HF Financial (HFFC) 10-Q 2002 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

ý            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2002

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-19772

HF FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Delaware	46-0418532
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
225 South Main Avenue, Sioux Falls, SD	57104
(Address of principal executive office)	(ZIP Code)
(605) 333-7556
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed  by Section 13 or 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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of May 13, 2002 there were 3,365,812 issued and outstanding shares of the Registrant’s Common Stock, with $.01 par value.

HF FINANCIAL CORP.

FORM 10-Q

INDEX

PART I.		Financial Information
	Item 1.	Financial Statements (Unaudited):
		Consolidated Statements of Financial Condition As of March 31, 2002 and June 30, 2001
		Consolidated Statements of Income for the Three and Nine Months Ended March 31, 2002 and 2001
		Consolidated Statement of Stockholders’ Equity for the Nine Months Ended March 31, 2002
		Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2002 and 2001
		Notes to Consolidated Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 5.	Other Information
PART II.		Other Information
	Item 1.	Legal Proceedings
	Item 2.	Changes in Securities
	Item 3.	Defaults upon Senior Securities
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 5.	Other Information
	Item 6.	Exhibits and Reports on Form 8-K
	Signatures

Item 1.

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands)

	March 31, 2002			June 30, 2001
	(Unaudited)
ASSETS
Cash and cash equivalents	$	17,227		$	84,913
Securities available for sale	39,797			49,969
Mortgage-backed securities available for sale	57,019			43,750
Loans and leases receivable	528,638			563,836
Loans held for sale	9,530			7,270
Accrued interest receivable	4,497			5,412
Office properties and equipment, net of accumulated depreciation	13,720			13,756
Foreclosed real estate and other properties	1,804			1,608
Prepaid expenses and other assets	7,975			2,720
Mortgage servicing rights	3,351			2,775
Deferred income taxes	2,272			2,230
Cost in excess of net assets acquired	5,388			5,763
	$	691,218		$	784,002
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits	$	537,506		$	601,207
Advances from Federal Home Loan Bank and other borrowings	74,687			108,376
Company obligated mandatorily redeemable preferred securities of subsidiary trust that solely holds subordinated debentures	10,000			—
Advances by borrowers for taxes and insurance	9,496			7,337
Accrued interest payable	4,211			7,901
Other liabilities	5,549			6,656
Total liabilities	641,449			731,477
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, 4,806,837 and 4,786,005 shares issued at March 31, 2002 and June 30, 2001, respectively	48			48
Additional paid-in capital	15,545			15,378
Retained earnings, substantially restricted	55,073			52,886
Accumulated other comprehensive income	271			338
Less cost of treasury stock, 1,519,030 and 1,105,209 shares at March 31, 2002 and June 30, 2001, respectively	(21,168		)	(16,125		)
	49,769			52,525
	$	691,218		$	784,002

See Notes to Consolidated Financial Statements.

1

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended March 31,				Nine Months Ended March 31,
	2002		2001		2002		2001
Interest and dividend income:
Loans and leases receivable	$	10,010	$	12,741	$	32,746	$	38,714
Mortgage-backed securities	562		820		1,859		2,588
Investment securities and interest-bearing deposits	658		1,415		2,612		3,541
	11,230		14,976		37,217		44,843
Interest expense:
Deposits	3,685		7,387		15,049		21,666
Advances from Federal Home Loan Bank and other borrowings	1,223		1,730		4,016		5,306
	4,908		9,117		19,065		26,972
Net interest income	6,322		5,859		18,152		17,871
Provision for losses on loans and leases	588		310		2,493		1,574
Net interest income after provision for losses on loans and leases	5,734		5,549		15,659		16,297
Noninterest income:
Fees on deposits	921		870		2,905		2,658
Gain on sale of loans, net	422		174		1,313		527
Loan servicing income	377		404		1,415		1,171
Commission and insurance income	320		312		951		1,007
Loan fees and service charges	253		202		915		694
Credit card fee income	252		471		931		2,142
Gain on sale of securities, net	—		—		5		—
Other	285		266		1,541		757
	2,830		2,699		9,976		8,956
Noninterest expense:
Compensation and employee benefits	4,307		3,622		12,087		10,443
Other general and administrative expenses	1,404		1,106		4,124		3,451
Occupancy and equipment	585		920		2,295		2,596
Credit card processing expense	318		560		1,034		2,008
Amortization of intangible assets	125		120		375		345
Federal insurance premiums	27		70		82		201
Other	22		53		172		110
	6,788		6,451		20,169		19,154
Income before income taxes	1,776		1,797		5,466		6,099
Income tax expense	667		709		2,097		2,401
Net income	$	1,109	$	1,088	$	3,369	$	3,698
Earnings per share:
Basic	$	0.33	$	0.30	$	0.94	$	1.01
Diluted	$	0.33	$	0.29	$	0.92	$	1.00

See Notes to Consolidated Financial Statements.

2

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Nine Months Ended March 31, 2002

(Dollars In Thousands, Except Per Share Data)

(Unaudited)

	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income			Treasury Stock			Total
Balance, June 30, 2001	$	48	$	15,378	$	52,886		$	338		$	(16,125	)	$	52,525
Comprehensive income:
Net income	—		—		3,369			—			—			3,369
Net change in unrealized gain on securities available for sale, net of deferred taxes	—		—		—			(67		)	—			(67		)
Comprehensive income	—		—		3,369			(67		)	—			3,302
7,560 shares issued under Director Restricted Stock Plan	—		104		—			—			—			104
Exercise of stock options for 13,272 shares	—		63		—			—			—			63
Cash dividends paid ($0.33 per share) on common stock	—		—		(1,182		)	—			—			(1,182		)
Purchase of treasury stock	—		—		—			—			(5,043		)	(5,043		)
Balance, March 31, 2002	$	48	$	15,545	$	55,073		$	271		$	(21,168	)	$	49,769

See Notes to Consolidated Financial Statements.

3

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended March 31,
	2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,369		$	3,698
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for losses on loans and leases	2,493			1,574
Depreciation	1,237			1,446
Amortization of premiums and discounts on securities available for sale, net	59			(54		)
Amortization of intangible assets	375			345
Amortization of mortgage servicing rights	254			200
Noncash issuance of common stock	104			100
(Decrease) in deferred loan fees	(405		)	(220		)
Loans originated for resale	(134,257		)	(51,131		)
Proceeds from the sale of loans	133,310			49,362
(Gain) on sale of loans, net	(1,313		)	(527		)
Mortgage servicing rights capitalized	(367		)	(131		)
Realized (gain) on sale of securities, net	(5		)	—
Losses and provision for losses on sales of foreclosed real estate and other properties, net	80			7
Loss (gain) on disposal of office properties and equipment, net	8			(11		)
Decrease in accrued interest receivable	915			67
(Increase) decrease in prepaid expenses and other assets	(255		)	364
(Increase) in deferred income taxes	(1		)	(43		)
(Decrease) increase in accrued interest payable and other liabilities	(4,797		)	37
Net cash provided by operating activities	804			5,083
CASH FLOWS FROM INVESTING ACTIVITIES
Loans and leases purchased	(25,127		)	(12,081		)
Loans originated and held	(167,166		)	(123,436		)
Principal collected on loans and leases	224,096			124,874
Mortgage-backed securities available for sale:
Sales	3,948			—
Purchases	(32,232		)	—
Repayments	14,970			8,194
Securities available for sale:
Sales and maturities	43,393			16,910
Purchases	(33,338		)	(16,993		)
Purchase of other investments	(5,000		)	—
Proceeds from sale of office properties and equipment	5			17
Purchase of office properties and equipment	(1,214		)	(1,500		)
Purchase of mortgage servicing rights	(463		)	(502		)
Purchase of intangible assets	—			(1,203		)
Proceeds from sale of foreclosed real estate and other properties, net	1,031			641
Net cash provided by (used in) investing activities	$	22,903		$	(5,079	)

See Notes to Consolidated Financial Statements.

4

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended March 31,
	2002			2001
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposit accounts	$	(63,701	)	$	34,622
Proceeds of advances from Federal Home Loan Bank and other borrowings	11,400			227,081
Proceeds from issuance of preferred securities of subsidiary trust	10,000			—
Payments on advances from Federal Home Loan Bank and other borrowings	(45,089		)	(231,895		)
Increase in advances by borrowers for taxes and insurance	2,159			3,563
Purchase of treasury stock	(5,043		)	—
Proceeds from issuance of common stock	63			18
Cash dividends paid	(1,182		)	(1,159		)
Net cash provided by (used in) financing activities	(91,393		)	32,230
Increase (decrease) in cash and cash equivalents	(67,686		)	32,234
Cash and Cash Equivalents
Beginning	84,913			26,417
Ending	$	17,227		$	58,651
Supplemental Disclosures of Cash Flows Information
Cash payments for interest	$	22,755		$	25,910
Cash payments for income and franchise taxes, net	2,256			1,952

See Notes to Consolidated Financial Statements.

5

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Nine Months Ended March 31, 2002 and 2001

(Dollars in Thousands)

(Unaudited)

NOTE 1.SELECTED ACCOUNTING POLICIES

Basis of presentation:

The foregoing consolidated financial statements are unaudited.  However, in the opinion of management, all adjustments (which consist of normal recurring accruals) necessary for a fair presentation of the consolidated financial statements have been included.  Results for any interim period are not necessarily indicative of results to be expected for the year.  The interim consolidated financial statements include the accounts of HF Financial Corp. (the “Company”), its subsidiaries, HomeFirst Mortgage Corp. (the “Mortgage Corp.”), HF Card Services L.L.C. (HF Card Services) and Home Federal Bank (formerly known as Home Federal Savings Bank), (the “Bank”) and the Bank’s subsidiaries.  During the quarter ended December 31, 2001, the Company formed a new subsidiary named HF Financial Capital Trust I (the “Trust”).  See Note 5.  The Bank ceased operation of its subsidiary, Mid-America Service Corporation, during the quarter ended March 31, 2002 with no material affect on the consolidated financial statements.

NOTE 2.REGULATORY CAPITAL

The following table sets forth the Bank’s compliance with its capital requirements at March 31, 2002:

	Amount		Percent
Tier I (core) capital:
Required	$	27,344	4.00	%
Actual	49,693		7.27
Excess	22,349		3.27
Risk-based capital:
Required.	$	43,903	8.00	%
Actual	55,996		10.20
Excess	12,093		2.20

NOTE 3.EARNINGS PER SHARE

Basic earnings per 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 issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding. The weighted average number of common shares outstanding for the three month period ended March 31, 2002 and 2001 was 3,325,629 and 3,680,733, respectively.  The weighted average number of common shares outstanding for the nine month period ended March 31, 2002 and 2001 were 3,568,424 and 3,678,314, respectively.

Dilutive earnings per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive options outstanding had been exercised. The weighted average number of common and dilutive potential common shares outstanding for the three month period ended March 31, 2002 and 2001 was 3,396,927 and 3,715,749, respectively.  The weighted average number of common and dilutive potential common shares outstanding for the nine month period ended March 31, 2002 and 2001 were 3,646,849 and 3,708,124, respectively.

6

NOTE 4.SEGMENT INFORMATION

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 Company for making operating decisions, allocating resources and monitoring performance.

The Company’s reportable segments are banking, credit card and other.  The “banking” segment is conducted through the Bank, and the “credit card” segment is conducted through, HF Card Services.  The “other” segment is composed of smaller nonreportable segments, the Company and inter-segment eliminations.

	Three Months Ended March 31, 2002
	Banking			Credit Card			Other			Total
	(Dollars in Thousands)
Net interest income	$	6,431		$	(20	)	$	(89	)	$	6,322
Provision for losses on loans and leases	(354		)	(234		)	—			(588		)
Noninterest income	2,234			248			348			2,830
Noninterest expense	(6,032		)	(384		)	(372		)	(6,788		)
Income (loss) before income taxes	$	2,279		$	(390	)	$	(113	)	$	1,776
Total assets	$	686,096		$	3,446		$	1,676		$	691,218

	Three Months Ended March 31, 2001
	Banking			Credit Card			Other			Total
	(Dollars in Thousands)
Net interest income	$	5,570		$	(12	)	$	301		$	5,859
(Provision) recoveries for losses on loans and leases	(347		)	90			(53		)	(310		)
Noninterest income	1,891			467			341			2,699
Noninterest expense	(5,301		)	(605		)	(545		)	(6,451		)
Income (loss) before income taxes	$	1,813		$	(60	)	$	44		$	1,797
Total assets	$	748,402		$	6,069		$	9,182		$	763,653

7

	Nine Months Ended March 31, 2002
	Banking			Credit Card			Other			Total
	(Dollars in Thousands)
Net interest income	$	18,048		$	(18	)	$	122		$	18,152
Provision for losses on loans and leases	(1,420		)	(1,073		)	—			(2,493		)
Noninterest income	7,539			1,621			816			9,976
Noninterest expense	(17,847		)	(1,210		)	(1,112		)	(20,169		)
Income (loss) before income taxes	$	6,320		$	(680	)	$	(174	)	$	5,466
Total assets	$	686,096		$	3,446		$	1,676		$	691,218

	Nine Months Ended March 31, 2001
	Banking			Credit Card			Other			Total
	(Dollars in Thousands)
Net interest income	$	16,890		$	159		$	822		$	17,871
Provision for losses on loans and leases	(1,041		)	(437		)	(96		)	(1,574		)
Noninterest income	5,800			2,132			1,024			8,956
Noninterest expense	(15,382		)	(2,162		)	(1,610		)	(19,154		)
Income (loss) before income taxes	$	6,267		$	(308	)	$	140		$	6,099
Total assets	$	748,402		$	6,069		$	9,182		$	763,653

NOTE 5.COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY SUBORDINATED DEBENTURES

On November 28, 2001, the Company issued 10,000 shares totaling $10.0 million of Company Obligated Mandatorily Redeemable Preferred Securities of HF Financial Capital Trust I.  The Trust exists for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the Company.  These subordinated debentures constitute the sole asset of the Trust.  The securities provide for cumulative cash distributions calculated at a rate based on six-month LIBOR plus 3.75% adjusted semi-annually.  The Company may, at one or more times, defer interest payments on the capital securities for up to 10 consecutive semi-annual periods, but not beyond December 8, 2031.  At the end of the deferral period, all accumulated and unpaid distributions will be paid.  The capital securities will be redeemed on December 8, 2031; however, the Company has the option to shorten the maturity date to a date not earlier than December 8, 2006.  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.

8

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

General

The Company was incorporated under the laws of the State of Delaware in November 1991 for the purpose of owning all of the outstanding stock of the Bank issued in the mutual to stock conversion of the Bank.  The Company acquired all of the outstanding stock of the Bank on April 8, 1992.  In May 1996, the Company formed  HF Card Services and became the owner of 51% of this entity. The Company became the owner of 100% of HF Card Services effective as of July 1998.  In November 2001, the Company formed HF Capital Trust I and became the owner of 100% of this entity (see Note 5).  The activities of the Company itself have no significant impact on the results of operations on a consolidated basis.  Unless otherwise indicated, all activities discussed herein relate to the Company, and its direct and indirect subsidiaries.

HF Card Services was established to provide secured, partially-secured and unsecured credit cards nationwide.  The target market for HF Card Services was subprime credit customers who have either an insufficient credit history or a negative credit history and are unable to obtain a credit card from more traditional card issuers.  The Company ceased credit card applications in March 1999.

The Company’s net income is primarily dependent upon the difference (or “spread”) between the average yield earned on loans, mortgage-backed securities and investments and the average rate paid on deposits and borrowings, as well as the relative amounts of such assets and liabilities.  The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows.  The Company, like other financial institutions, is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different times, or on a different basis, than its interest-earning assets.  To better insulate itself from such risk, the Company has, over the last few years, attempted to increase both numerically and on a percentage basis its holding of consumer and commercial loans.  The Company has also decreased its ratio of fixed-rate to adjustable-rate loans. The Company’s net income is also affected by, among other things, gains and losses on sales of foreclosed property, loans, mortgage-backed securities and securities available for sale, provisions for losses on loans and leases, service charge fees, subsidiary activities, operating expenses and income taxes.

Forward-Looking Statements

This Form 10-Q and other reports issued by the Company, including reports filed with the Securities and Exchange Commission, may contain “forward-looking” statements that deal with future results, expectations, plans or performance.  In addition, the Company’s management may make such statements orally to the media, securities analysts, investors or others. Forward-looking statements deal with matters that do not relate strictly to historical facts.  These forward-looking statements might include one or more of the following:

•Projections of income, revenues, earnings per share, dividends, capital expenditures, capital structure or other financial items.

•Descriptions of plans or objectives of management for future operations, products or services.

•Forecasts of future economic performance.

•Descriptions of assumptions underlying or relating to such matters.

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts.  They often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.”

The Company’s future results may differ materially from historical performance, and forward-looking statements about the Company’s expected financial results or other plans are subject to a number of risks and uncertainties.  These include but are not limited to possible legislative changes and adverse economic, business and competitive developments such as shrinking interest margins; deposit outflows; reduced demand for financial services and loan products; changes in accounting policies or guidelines, or in monetary and fiscal policies of the federal government; changes in credit and other risks posed by the Company’s loan portfolios; technological, computer-related or operational difficulties; adverse changes in securities markets; results of litigation; or other significant uncertainties.

Forward-looking statements speak only as of the date they are made.  The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

9

Financial Condition Data

At March 31, 2002, the Company had total assets of $691.2 million, a decrease of $92.8 million from the level at June 30, 2001.  The decrease in assets was due primarily to a decrease in cash and cash equivalents of $67.7 million, a decrease in loans and leases receivable of $35.2 million and a decrease in securities available for sale of $10.2 million offset by increases in mortgage-backed securities of $13.3 million, prepaid expenses and other assets of $5.3 million and loans held for sale of $2.3 million.  The decrease in liabilities was due primarily to decreases in deposits of $63.7 million, advances from Federal Home Loan Bank (“FHLB”) and other borrowings of $33.7 million and  accrued interest payable of $3.7 million, which was partially offset by increases in the liability for company obligated mandatorily redeemable preferred securities of $10.0 million and advances by borrowers for taxes and insurance of $2.2 million from the levels at June 30, 2001.  In addition, stockholders’ equity decreased from $52.5 million at June 30, 2001 to $49.8 million at March 31, 2002, primarily due to purchases of treasury stock totaling $5.0 million since June 30, 2001.

The decrease in loans and leases receivable of $35.2 million was due primarily to sales, amortization and prepayments of principal exceeding purchases and originations.

The decrease in securities available for sale of $10.2 million was primarily the result of maturities and calls of $43.3 million exceeding purchases of $33.3 million.

The increase in mortgage-backed securities of $13.3 million was primarily the result of purchases of $32.2 million exceeding maturities, sales, calls, amortization and repayments of principal of $18.9 million.

The increase in prepaid expenses and other assets of $5.3 million was primarily due to  the purchase of $5.0 million of other investments.

The $2.3 million increase in loans held for sale was primarily due to an increase in loans originated for sale into the secondary market during the nine months ended March 31, 2002.

The $63.7 million decrease in deposits was primarily due to a decrease in savings accounts of $16.5 million and certificates of deposit of $81.0 million offset by an increase in demand accounts of $7.7 million and money market accounts of $26.1 million.

Advances from the FHLB and other borrowings decreased $33.7 million for the nine month period ended March 31, 2002 primarily due to the paydown of $45.1 million in advances and other borrowings which was offset by additional draws on other borrowings of $11.4 million.

The decrease in accrued interest payable of $3.7 million was primarily the result of the decrease in deposits of $63.7 million.

The liability for company obligated mandatorily redeemable preferred securities of HF Capital Trust I increased $10.0 million for the nine month period  ended March 31, 2002.  See Note 5.

The $2.2 million increase in advances by borrowers for taxes and insurance was due primarily to the receipt of escrow payments in excess of amounts paid out.  The major escrow payments are primarily paid semiannually in April and October.

10

Analysis of Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities.  Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.

Average Balances, Interest Rates and Yields.  The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin.  The table does not reflect any effect of income taxes.  All average balances are monthly average balances and include the balances of nonaccruing loans.  The yields and costs for the three and nine months ended March 31, 2002 and 2001 include fees which are considered adjustments to yield.

	THREE MONTHS ENDED MARCH 31,
	2002						2001
	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)	$	539,948	$	10,010	7.52	%	$	568,526	$	12,741	9.09	%
Mortgage-backed securities	39,649		562		5.75	%	48,652		820		6.84	%
Other investment securities (2)	68,229		611		3.63	%	93,698		1,302		5.64	%
FHLB stock	6,332		47		3.01	%	6,332		113		7.24	%
Total interest-earning assets	$	654,158	$	11,230	6.96	%	$	717,208	$	14,976	8.47	%
Noninterest-earning assets	46,531						39,693
Total assets	$	700,689					$	756,901
Interest-bearing liabilities:
Deposits:
Checking and money market	$	255,935	$	774	1.23	%	$	208,568	$	1,965	3.82	%
Savings	39,599		99		1.01	%	40,953		378		3.74	%
Certificates of deposit	253,205		2,812		4.50	%	324,096		5,044		6.31	%
Total deposits	$	548,739	$	3,685	2.72	%	$	573,617	$	7,387	5.22	%
FHLB advances and other borrowings	70,607		1,008		5.79	%	108,948		1,730		6.44	%
Company obligated mandatorily redeemable preferred securities of subsidiary trust that solely holds subordinated debentures	10,000		215		8.72	%	—		—		0.00	%
Total interest-bearing liabilities	$	629,346	$	4,908	3.17	%	$	682,565	$	9,117	5.42	%
Other liabilities	21,313						22,965
Total liabilities	$	650,659					$	705,530
Equity	50,030						51,371
Total liabilities and equity	$	700,689					$	756,901
Net interest income; interest rate spread (4)			$	6,322	3.79	%			$	5,859	3.05
Net interest margin (3) (4)					3.92	%					3.31	%

(1)  Includes interest on accruing loans past due 90 days or more.

(2)  Includes primarily U.S. Government and agency securities and FHLB daily time.

(3)  Net interest margin is net interest income divided by average interest-earning assets.

(4)  Percentages for the three months ended March 31, 2002 and March 31, 2001 have been annualized.

11

	NINE MONTHS ENDED MARCH 31,
	2002						2001
	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)	$	546,954	$	32,746	7.98	%	$	566,181	$	38,714	9.11	%
Mortgage-backed securities	40,156		1,859		6.17	%	51,353		2,588		6.71	%
Other investment securities (2)	89,723		2,437		3.62	%	73,674		3,262		5.90	%
FHLB stock	6,332		175		3.68	%	6,261		279		5.94	%
Total interest-earning assets	$	683,165	$	37,217	7.26	%	$	697,469	$	44,843	8.56	%
Noninterest-earning assets	46,774						38,042
Total assets	$	729,939					$	735,511
Interest-bearing liabilities:
Deposits:
Checking and money market	$	235,320	$	3,106	1.76	%	$	195,112	$	5,806	3.96	%
Savings	38,864		468		1.60	%	40,643		1,192		3.91	%
Certificates of deposit	290,342		11,475		5.26	%	314,636		14,668		6.21	%
Total deposits	$	564,526	$	15,049	3.55	%	$	550,391	$	21,666	5.24	%
FHLB advances and other borrowings	85,050		3,800		5.95	%	113,528		5,306		6.23	%
Company obligated mandatorily redeemable preferred securities of subsidiary trust that soley holds subordinated debentures	5,556		216		5.18	%	—		—		0.00	%
Total interest-bearing liabilities	$	655,132	$	19,065	3.87	%	$	663,919	$	26,972	5.41	%
Other liabilities	22,287						21,975
Total liabilities	$	677,419					$	685,894
Equity	52,520						49,617
Total liabilities and equity	$	729,939					$	735,511
Net interest income; interest rate spread (4)			$	18,152	3.39	%			$	17,871	3.15	%
Net interest margin (3) (4)					3.54	%					3.41	%

(1)  Includes interest on accruing loans past due 90 days or more.

(2)  Includes primarily U.S. Government and agency securities and FHLB daily time.

(3)  Net interest margin is net interest income divided by average interest-earning assets.

(4)  Percentages for the nine months ended March 31, 2002 and March 31, 2001 have been annualized.

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Rate/Volume Analysis of Net Interest Income

The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities.  It distinguishes between the increases and decreases due to fluctuating outstanding balances that are due to the levels and volatility of interest rates.  For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by new 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,
	2002 vs 2001									2002 vs 2001
	Increase (Decrease) Due to Volume			(Decrease) Due to Rate			Total Increase (Decrease)			Increase (Decrease) Due to Volume			(Decrease) Due to Rate			Total Increase (Decrease)
							(Dollars in Thousands)
Interest-earning assets:
Loans and leases receivable (1)	$	(585	)	$	(2146	)	$	(2731	)	$	(1315	)	$	(4653	)	$	(5968	)
Mortgage-backed securities	(140		)	(118		)	(258		)	(564		)	(165		)	(729		)
Other investment securities (2)	(291		)	(400		)	(691		)	711			(1536		)	(825		)
FHLB stock	—			(66		)	(66		)	3			(107		)	(104		)
Total interest-earning assets	$	(1016	)	$	(2730	)	$	(3746	)	$	(1165	)	$	(6461	)	$	(7626	)
Interest-bearing liabilities:
Deposits:
Checking and money market	$	295		$	(1486	)	$	(1191	)	$	1196		$	(3896	)	$	(2700	)
Savings	(7		)	(272		)	(279		)	(52		)	(672		)	(724		)
Certificates of deposit	(945		)	(1287		)	(2232		)	(1133		)	(2060		)	(3193		)
Total deposits	(657		)	(3045		)	(3702		)	11			(6628		)	(6617		)
FHLB advances and other borrowings	(440		)	(282		)	(722		)	(1071		)	(435		)	(1506		)
Company obligated mandatorily redeemable preferred securities of subsidiary trust that solely holds subordinated debentures	—			215			215			—			216			216
Total interest-bearing liabilities	$	(1097	)	$	(3112	)	$	(4209	)	$	(1060	)	$	(6847	)	$	(7907	)
Net interest income							$	463								$	281

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

(2)  Includes primarily U. S. Government and agency securities and FHLB daily time.

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Asset Quality

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 determine the adequacy of the allowance for loan and lease losses.  The following table sets forth the amounts and categories of the Company’s nonperforming assets for the periods indicated.

	Nonperforming Assets As Of
	March 31, 2002			June 30, 2001
	(Dollars in Thousands)
Nonaccruing loans and leases:
One- to four-family	$	456		$	723
Commercial real estate	3,706			385
Multi-family	292			—
Commercial business	3,058			3,223
Consumer	690			518
Agriculture	533			373
Mobile homes	47			88
Total	$	8,782		$	5,310
Accruing loans and leases delinquent more than 90 days:
Multi-family	$	—		$	304
Commercial business	319			—
Equipment finance leases	377			—
Agriculture	38			23
Credit cards	168			283
Total	$	902		$	610
Foreclosed assets: (2)
One- to four-family	$	358		$	203
Consumer	107			105
Mobile homes	41			2
Total	$	506		$	310
Total nonperforming assets	$	10,190		$	6,230
Ratio of nonperforming assets to total assets	1.47		%	0.79		%
Ratio of nonperforming loans and leases to total loans and leases  (1)	1.78		%	1.02		%

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

(2)  Total foreclosed assets does not include land held for development.

Loans are generally classified as nonaccrual when there are reasonable doubts as to the collectibility 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.  Credit card loans remain in accrual status until 120 days, when accrued interest income on the loan is taken out of income.

Nonperforming assets increased to $10.2 million at March 31, 2002 from $6.2 million at June 30, 2001, an increase of $4.0 million.  In addition, the ratio of nonperforming assets to total assets, which is one indicator of credit risk exposure, increased to 1.47% at March 31, 2002 as compared to 0.79% at June 30, 2001.

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Nonaccruing loans and leases increased to $8.8 million at March 31, 2002 from $5.3 million at June 30, 2001, an increase of $3.5 million.  Included in nonaccruing loans at March 31, 2002 were nine loans totaling $456,000 secured by one- to four-family real estate, one loan in the amount of $292,000 secured by multi-family real estate, six commercial real estate loans totaling $3.7 million, twenty loans totaling $3.1 million secured by commercial business, three mobile home loans totaling $47,000, forty-five consumer loans totaling $690,000 and five agriculture loans totaling $533,000.  For the three and nine months ended March 31, 2002, an additional $62,000 and $231,000 of interest income, respectively, would have been recognized on loans accounted for on a nonaccrual basis had such loans been current in accordance with their original terms.

At March 31, 2002, the Bank had approximately $10.4 million of other loans of concern that management has determined need to be closely monitored because of possible credit problems of the borrowers or the cash flows of the secured properties.  These loans were considered in determining the adequacy of the allowance for probable loan losses.  The allowance for probable loan losses is established based on management’s evaluation of the risks inherent in the loan portfolio and changes in the nature and volume of loan activity.  Such evaluation, which includes a review of all loans for which full collectability may not be reasonably assured, considers the estimated fair market value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance.  Although the Company’s management believes that the March 31, 2002 recorded allowance for loan and lease losses was adequate to provide for potential losses on the related loans and leases, there can be no assurance that the allowance existing at March 31, 2002 will be adequate in the future.

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

	Nine Months Ended
	3/31/2002			3/31/2001
	(Dollars in Thousands)
Balance at beginning of period	$	6,544		$	8,475
Charge-offs:
One- to four-family	(38		)	(21		)
Commercial real estate	(50		)	—
Commercial business	(486		)	(250		)
Equipment finance leases	(41		)	(78		)
Consumer	(980		)	(787		)
Agriculture	(58		)	—
Credit cards	(1,512		)	(2,678		)
Mobile homes	(50		)	(31		)
Total charge-offs	$	(3,215	)	$	(3,845	)
Recoveries:
One- to four-family	$	2		$	—
Commercial real estate	2			—
Commercial business	37			—
Equipment finance leases	44			—
Consumer	234			211
Agriculture	28			—
Credit cards	124			239
Mobile homes	8			12
Total recoveries	$	479		$	462
Net (charge-offs)	$	(2,736	)	$	(3,383	)
Additions charged to operations	2,493			1,574
Additions fromacquisition	—			97
Balance at end of period	$	6,301		$	6,763
Ratio of net (charge-offs) during the period to average loans and leases outstanding during the period	(0.50		)%	(0.60		)%
Ratio of allowance for loan and lease losses to total loans and leases at end of period	1.16		%	1.19		%
Ratio of allowance for loan losses to nonperforming loans and leases at end of period (1)	65.07		%	176.49		%

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

16

The allowance for loan and lease losses was $6.3 million at March 31, 2002 as compared to $6.5 million at June 30, 2001.  The ratio of the allowance for loan and lease losses to total loans and leases was 1.16% at March 31, 2002 and 1.13% at June 30, 2001.  The Company’s management has considered nonperforming assets and other assets of concern in establishing the allowance.  The Company continues to monitor its allowance for probable 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 all commercial business, agricultural, construction and multi-family and commercial real estate loans, including purchased loans.  A monthly credit review is performed on all types of loans 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 portfolio, historical loss experience for each loan category, previous loan experience, concentrations of credit, current economic conditions and other factors that in management’s judgment deserve recognition.

Comparison of the Three Months Ended March 31, 2002 and March 31, 2001

General.  The Company’s net income increased $21,000 for the three months ended March 31, 2002 as compared to the three months ended March 31, 2001.  As discussed in more detail below, this increase was due primarily to an increase in noninterest income of $131,000 and decreases in interest expense of $4.2 million and income tax expense of $42,000 offset by a decrease in interest and dividend income of $3.7 million, an increase in provision for losses on loans and leases of $278,000 and an increase in noninterest expense of $337,000.

Interest and Dividend Income.  Interest and dividend income decreased $3.7 million from $15.0 million for the three months ended March 31, 2001 to $11.2 million for the three months ended March 31, 2002.  A $2.7 million decrease in interest and dividend income was the result of the  average yield on interest-earning assets decreasing from 8.47% to 6.96% for the three months ended March 31, 2001 and March 31, 2002, respectively.  In addition, the average balance of interest-earning assets decreased $63.1 million at March 31, 2002 as compared to the same period in the prior fiscal year, which resulted in a $1.0 million decrease in interest and dividend income.

Interest Expense.  Interest expense decreased $4.2 million from $9.1 million for the three months ended March 31, 2001 to $4.9 million for the three months ended March 31, 2002.  A $3.1 million decrease in interest expense was the result of the decrease in the average rate paid on interest-bearing liabilities from 5.42% to 3.17% for the three months ended March 31, 2001 and March 31, 2002, respectively.  In addition, the average balance of interest-bearing liabilities decreased $53.2 million at March 31, 2002 as compared to the same period in the prior fiscal year, which resulted in a $1.1 million decrease in interest expense.

Net Interest Income. The Company’s net interest income for the three months ended March 31, 2002 increased $463,000 as compared to the same period in fiscal 2001.  The increase in net interest income reflects an increase in the net interest spread on average earning assets to 3.79% for the three months ended March 31, 2002 from 3.05% for the same period in the prior fiscal year.

During the three months ended March 31, 2002, the Company increased its average balances of commercial and consumer loans. The Company anticipates activity in this type of lending to continue in future years, subject to market demand.  In addition, the Company sells the majority of conventional single-family residential real estate loan originations into the secondary market.  Net interest income is expected to trend upward as a result of this lending activity as interest rate yields are generally higher on these types of loans compared to the yield provided by conventional single-family residential real estate loans.  This lending activity is considered to carry a higher level of risk due to the nature of the collateral and the size of the individual loans.  As such, the Company anticipates continued increases in its allowance for loan losses.

Provision for Losses on Loans. During the three months ended March 31, 2002, the Company recorded a provision for losses on loans of $588,000 as compared to $310,000 for the three months ended March 31, 2001, an increase of $278,000.  See “Asset Quality” for further discussion.

Noninterest Income.  Noninterest income was $2.8 million for the three months ended March 31, 2002 as compared to $2.7 million for the three months ended March 31, 2001, an increase of $131,000.

The increase in net gain on sale of loans of $248,000 was due to increased sales of one- to four-family loans sold into the secondary market as compared to the same period in the prior fiscal year.

17

The decrease in credit card fee income of $219,000 for the three months ended March 31, 2002 as compared to the same period in fiscal 2001 is primarily due to a decrease in fees received on unsecured credit cards. This is a result of the credit card portfolio decreasing from $6.6 million at March 31, 2001 as compared to $4.1 million at March 31, 2002. The fee income represents interchange fees, annual/monthly fees, late fees and other miscellaneous fees. This credit card program was initiated in fiscal 1997. The Company ceased credit card applications in March 1999, which decreased the level of these fees.  Interest income on credit card loans is included in interest income on loans.

Noninterest Expense.  Noninterest expense increased $337,000 as compared to the same period in the prior fiscal year primarily due to increases in compensation and employee benefits of $685,000 and other general and administrative expenses of $298,000 (increases primarily related to three new banking centers) offset by decreases in occupancy and equipment of $335,000 and credit card processing expenses of $242,000.

The Company expects the cost for property and casualty coverage will be increasing at its next renewal date due to the terrorists attacks of September 11, 2001.  The Company has been informed by its property and casualty insurance carrier that  due to terrorist attacks of September 11, 2001, and the resulting unavailability of reinsurance in the market,  insurance contracts will be amended with exclusionary language that will clearly define what is considered war and terrorist activity and excludes coverage for certain war and terrorist actions.  Management believes that these exclusions could have an impact on the Company’s financial performance should an event such as the events of September 11, 2001 take place in the Company’s trade territory.

Income tax expense.  The Company’s income tax expense for the three months ended March 31, 2002 was $667,000 as compared to $709,000 for the three months ended March 31, 2001, a decrease of $42,000. This decrease was primarily due to a decrease in the Company’s effective tax rate from 39.45% to 37.56% for the three months ended March 31, 2001 and March 31, 2002, respectively, due to changes in permanent tax differences.

Comparison of the Nine Months Ended March 31, 2002 and March 31, 2001

General.  The Company’s net income decreased $329,000 for the nine months ended March 31, 2002 as compared to the nine months ended March 31, 2001. As discussed in more detail below, this decrease was due primarily to an increase in the provision for losses on loans and leases of $919,000 and an increase in noninterest expense of $1.0 million which were partially offset by an increase in net interest income of $281,000, an increase in noninterest income of $1.0 million and a decrease in income tax expense of $304,000.

Interest and Dividend Income.  Interest and dividend income decreased $7.6 million from $44.8 million for the nine months ended March 31, 2001 to $37.2 million for the nine months ended March 31, 2002.   A $6.5 million decrease in interest and dividend income was the result of the  average yield on interest-earning assets decreasing from 8.56% to 7.26% for the nine months ended March 31, 2001 and March 31, 2002, respectively.  In addition, the average balance of interest-earning assets decreased $14.3 million at March 31, 2002 as compared to the same period in the prior fiscal year, which resulted in a $1.2 million decrease in interest and dividend income.

Interest Expense.  Interest expense decreased $7.9 million from $27.0 million for the nine months ended March 31, 2001 to $19.1 million for the nine months ended March 31, 2002.  A $6.8 million decrease in interest expense was the result of the decrease in the average rate paid on interest-bearing liabilities from 5.41% to 3.87% for the nine months ended March 31, 2001 and March 31, 2002, respectively.  In addition, the average balance of interest-bearing liabilities decreased $8.8 million at March 31, 2002 as compared to the same period in the prior fiscal year, which resulted in a $1.1 million decrease in interest expense.

Net Interest Income. The Company’s net interest income for the nine months ended March 31, 2002 increased $281,000 to $18.2 million compared to $17.9 million for the same period in fiscal 2001.  The increase in net interest income reflects an increase in the net interest spread on average earning assets to 3.39% for the nine months ended March 31, 2002 from 3.15% for the same period in fiscal 2001.

During the nine months ended March 31, 2002, the Company increased its average balances of commercial and consumer loans. The Company anticipates activity in this type of lending to continue in future years, subject to market demand.  In addition, the Company sells the majority of conventional single-family residential real estate loan originations into the secondary market.  Net interest income is expected to trend upward as a result of this lending activity as interest rate yields are generally higher on these types of loans compared to the yield provided by conventional single-family residential

18

real estate loans.  This lending activity is considered to carry a higher level of risk due to the nature of the collateral and the size of the individual loans.  As such, the Company anticipates continued increases in its allowance for loan losses.

Provision for Losses on Loans. During the nine months ended March 31, 2002, the Company recorded a provision for losses on loans of $2.5 million as compared to $1.6 million for the nine months ended March 31, 2001, an increase of $919,000.  See “Asset Quality” for further discussion.

Noninterest Income.  Noninterest income was $10.0 million for the nine months ended March 31, 2002 as compared to $9.0 million for the nine months ended March 31, 2001, an increase of $1.0 million.

The decrease in credit card fee income of $1.2 for the nine months ended March 31, 2002 as compared to the same period in fiscal 2001 is primarily due to a decrease in fees received on unsecured credit cards. This is a result of the credit card portfolio decreasing from $6.6 million at March 31, 2001 as compared to $4.1 million at March 31, 2002. The fee income represents interchange fees, annual/monthly fees, late fees and other miscellaneous fees. This credit card program was initiated in fiscal 1997. The Company ceased credit card applications in March 1999, which decreased the level of these fees.  Interest income on credit card loans is included in interest income on loans.

The increases in loan servicing income of $244,000 and net gain on sale of loans of $786,000 for the nine months ended March 31, 2002 as compared to the same period in the prior fiscal year were primarily due to the package sale of $23.1 million of one- to four-family, 15 and 30 year fixed-rate loans during the quarter ended September 30, 2001.

Other noninterest income increased $784,000 compared to the same period in the prior fiscal year primarily due to a one-time payment of $700,000 in full settlement of an insurance claim for recovery of prior losses.

Noninterest Expense.  Noninterest expense increased $1.0 million as compared to the same period in the prior fiscal year primarily due to increases in compensation and employee benefits of $1.6 million, other general and administrative expenses of $673,000 and other noninterest expense of $62,000 (increases primarily related to  six new banking centers, one branch acquisition, increased activity in mortgage and commercial lending and the purchase of a leasing company) offset by decreases in credit card processing expenses of $974,000 and occupancy and equipment of $301,000. Credit card processing expenses represent costs for collecting loans and servicing credit cards for the unsecured credit card program.

The Company expects the cost for property and casualty coverage will be increasing at its next renewal date due to the terrorists attacks of September 11, 2001.  The Company has been informed by its property and casualty insurance carrier that  due to terrorist attacks of September 11, 2001, and the resulting unavailability of reinsurance in the market,  insurance contracts will be amended with exclusionary language that will clearly define what is considered war and terrorist activity and excludes coverage for certain war and terrorist actions.  Management believes that these exclusions could have an impact on the Company’s financial performance should an event such as the events of September 11, 2001 take place in the Company’s trade territory.

Income tax expense.  The Company’s income tax expense for the nine months ended March 31, 2002 was $2.1 million as compared to $2.4 million for the nine months ended March 31, 2001, a decrease of $304,000. This decrease was primarily due to the decrease in the Company’s pretax income from $6.1 million to $5.5 million and the decrease in the effective tax rate from 39.37% to 38.36% for the nine months ended March 31, 2001 and March 31, 2002, respectively, due to changes in permanent tax differences.

Liquidity and Capital Resources

The Bank’s primary sources of funds are deposits, FHLB advances and prepayments of loan principal and, to a lesser extent, sales of mortgage loans, sales and/or maturities of securities, mortgage-backed securities, and short-term investments.  While scheduled loan payments and maturing securities are relatively predictable, deposit flows and loan 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

19

agency obligations.  During the nine months ended March 31, 2002, the Bank paid down FHLB advances and decreased its borrowings with the FHLB by $37.5 million.  See “Financial Condition Data” for further discussion.

The Bank anticipates that it will have sufficient funds available to meet current loan commitments.  At March 31, 2002, the Bank had outstanding commitments to originate or purchase mortagage and commercial loans of $28.0 million and to sell mortgage and commercial loans of $14.7 million.  At March 31, 2002, the Bank had no outstanding commitments to purchase or sell securities available for sale.

Although deposits are 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.  See “Financial Condition Data” for further analysis.

The Company currently has in effect a stock buy back program in which up to 10% of the common stock of the Company outstanding on April 22, 2001 may be acquired through April 30, 2002.  A total of 73,400 shares of common stock were purchased pursuant to this program during the nine months ended March 31, 2002.  In addition, the Company repurchased a block of 340,421 shares of its common stock in a private transaction completed on February 13, 2002.  The Company approved a new stock buy back program in which up to 10% of the common stock of the Company outstanding on May 1, 2002 may be acquired through April 30, 2003.  No shares of common stock have been purchased pursuant to the new program.

On November 28, 2001, the Company issued 10,000 shares totaling $10.0 million of Company Obligated Mandatorily Redeemable Preferred Securities of HF Financial Capital Trust I.  The Trust exists for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures of the Company.  These subordinated debentures constitute the sole asset of the Trust.  The securities provide for cumulative cash distributions calculated at a rate based on six-month LIBOR plus 3.75% adjusted semi-annually.  The Company may, at one or more times, defer interest payments on the capital securities for up to 10 consecutive semi-annual periods, but not beyond December 8, 2031.  At the end of the deferral period, all accumulated and unpaid distributions will be paid.  The capital securities will be redeemed on December 8, 2031; however, the Company has the option to shorten the maturity date to a date not earlier than December 8, 2006.  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.

Savings institutions insured by the Federal Deposit Insurance Corporation are required by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) to meet three regulatory capital requirements.  If a requirement is not met, regulatory authorities may take legal or administrative actions, including restrictions on growth or operations or, in extreme cases, seizure.  Institutions not in compliance may apply for an exemption from the requirements and submit a recapitalization plan.  Under these capital requirements, at March 31, 2002, the Bank met all current capital requirements.

The Office of Thrift Supervision (“OTS”) has adopted a core capital requirement for savings institutions comparable to the requirement for national banks.  The OTS core capital requirement is 4% of total adjusted assets.  The Bank had core capital of 7.27% at March 31, 2002.

Pursuant to the Federal Deposit Insurance Corporation Insurance Act (“FDICIA”), the federal banking agencies, including the OTS, have also proposed regulations authorizing the agencies to require a depository institution to maintain additional total capital to account for concentration of credit risk and the risk of non-traditional activities.  No assurance can be given as to the final form of any such regulation.

Impact of Inflation and Changing Prices

The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, 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.

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Recent Accounting Pronouncements

In July, 2001, the Financial Accounting Standards Board (FASB) issued two statements — Statement 141, Business Combinations, and Statement 142, Goodwill and Other Intangible Assets, which will impact the Company’s accounting for its reported goodwill.  The provisions of FASB Statement 141 apply to all business combinations initiated after June 30, 2001 and all business combinations accounted for by the purchase method for which the date of acquisition is July 1, 2001, or later.  The provisions of FASB Statement 142 will be implemented by the Company for the first quarter of its fiscal year 2003 financial statements.  The Company has not yet completed its full assessment of the effects of these new pronouncements on its financial statements and is uncertain as to the impact.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Interest rate risk is the most significant market risk affecting the Company.  Other types of market risk, such as foreign exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities.

The composition of the Bank’s balance sheet results in maturity mismatches between interest-earning assets and interest-bearing liabilities.  The scheduled maturities of the Bank’s fixed rate interest-earning assets are longer than the scheduled maturities of its fixed rate interest-bearing liabilities.  This mismatch exposes the Bank to interest rate risk.  In a rising rate scenario, as measured by the OTS interest rate risk exposure simulation model, the estimated market or portfolio value (“PV”) of the Bank’s assets would decline in value to a greater degree than the change in the PV of the Bank’s liabilities, thereby reducing net portfolio value (“NPV”), the estimated market value of its shareholders’ equity.

As of September 30, 2001, under a rate shock scenario of plus/minus 200 basis points (“bp”), the Bank’s pre-shock NPV ratio (NPV as a % of PV of assets) was estimated in the OTS model to be 9.80%.  The post-shock NPV ratio (worst case scenario being a decrease of 200 bp in market interest rates) was estimated to be 8.92%, a decline of 88bp.  As of December 31, 2001, the most recent report available, the post-shock NPV ratio (worst case scenario being a decrease of 100 bp in market interest rates) was estimated to be 10.12%, a decrease of 55bp from the pre-shock NPV ratio estimate of 10.67%.

In managing market risk and the asset/liability mix, the Bank has placed its emphasis on developing a portfolio in which, to the extent practicable, assets and liabilities reprice within similar periods. The effect of this policy will generally be to reduce the Bank’s sensitivity to interest rate changes.  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 5.

Other Information

The Company entered into an  addendum to an agreement with Commercial Federal Bank regarding the Company’s intention to purchase certain Minnesota locations of Commercial Federal.  After additional review, the Company decided not to continue with the purchase and assumption transaction and the addendum reflects the terms whereby the Company will be released upon regulatory approval of the new buyer and payment of $50,000 for Commercial Federal costs.

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HF FINANCIAL CORP.

FORM 10-Q

PART II.  OTHER INFORMATION

Item 1.    Legal Proceedings

None

Item 2.    Changes in Securities

None

Item 3.    Defaults upon Senior Securities

None

Item 4.    Submission of Matters to a Vote of Security Holders

None

Item 5.    Other Information

None

Item 6.    Exhibits and Reports on Form 8-K

None

No other information is required to be filed under Part II of the form.

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HF FINANCIAL CORP.

FORM 10-Q

SIGNATURES

Pursuant to the requirements 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.
			(Registrant)
Date:	May 13, 2002	by	/s/ Curtis L. Hage
			Curtis L. Hage, Chairman, President
			And Chief Executive Officer
			(Duly Authorized Officer)
Date:	May 13, 2002	by	/s/ Darrel L. Posegate
			Darrel L. Posegate, Senior Vice President
			And Chief Financial Officer
			(Principal Financial and Accounting Officer)

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