest income for fiscal 2015 was $26.5 million, an increase of $3.6 million, or 15.8%, compared to fiscal 2014, due to an increase in interest income of $1.8 million or 6.2%, and a decrease in interest expense of $1.8 million or 25.5%. The net interest margin for the first nine months of fiscal 2015 was 3.05% as compared to 2.61% for the prior fiscal year, an increase of 44 basis points. The Company's net interest margin on a fully taxable equivalent basis was 3.11% for the fiscal year ended March 31, 2015, as compared to 2.66% for the prior fiscal year. The yield on interest-earning assets increased 24 basis points to 3.64% for fiscal 2015, while the average rate paid on interest-bearing liabilities decreased 24 basis points to 0.73% in fiscal 2015. In fiscal 2015, the average balances decreased from a year ago for interest-earning assets and interest-bearing liabilities by 1.0% and 0.2%, respectively. The average yield on interest-earning assets increased primarily due to the higher yielding mix of assets related to the increased loan balances and complemented by the recovery of nonaccrued interest. The Company continues to have a diversified loan portfolio comprised of a mix of consumer and business type lending. This mix helps the Company manage the net interest margin and interest rate risk by retaining loan and lease production on the balance sheet or by looking at alternatives through secondary markets.

Provision for Losses on Loans and Leases. The allowance for loan and lease losses is maintained at a level which is believed by management to be adequate to absorb probable losses on existing loans and leases that may become uncollectible, based on an evaluation of the collectability of the loans and leases and prior loan and lease loss experience. The evaluation takes into consideration such factors as changes in the nature and balance of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases, and current economic conditions that may affect the borrower's ability to pay. The allowance for loan and lease losses is established through a provision for losses on loans and leases charged to expense. See "Asset Quality" above for further discussion.

Provision for losses on loans and leases increased $922,000, to $1.2 million for the nine months ended March 31, 2015, as compared to $279,000 for the same period in the prior year. The increase in the provision as compared to the same period of the prior fiscal year, is primarily due to the prior fiscal year's nine month provision benefit received by the reduction of the specific valuation on impaired loans since the beginning of the prior fiscal year, which offset the general valuation allowance increases due to the loan growth and some of the provision that would have been recorded due to net charge offs. For the nine months ended March 31, 2015, loans increased by $59.7 million from June 30, 2014, compared to loan growth of $59.0 million for the same period of the prior fiscal year. Net charge-offs for the current year-to-date period totaled $691,000, compared to the $676,000 of net charge-offs from the prior year period. The specific valuation allowance on impaired loans in accordance with ASC 310 increased by $38,000 since June 30, 2014, while the allowance in accordance with ASC 450 increased $472,000, which is primarily due to the increase in loan and lease balances. In the prior year, the specific valuation allowance decreased $1.7 million from the prior fiscal year end and the general valuation allowance increased $1.3 million, which as mentioned above impacted the prior year's provision through the nine month period. Total nonperforming loans decreased by $4.3 million during the nine month period ended March 31, 2015, as compared to a $4.1 million decrease for the same period of the prior fiscal year. Dairy-related credits within the agricultural sector remained the largest segment within the nonperforming loans for March 31, 2015, but have decreased to 43% of total nonperforming loans.

The allowance for losses on loans and leases at March 31, 2015 was $11.0 million, which is higher than the amount reported at March 31, 2014 of $10.3 million. The ratio of allowance for loan and lease losses to total loans and leases was 1.26% at March 31, 2015, compared to 1.37% at March 31, 2014. The specific valuation allowance of $521,000, which is comprised primarily of consumer loans, decreased by $197,000 from March 31, 2014. At March 31, 2015 the general valuation allowance of $10.5 million is an increase of $863,000 since March 31, 2014, and was evaluated primarily based upon a review

of historical loss and environmental factors and applied to loan and lease balances outstanding, which increased significantly since the year ago period. The balance of total loans and leases at March 31, 2015 was $871.6 million, and was an increase of $116.8 million from March 31, 2014. The ratio of allowance for loan and lease losses to nonperforming loans and leases at March 31, 2015, was 84.4% compared to 55.8% at March 31, 2014. The Bank's management believes that the March 31, 2015, 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 $8.5 million for the nine months ended March 31, 2015, as compared to $11.8 million for the same period of the prior fiscal year, which represents a decrease of $3.3 million or 27.8%. This was due to decreases in net loan servicing income, net gain on sale of loans, and net gain or loss on sale of investment securities of $1.1 million, $283,000, and $1.7 million, respectively. In addition, the disposal of closed-branch fixed assets resulted in a loss of $461,000 and fees on deposits decreased by $203,000 compared to the same period of the prior fiscal year. These decreases were partially offset by increases in commission and insurance income and trust income of $189,000 and $40,000, respectively. In the third quarter of fiscal 2015, the Company sold a traditional branch property as part of a sale-leaseback transaction. This transaction resulted in a gain on sale of property of $313,000, which was recorded as other noninterest income. This transaction also recorded $224,000 of deferred gain, which will be recognized over the term of the new lease as other noninterest income.

Loan servicing income decreased by $1.1 million to $1.0 million for the first nine months of fiscal 2015 primarily due to the net decrease of the valuation allowance benefit of $1.2 million recorded in the comparable period of the prior fiscal year. No valuation allowance or benefit was recorded in fiscal 2015. In addition, amortization expense decreased by $251,000 while servicing fees received decreased by $100,000. The reduction in prepayment speeds within the portfolio contributed to the amount of amortization expense decrease when comparing the year over year information. Servicing income decreased primarily due to a decreasing asset base.

Net gain on the sale of loans totaled $1.5 million, a decrease of $283,000 for the nine months ended March 31, 2015, as compared to the same period of the prior fiscal year. The decrease reflects reduced customer refinancing volume on residential lending in the current fiscal year. Origination activity for residential lending continues to remain sound due to the local economic climate and favorable interest rates relative to historical levels.

Net loss on the sale of securities totaled $1.1 million, for the nine months ended March 31, 2015 and is a decrease of $1.7 million from the net gain reported for the same period of the prior fiscal year. The Company received proceeds of $140.7 million for net losses of $1.1 million for the first nine months of fiscal 2015 as compared to proceeds received of $61.7 million for net gains of $591,000 for the first nine months of fiscal 2014. In December 2014, the Company prepaid $84.9 million of term advances from the FHLB. To fund this prepayment of debt, lower rate earning investment securities were sold in December 2014 and throughout the third fiscal quarter of 2015 which netted proceeds of $129.8 million. The resulting impact of these transactions were to reduce higher-cost term debt and lower-earning investment security assets, which improved net interest margin.

A retail branch office was closed in the first fiscal quarter of 2015 and three in-store retail branch offices were closed in the third fiscal quarter of 2015. Additionally, a fourth in-store retail branch office was relocated to a new retail branch office within close proximity to the original in-store location to maintain appropriate customer coverage during the third fiscal quarter. During the first nine months of fiscal 2015, these closings resulted in a loss on disposal of closed-branch fixed assets of $461,000, which reduced other income. The closures were made in the continued efforts to increase efficiencies through reduced operating expenses. Other branch closure costs totaling $435,000 were incurred and are included in various categories in noninterest expense and indicated below.

Commission and insurance income totaled $1.2 million for the first nine months of fiscal 2015, which is an increase of $189,000, when compared to the same period of the prior fiscal year. This increase is due primarily to growth in the asset base from which commissions are earned within the investment services line of business. In conjunction with the increased revenue, variable pay, which is included in compensation expense, increased by $114,000 when compared to the same nine months of the prior fiscal year.

Noninterest Expense. Noninterest expense was $32.0 million for the nine months ended March 31, 2015, compared to $27.0 million for the nine months ended March 31, 2014, an increase of $4.9 million, or 18.2%. During the second quarter of fiscal 2015, a total of $84.9 million in long-term FHLB advances were prepaid, which resulted in a loss on early extinguishment of debt of $4.1 million. Other factors that contributed to the increase in expense were compensation and employee benefits increases of $409,000, occupancy and equipment increases of $241,000, check and data processing increases of $166,000, and

marketing and community investment increases of $257,000. Partially offsetting these increases were a decrease in professional fees and net expense on foreclosed real estate of $121,000 and $245,000, respectively. Costs recorded in noninterest expense specifically related to branch closure costs in fiscal 2015 included occupancy and equipment, compensation and employee benefits, and check and data processing costs of $336,000, $63,000, and $36,000, respectively.

Compensation and employee benefits were $16.4 million for the nine months ended March 31, 2015, an increase of $409,000, or 2.6% when compared to the same period ended March 31, 2014. Health and insurance benefits was the primary component in the increase as it was $254,000 higher than the same nine month period from the prior year. Variable and incentive pay increased by $123,000, but was primarily the result from the commission and insurance revenue increases which are directly related as mentioned earlier. Base salaries and wages increased by $330,000, or 2.9% even though the average FTEs decreased by 3.7% to an average of 287 FTEs for nine months ended March 31, 2015 when compared to the same period of the prior fiscal year. This increase has been driven by recent investments into higher salaried sales positions, annual salary increases of approximately 2.5% and retention and severance pay related to the closed branches. Deferred loan costs under ASC 310-20 increased when compared to the prior year due to the increasing costs to originate loans, which reduced the amount of compensation that was directly expensed. The decrease in expense related to the increased deferrals was $248,000 for the nine months ended March 31, 2015 as compared to the same period of the prior year. Retirement and other costs decreased by $58,000 when compared to the prior year primarily due to reduced net period benefit costs of the pension plan.

Occupancy and equipment increased $241,000 to $3.4 million for the nine months ended March 31, 2015, due primarily to the $336,000 costs associated with the branch closures in fiscal 2015. Excluding these one-time costs, occupancy and equipment costs have decreased by $95,000, or 3.0% when comparing the same nine month periods of fiscal 2015 to 2014.

Check and data processing expense was $2.5 million for the nine months ended March 31, 2015, which is an increase of $166,000 over the same period of fiscal 2014. The increase was driven by a combination of computer service expenses, data communications expense and card service fees, exclusive of the specific branch closure costs incurred of $36,000 as mentioned earlier.

Marketing and community investment increased $257,000 to $1.2 million for the nine months ended March 31, 2015, due primarily to a larger strategic focus on advertising and related increased costs incurred.

Net expense on foreclosed real estate and other properties was $61,000 for the nine months ended March 31, 2015, a decrease of $245,000. During the first quarter of the prior fiscal year, a loss on the sale of a specific foreclosed property of $86,000 combined with a decrease in foreclosed real estate and other properties in the current fiscal year reduced the related expenses in the current year as compared to the same period of the prior year.

Income tax expense. The Company's income tax expense for the nine months ended March 31, 2015 decreased by $2.1 million to $206,000 when compared to the same period of the prior fiscal year. The effective tax rates were 11.0% and 30.6% for the nine months ended March 31, 2015 and 2014, respectively. The current year's tax rate is lower than the previous year's rate due to a higher percentage of permanent tax items to pretax net income in the current year where earnings were substantially less. This reduced the effective tax rate to a lower than expected amount in the current year. Permanent tax net deductions as a percentage of pretax income were 70.6% and 24.2%, respectively, for the nine months of fiscal 2015 and 2014, which was impacted almost entirely by the change in pretax income.

Liquidity and Capital Resources

The Company's liquidity is comprised of three primary classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash provided by operating activities and investing activities for the nine months ended March 31, 2015 were $9.0 million and $126.6 million, respectively, which were partially offset by net cash used in financing activities of $139.9 million. For the same period ended March 31, 2014, net cash provided by operating activities and financing activities were $14.3 million and $38.1 million, respectively, which were offset by cash used in investing activities of $47.2 million. The results were a decrease in cash and cash equivalents of $4.3 million for the nine months ended March 31, 2015 compared to an increase in cash and cash equivalents of $5.2 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, 2015, the Bank decreased its borrowings with the FHLB and other borrowings by $79.4 million.

Although in-market deposits is one of the Bank's primary source of funds, the Bank's policy has been to utilize borrowings where the funds can be invested in either loans or securities at a positive rate of return or to use the funds for short-term liquidity purposes. At March 31, 2015, 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;


•	$73.7 million of available credit from the Federal Reserve Bank; and


•	$281.4 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, 2015. 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, 2015, the Bank had $39.4 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, 2015, the Bank had outstanding commitments to originate and purchase mortgage and commercial loans of $60.3 million and to sell mortgage loans of $4.5 million. Commitments by the Bank to originate loans are not necessarily executed by the customer. The Bank monitors the ratio of commitments to funding for use in liquidity management. At March 31, 2015, 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, 2015. The line of credit was renewed on October 1, 2014 and is available through October 1, 2015. 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, 2015, the Bank met all current capital requirements.

required beginning January 1, 2015, for most banking organizations including the Holding Company and Home Federal Bank, subject to a transition period for several aspects of the final rules, including the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions. The capital conservation buffer will transition effective beginning January 1, 2016 through January 1, 2019, which 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 10.23% at March 31, 2015, 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 13.64% at March 31, 2015. For further details on capital and capital ratios 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, 2015, the total notional amount of interest rate swap contracts was $47.9 million with a fair value net loss of $1.2 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 2014, 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 January 2014, FASB issued ASU 2014-04 “Receivables-Troubled Debt Restructurings by Creditors” (ASC Topic 310-40), regarding guidance to reduce inconsistencies when derecognizing loan receivables and recording real estate recognized. A creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The guidance is effective for fiscal years beginning after December 15, 2014, and the interim periods within those fiscal years. An entity can elect to adopt the amendments using either a modified retrospective transition method or a prospective transition method. Early adoption is

permitted. The Company anticipates to adopt this update in the first quarter of fiscal 2016 and does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

In April 2014, FASB issued ASU 2014-08 “Presentation of Financial Statement (ASC Topic 205) and Property, Plant, and Equipment" (ASC Topic 360), regarding guidance to report discontinued operations and disclosures of disposals of components of an entity. This update addresses the issue that currently, many disposals of small groups of assets, that are recurring in nature, qualify for discontinued operations. This update changes the criteria for reporting discontinued operations and also enhances convergence of the FASB’s and the International Accounting Standard Board’s (IASB) reporting requirements for discontinued operations.The guidance is effective for fiscal years beginning after December 15, 2014, and the interim periods within those fiscal years. Early adoption is permitted, but only for disposals that have not been reported in the financial statements previously issued or available for issuance. The Company anticipates to adopt this update in the first quarter of fiscal 2016 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 June 2014, FASB issued ASU 2014-11 “Transfers and Servicing" (ASC Topic 860), regarding changing the accounting for repurchase-to-maturity transactions to secured borrowing accounting requiring separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. In addition, this Update requires disclosures for certain transactions comprising (1) a transfer of a financial asset accounted for as a sale and (2) an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. The update is effective for the first interim or annual period beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The Company adopted the update in the third quarter of fiscal 2015 and the implementation of this update did not have a material effect on the Company's consolidated financial condition, results of operations or cash flows. The disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings will be implemented in the fourth quarter of fiscal 2015, as required, 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 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 anticipates to adopt this update in the first quarter of fiscal 2016 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 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 anticipates to adopt this update in the first quarter of fiscal 2016 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 2015-03 “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 anticipates to adopt this update in the first quarter of fiscal 2016 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, 2015, the FASB issued ASU No. 2015-02 through ASU no. 2015-05. Other than ASU 20150-03 mentioned above, no other updates are applicable to the consolidated financial statements of the Company.

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, 2015 and June 30, 2014, 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 2014 or that the Company's primary market risk exposures and how those exposures were managed during the nine months ended March 31, 2015 changed significantly when compared to June 30, 2014.

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, 2015
			Estimated Increase (Decrease) in NPV
Change in Interest Rates	Estimated NPV Amount		Amount			Percent
	(Dollars in Thousands)
Basis Points
+300	$	221,115	$	20,075		10	%
+200	217,640		16,600			8
+100	211,452		10,412			5
—	201,040		—			—
-100	162,668		(38,372		)	(19	)



June 30, 2014
			Estimated Increase (Decrease) in NPV
Change in Interest Rates	Estimated NPV Amount		Amount			Percent
	(Dollars in Thousands)
Basis Points
+300	$	255,897	$	25,152		11	%
+200	250,767		20,022			9
+100	242,485		11,740			5
—	230,745		—			—
-100	189,935		(40,810		)	(18	)

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31, 2015, 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, 2015.

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, 2015, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company, the Bank and each of their subsidiaries are, from time to time, involved as plaintiff or defendant in various legal actions arising in the normal course of their businesses. While the ultimate outcome of any such proceedings cannot be predicted with certainty, it is generally the opinion of management, after consultation with counsel representing the Bank and the Company in any such proceedings, that the resolution of any such proceedings should not have a material effect on the Company's consolidated financial position or results of operations. The Company, the Bank and each of their subsidiaries are not aware of any material legal actions or other proceedings contemplated by governmental authorities outside of the normal course of business.

Item 1A. Risk Factors

The discussion of our business and operations should be read together with the risk factors contained in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2014, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. There have been no material changes to the risk factors set forth in the above-referenced filing as of March 31, 2015.

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 8, 2015	By:	/s/ STEPHEN M. BIANCHI
			Stephen M. Bianchi, President and Chief Executive Officer (Principal Executive Officer)


Date:	May 8, 2015	By:	/s/ BRENT R. OLTHOFF
			Brent R. Olthoff, Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)

Exhibit Index



Exhibit Number		Description
10.1		Renewal Addendum no. 1 to Second Amended and Restated Employment Agreement between Stephen M. Bianchi and Home Federal Bank, dated March 17, 2015 (incorporated by reference to Exhibit 10.1 from the Company's Current Report on Form 8-K dated March 17, 2015, and filed with the SEC on March 20, 2015, file no. 033-44383).
10.2		Renewal Addendum No. 2 to Employment Agreement between Jon M. Gadberry and Home Federal Bank, dated March 17, 2015 (incorporated by reference to Exhibit 10.2 from the Company's Current Report on Form 8-K dated March 17, 2015, and filed with the SEC on March 20, 2015, file no. 033-44383).
10.3		Renewal Addendum No. 2 to Employment Agreement between Brent R. Olthoff and Home Federal Bank, dated March 17, 2015 (incorporated by reference to Exhibit 10.3 from the Company's Current Report on Form 8-K dated March 17, 2015, and filed with the SEC on March 20, 2015, file no. 033-44383).
10.4		Renewal Addendum No. 2 to Employment Agreement between Michael Westberg and Home Federal Bank, dated March 17, 2015 (incorporated by reference to Exhibit 10.4 from the Company's Current Report on Form 8-K dated March 17, 2015, and filed with the SEC on March 20, 2015, file no. 033-44383).
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.

Exhibit 31.1

CERTIFICATION

I, Stephen M. Bianchi, certify that:


1.	I have reviewed this Quarterly Report of HF Financial Corp. on Form 10-Q for the quarterly period ended March 31, 2015;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



Date:	May 8, 2015

		/s/ Stephen M. Bianchi
		Stephen M. Bianchi, President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Brent R. Olthoff, certify that:


1.	I have reviewed this Quarterly Report of HF Financial Corp. on Form 10-Q for the quarterly period ended March 31, 2015;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



Date:	May 8, 2015

		/s/ Brent R. Olthoff
		Brent R. Olthoff, Senior Vice President, Chief Financial Officer and Treasurer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of HF Financial Corp. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen M. Bianchi, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:


(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



		/s/ Stephen M. Bianchi
		Stephen M. Bianchi, President and Chief Executive Officer

		Date:	May 8, 2015

^{___________________________________________________}


•	A signed original of this written statement required by Section 906 has been provided to HF Financial Corp. and will be retained by HF Financial Corp. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of HF Financial Corp. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brent R. Olthoff, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:


(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



		/s/ Brent R. Olthoff
		Brent R. Olthoff, Senior Vice President, Chief Financial Officer and Treasurer

		Date:	May 8, 2015

^{___________________________________________________}


•	A signed original of this written statement required by Section 906 has been provided to HF Financial Corp. and will be retained by HF Financial Corp. and furnished to the Securities and Exchange Commission or its staff upon request.

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