<PAGE> 1

                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549

                                   FORM 10-K

                  Annual Report Pursuant to Section 13 of the
                        Securities Exchange Act of 1934

                    For the fiscal year ended June 30, 1997

            Securities and Exchange Commission File Number 0-25722

                               HF BANCORP, INC.
            (Exact name of registrant as specified in its charter)

            DELAWARE                                         33-0576146
  (State or other jurisdiction                       (I.R.S. Employer I.D. No.)
of incorporation or organization)

                445 E. FLORIDA AVENUE, HEMET, CALIFORNIA 92543
                   (Address of principal executive offices)


      Registrant's telephone number, including area code: (909) 658-4411
  Securities registered pursuant to Section 12(b) of the Act:  Not Applicable
         Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $.01 PAR VALUE PER SHARE     NASDAQ STOCK MARKET
            (Title of Class)              (Name of exchange on which registered)


      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 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   X          No
                                             -----           ------

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ X ]

      The number of shares  outstanding for each of the registrant's  classes of
common stock issued and outstanding as of September 5, 1997 was 6,281,875.

      The aggregate market value of the voting stock held by "non-affiliates" of
the registrant (i.e., persons other than the directors and executive officers of
the  registrant)  was $ 89,696,012  based upon the last sales price as quoted on
The NASDAQ Stock Market for September 5, 1997.


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                               HF BANCORP, INC.
                         1997 FORM 10-K ANNUAL REPORT

                               TABLE OF CONTENTS

                                    PART I
                                                                         PAGE
                                                                         ----

Item 1.  Description of Business.....................................      5
            General..................................................      5
            Market Area and Competition..............................      9
            Weakness in the Regional Economy.........................      9
            Employees................................................     10
            Effect of Governmental Policies..........................     10
            Regulation and Supervision...............................     10
            Capital Requirements and Capital Categories..............     13
            Safety and Soundness Standards...........................     16
            Potential Enforcement Actions............................     18
            Premiums for Deposit Insurance...........................     19
            Transactions with Related Parties........................     20
            Community Reinvestment Act...............................     21
            Qualified Thrift Lender Test.............................     21
            Limitation on Capital Distributions......................     22
            Liquidity ...............................................     22
            Branching ...............................................     23
            Restrictions on Investments and Loans....................     23
            Classification of Assets.................................     24
            Federal Home Loan Bank System............................     25
            Federal Reserve System...................................     25
            Federal Securities Laws..................................     26
            Non Banking Regulation...................................     26
            Federal and State Taxation...............................     27
            Financial Industry Reform Legislation....................     28
            Federal Judicial Review..................................     29
            Factors that May Affect Future Results...................     29
            Additional Item: Executive Officers......................     30

Item 2.  Properties  ................................................     31

Item 3.  Legal Proceedings...........................................     32

Item 4.  Submission of Matters to a Vote of Security Holders.........     32




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                                    PART II

Item 5.  Market for the Registrant's Common Equity and
            Related Stockholder Matters..............................     32

Item 6.  Selected Financial Data.....................................     34

Item 7.  Management's Discussion and Analysis of Financial Condition
            and Results of Operations................................     37
            Overview  ...............................................     37
            Analysis of the Results of Operations....................     42
            Overview ................................................     42
            Net Interest Income .....................................     42
            Asset / Liability Management ............................     46
            Provision for Estimated Loan Losses .....................     50
            Other Income / Expense ..................................     51
            Subsidiary activities ...................................     52
            General & Administrative Expenses .......................     52
            Income Taxes ............................................     53
            Analysis of Financial Condition .........................     54
            Overview ...............................................      54
            Securities Portfolio ....................................     54
            Loans. . . .    .........................................     56
            Credit Quality ..........................................     62
            Intangible Assets .......................................     67
            Deposits. . .............................................     70
            Borrowings ..............................................     71
            Liquidity  ..............................................     73
            Capital Resources .......................................     74
            Off Balance Sheet .......................................     75
            Impact of Inflation & Changing Prices ...................     76
            Recent Accounting Pronouncements ........................     76

Item 8.  Financial Statements and Supplementary Data.................     77

Item 9.  Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure.................................    131


                                   PART III

Item 10. Directors and Executive Officers of the Registrant.........     131
Item 11. Executive Compensation.....................................     131
Item 12. Security Ownership of Certain Beneficial Owners and
            Management..............................................     131
Item 13. Certain Relationships and Related Transactions.............     131

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on
            Form 8-K................................................     132


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                                 INTRODUCTION


      In addition to historical  information,  this document may include certain
forward looking  statements within the meaning of the Private  Securities Reform
Act of 1995 (the "Reform  Act").  These forward  looking  statements  relate to,
among  other  things,  expectations  of the  business  environment  in which the
Company operates, projections of future performance,  perceived opportunities in
the market,  and statements  regarding the Company's  mission and vision.  These
forward looking statements are based upon current management  expectations,  and
therefore may involve risks and  uncertainties.  The Company's  actual  results,
performance,  or  achievements  may  differ  materially  from  those  suggested,
expressed,  or implied by the forward looking  statements due to a wide range of
factors, including:

o     vacillation in general economic conditions

o     legislative and regulatory changes

o     monetary and fiscal policies of the federal government

o     changes in  tax policies, rates  and regulations of  federal,  state,  and
      local tax authorities

o     fluctuations in interest rates

o     variation in the cost of funds

o     changes in demand for the Company's products and services

o     actions by competitors

o     changes in the composition of the Company's loan and investment portfolios

o     variation in the credit quality of the Company's assets

o     alterations in accounting principles, policies, or guidelines

o     changes  in  other  economic,  competitive,  government, and technological
      factors

Further  description  of the  risks and  uncertainties  to the  Company  and its
business are presented in "Item 1.  Description  Of Business -- Factors That May
Affect Future Results".





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                                    PART I

ITEM 1.   DESCRIPTION OF BUSINESS


GENERAL

      H.F. Bancorp, Inc. (referred to herein on an unconsolidated basis as "HFB"
and on a  consolidated  basis as the  "Company")  is a savings and loan  holding
company incorporated in the State of Delaware that was organized for the purpose
of  acquiring  all  of  the  capital  stock  of  Hemet  Federal  Savings  & Loan
Association  (the "Bank") upon its conversion from a federally  chartered mutual
savings association to a federally chartered stock savings association.  On June
30, 1995,  the Company  completed its sale of 6,612,500  shares of common stock,
and used  approximately 50% of the $51.1 million in net proceeds to purchase all
of the Bank's common stock issued in the Bank's  conversion to stock form.  Such
business combination was accounted for at historical cost in a manner similar to
a pooling of interests.

      HFB's principal business is to serve as a holding company for the Bank and
for  other  banking  or  banking  related  subsidiaries  which the  Company  may
establish  or  acquire.  As a  legal  entity  separate  and  distinct  from  its
subsidiaries,  HFB's  principal  source  of funds is its  existing  capital  and
assets,  and  future  dividends  paid  by and  other  funds  advanced  from  its
subsidiaries.  Legal limitations are imposed on the amount of dividends that may
be paid and loans that may be made by the Bank to HFB ( See "Item 1. Description
of Business -- Supervision and Regulation"). HFB's common stock is listed on the
Nasdaq National Market ("NASDAQ") under the symbol "HEMT".

      At June 30, 1997, the Company had $984.7  million in total assets,  $484.3
million in total net loans receivable, and $839.7 million in total deposits. The
Company is subject to  regulation by the Office Of Thrift  Supervision  ("OTS"),
the Federal  Deposit  Insurance  Corporation  ("FDIC"),  and the  Securities and
Exchange Commission ("SEC").  The principal executive offices of the Company and
the Bank are  located at 445 East  Florida  Avenue,  Hemet,  California,  92543,
telephone  number (909) 658 - 4411, toll free (800) 540-4363,  facsimile  number
(909)  925 - 5398.  The Bank is a member  of the  Federal  Home Loan Bank of San
Francisco  ("FHLB") and its deposit accounts are insured by the FDIC through the
Savings  Association  Insurance Fund ("SAIF") to the maximum extent permitted by
law.

      On September  27,  1996,  the Bank  consummated  the  acquisition  of Palm
Springs Savings Bank ("PSSB") by purchasing, for cash, their 1,131,446 shares of
common stock for $16.3 million. The acquisition was accounted for under purchase
accounting  guidelines and therefore  generated  intangible assets (See "Item 7.
Management's  Discussion And Analysis Of Financial  Condition And The Results Of
Operations -- Intangible Assets").

      On June 21, 1996,  the Bank  entered the Northern San Diego County  market
through the  purchase of three  branch  offices  and the  assumption  of deposit
liabilities  totaling $185.2 million from Hawthorne Savings Bank. In conjunction
with the purchase, the Bank generated a core deposit

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intangible  of $6.6  million,  or 3.6% of the  deposits  assumed.  (See "Item 7.
Management's  Discussion And Analysis Of Financial  Condition And The Results Of
Operations -- Acquisitions").

      The consolidated  financial statements include the accounts of HF Bancorp,
Inc., and its wholly owned  subsidiary  Hemet Federal Savings & Loan Association
and its wholly owned subsidiaries,  HF Financial  Corporation,  Coachella Valley
Financial  Services  Corporation  ("CVFSC"),   PSSB  Insurance  Services,   Inc.
("PSSBI") and HF Financial  Corporation's  subsidiary,  First Hemet  Corporation
(collectively,  the Company). CVFSC served as the trustee on deeds of trust held
by Palm Springs Savings Bank.  This service has been  transferred to First Hemet
Corporation.  PSSBI was  formed to offer  life  insurance  and other  investment
products  to  customers  of  PSSB.  In  September  of 1994,  PSSBI  discontinued
marketing debt and equity  securities,  including  mutual funds,  to the general
public and the PSSB  customer  base.  HF  Bancorp,  Inc.  and Hemet  Federal are
currently in the process of consolidating HF Financial  Corporation,  CVFSC, and
PSSBI with and into First Hemet Corporation.  First Hemet Corporation engages in
trustee services for the Bank,  conducts real estate  development,  and receives
commissions  from  the sale of  mortgage  life  insurance,  fire  insurance  and
annuities.  All material intercompany  transactions,  profits, and balances have
been eliminated.

      The  Company  conducts  business  from  nineteen  branch  offices  and one
centralized loan servicing center, located as follows:


Greater Hemet / San Jacinto  Valley Area
----------------------------------------
      Hemet - Diamond Valley
      Hemet - Downtown (Main Office)
      Hemet - East
      Hemet - Sanderson (Loan Service Center)
      Hemet - West
      Idyllwild
      San Jacinto


Northern San Diego County                    Coachella Valley
-------------------------                    ----------------     
      Oceanside                                   Cathedral City
      Rancho Bernardo                             Desert Hot Springs
      Vista                                       Palm Springs
                                                  Rancho Mirage


Greater City of Riverside Area               Southwestern Riverside County
------------------------------               -----------------------------
      Arlington                                   Canyon Lake
      Canyon Crest                                Murrieta
      Tyler Mall                                  Sun City

      In addition,  the Company supports its customers through 24 hour telephone
banking and ATM access  through an array of  networks  including  STAR,  CIRRUS,
PLUS, and NOVUS.



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      Through its network of banking offices,  the Bank emphasizes  personalized
service focused upon two primary markets:  households and small businesses.  The
Bank offers a wide complement of lending products, including:

o     a broad array  of residential mortgage products, both fixed and adjustable
      rate

o     consumer loans, including home  equity  lines of  credit,  auto loans, and
      personal lines of credit

o     specialized financing programs to support community development

o     mortgages for apartments

o     commercial real estate loans

o     construction lending

o     commercial loans to  businesses, including  both revolving lines of credit
      and term loans



      The Bank also  provides an  extensive  selection  of deposit  instruments.
These include:

o     multiple checking products for both personal and business accounts

o     various savings accounts, including those for minors

o     tiered money markets accounts

o     tax qualified deposit accounts (e.g. IRA's)

o     a broad array of certificate  of deposit products,  with terms from 7 days
      to 7 years


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      The Bank also  supports  its  customers  by  functioning  as a federal tax
depository, providing merchant bankcard services, and supplying various forms of
electronic  funds  transfer.   In  addition,   the  Bank,  through  third  party
relationships,  makes various non FDIC insured investment  products available to
its customers, including mutual funds and selected insurance related products.

      The Company  participates  in the wholesale  capital  markets  through the
management  of its security  portfolio and its use of various forms of wholesale
funding.  The Company's  security  portfolio  contains a variety of instruments,
including  callable  debentures,  fixed  and  adjustable  rate  mortgage  backed
securities,   and  collateralized   mortgage   obligations.   The  Company  also
participates in the secondary  market for loans as both a purchaser and a seller
of various types of mortgage products.

      The Company's  revenues are derived from interest on its loan and mortgage
backed  securities   portfolios,   interest  and  dividends  on  its  investment
securities, and its fee income associated with the provision of various customer
services.  The Company's  primary  sources of funds are deposits,  principal and
interest  payments on its asset  portfolios,  and various  sources of  wholesale
borrowings  including  FHLB  advances  and reverse  repurchase  agreements.  The
Company's most significant operating  expenditures are its staffing expenses and
the costs associated with maintaining its branch network.

      Additional  information  concerning  the  Company's  business is presented
under Item 7. "Management's  Discussion and Analysis of Financial  Condition and
Results of Operations", which is incorporated herein by reference.


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MARKET AREA AND COMPETITION

      The banking and financial services business in California  generally,  and
in the Bank's market areas specifically, is highly competitive. The increasingly
competitive environment is a result of:

o     changes in regulation,  technology,  and product delivery systems, whereby
      the Bank must  compete  with both (i) in market  entities  and (ii) remote
      entities soliciting customers via electronic means

o     the accelerating  pace of  consolidation among  financial institutions and
      the continuing mergers among commercial and investment banks

o     the growth of nonbank financial services providers

      The Bank  competes  for  loans,  deposits,  and  customers  for  financial
services with commercial banks, savings & loans, credit unions,  thrift & loans,
securities and brokerage companies, mortgage companies, insurance firms, finance
companies,  mutual funds,  and other non bank service  providers.  Many of these
competitors  are much larger than the Bank in total assets,  market  reach,  and
capitalization;  and enjoy  greater  access to capital  markets  and can offer a
broader array of products and services than the Bank can legally furnish.

      In order to compete  with other  financial  services  providers,  the Bank
relies upon local  community  involvement,  personal  service and the  resulting
personal relationships of its staff and customers,  and specialized products and
services tailored to meet its customers' needs.


WEAKNESS IN THE REGIONAL ECONOMY

      Although recently  improving,  Southern  California,  including the Bank's
market area, has, throughout much of the 1990's,  experienced reduced employment
and  recessionary  economic  conditions  as a result  of the  downsizing  of the
defense  industry,  a  slowdown  in  construction,  and  corporate  mergers  and
relocations.  This economic  backdrop led to a general  weakening of real estate
values,  which  in some of the  Bank's  market  areas  have  yet to  recover  to
pre-recessionary levels. The volume and quality of the Bank's loan portfolio has
been  impacted by these  conditions.  While the Bank has  experienced  a general
improvement  in its  aggregate  credit  profile over the past several  quarters,
there can be no assurance that the Southern  California  economy and real estate
market will not deteriorate; or that such deterioration,  if it occurs, will not
present an adverse  impact on the  Company's  financial  condition or results of
operations.



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EMPLOYEES

      As of June 30,  1997,  the  Company  had 201  full-time  employees  and 74
part-time  employees.   The  employees  are  not  represented  by  a  collective
bargaining   unit.   The  Company   considers  its  employee   relations  to  be
satisfactory.

EFFECT OF GOVERNMENTAL POLICIES

      Banking is a business  that  depends,  in large part,  upon  interest rate
differentials. In general, the difference between the interest rates paid by the
Bank on its deposits and other sources of funds and the interest  rates received
by the Bank on its loan and investment portfolios  constitutes the major portion
of the  Bank's  earnings.  These  interest  rates are highly  sensitive  to many
factors which are beyond the control of the Bank. Accordingly,  the earnings and
growth of the Bank and the Company are subject to the  influence of domestic and
foreign economic conditions, including inflation, recession, and unemployment.

      The banking business is not only affected by general economic  conditions,
but is also significantly  influenced by the monetary and fiscal policies of the
federal  government  and the  policies of  regulatory  agencies,  including  the
Federal Reserve Board ("FRB").  The FRB implements  national  monetary  policies
(with objectives such as curbing  inflation and avoiding  recession) by its open
market  operations  in United  States  Government  securities,  by changing  the
required level of reserves for applicable  financial firms, and by adjusting the
discount rate used for borrowings by depository institutions. The actions of the
FRB in these  areas  influence  the  demand  for  loans and the  interest  rates
associated with many of the Bank's products. The nature and impact of any future
policy changes by the FRB cannot be predicted.


REGULATION AND SUPERVISION

General
-------

      Financial   institution   holding   companies   and   insured   depository
institutions  are  extensively  regulated  under both federal and state law. Set
forth  below is a summary  description  of certain  laws and  regulations  which
relate to the  operation  of the Company  and its  subsidiaries.  The  following
description  does not purport to be complete and is qualified in its entirety by
reference to the applicable laws and regulations.

      HFB, as a savings & loan  holding  company,  is  required to file  certain
reports with, and otherwise  comply with the rules and  regulations  of, the OTS
under the Home  Owners'  Loan Act, as amended (the  "HOLA").  In  addition,  the
activities  of the  Bank  are  governed  by the  HOLA  and the  Federal  Deposit
Insurance Act ("FDIA").

      The Bank is subject to extensive regulation,  examination, and supervision
by the OTS, as its primary  federal  regulator,  and the FDIC, as the insurer of
customer  deposits.  The  Bank  must  file  reports  with  the OTS and the  FDIC
concerning its activities and financial condition. In addition, the

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Bank must obtain various regulatory  approvals prior to conducting certain types
of business or entering into selected  transactions;  e.g. acquisitions of other
financial institutions.  The OTS and / or the FDIC conduct periodic examinations
of the  Bank's  safety  and  soundness,  its  operations  (including  technology
utilization), and its compliance with applicable laws and regulations, including
the Community  Reinvestment Act ("CRA"),  the Real Estate Settlement  Procedures
Act  ("RESPA"),  and the  Bank  Secrecy  Act  ("BSA").  These  examinations  are
primarily  conducted  for the  protection  of the SAIF,  and are not intended to
provide any assurance to investors in the Company's common stock.

      The  regulatory  structure  provides  the  supervisory   authorities  with
extensive discretion across a wide range of the Company's operations, including,
but not limited to:

o     loss reserve adequacy

o     capital requirements

o     credit classification

o     limitation or prohibition of dividends

o     assessment levels for deposit insurance and examination costs

o     permissible branching

      Any change in regulatory requirements or policies, whether by the OTS, the
FDIC, the FRB, or Congress, could have a material adverse impact on the Company.

Holding Company Regulation
--------------------------

      HFB is a non diversified unitary savings & loan holding company within the
meaning  of the  HOLA.  As such,  HFB will  generally  not be  restricted  under
existing  laws as to the types of  business  activities  in which it may engage,
provided  that the Bank  continues  to be a  qualified  thrift  lender  ("QTL").
However,  a number of potential  laws are being debated in Congress  which could
significantly alter the business and regulatory environment in which HFB and its
subsidiaries   may  operate   (See  "Item  1.   Financial   Institution   Reform
Legislation").

      Upon any non  supervisory  acquisition  by the Company of another  savings
institution  or savings bank which that meets the QTL test and is deemed to be a
savings institution by the OTS, the Company could then become a multiple savings
& loan holding company (if the acquired  institution is maintained as a separate
subsidiary),  and would then be subject to extensive limitations on the types of
business  activities in which it could engage. The HOLA limits the activities of
a multiple savings & loan holding company and its non FDIC insured  subsidiaries
primarily  to those  activities  permissible  for bank holding  companies  under
Section  4(c)(8)of  the Bank  Holding  Company Act  ("BHCA")  and certain  other
activities authorized by OTS regulations.


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      The HOLA  prohibits  a  savings  and loan  holding  company,  directly  or
indirectly, or through one or more subsidiaries, from:

1)    acquiring more than 5% of the voting stock of another savings institution
      or holding company thereof, without prior written approval of the OTS;

2)    acquiring or  retaining,  with certain  exceptions, more than 5% of a non-
      subsidiary company engaged in activities other than those permitted by the
      HOLA;

3)    acquiring or  retaining control  of a  depository institution  that is not
      insured by the FDIC.

      In  evaluating  applications  by  holding  companies  to  acquire  savings
institutions,  the OTS must consider the financial and managerial  resources and
future prospects of the company and the institution involved,  the effect of the
acquisition on the risk to the deposit  insurance  funds,  the  convenience  and
needs of the community, and competitive factors.

      The OTS is prohibited from approving any acquisition  that would result in
a multiple savings and loan holding company controlling savings  institutions in
more than one state, subject to two exceptions:

(A)   the  approval of interstate supervisory  acquisitions  by  savings  & loan
      holding companies and

(B)   the  acquisition of a savings  institution in another state if the laws of
      the state of the  target  savings  institution  specifically  permit  such
      acquisitions.  The  states  vary  in  the  extent  to  which  they  permit
      interstate savings & loan holding company acquisitions.

      Although  savings & loan  holding  companies  are not  subject to specific
capital  requirements  or specific  restrictions  on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings  institutions,  as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition,  the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the  OTS in its  examination  of the  safety  and  soundness  of the  insured
depository  institution.  The OTS  also has  authority  to  order  cessation  of
activities  or  divestiture  of holding  company  subsidiaries  deemed to pose a
threat to the safety and soundness of the insured depository institution.



                                      12

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CAPITAL REQUIREMENTS AND CAPITAL CATEGORIES

      FIRREA Capital Requirements.  OTS capital regulations,  as mandated by the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"),
require savings institutions to meet three minimum capital standards (as defined
by applicable regulations):

o     a 1.5% tangible capital ratio

o     a 3.0% leverage (core) capital ratio

o     an 8.0% risk-based capital ratio

      The capital standards  applicable to savings  institutions must be no less
stringent  than those for national  banks.  In addition,  the prompt  corrective
action  ("PCA")  standards  discussed  below  also  establish,  in  effect,  the
following minimum standards:

o     a 2.0% tangible capital ratio

o     a 4.0% leverage (core) capital ratio (3.0% for institutions receiving  the
      highest regulatory rating under the CAMELS rating system)

o     a 4.0% Tier One risk based capital ratio

      The OTS also has the  authority,  after  giving the  affected  institution
notice and an  opportunity to respond,  to establish  specific  minimum  capital
requirements for a single institution which are higher than the general industry
minimum  requirements  presented  above.  The OTS can take  this  action  upon a
determination that a higher minimum capital  requirement is appropriate in light
of an institution's particular circumstances.

      Tangible capital is composed of:

o     common stockholders' equity (including retained earnings)

o     certain noncumulative perpetual preferred stock and related earnings

o     minority interests in equity accounts of consolidated subsidiaries


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      less:
      -----

o     intangible assets other than certain asset servicing rights

o     investments  in  and  loans  to  subsidiaries  engaged  in  activities  as
      principal, not permissible for a national bank

o     deferred tax assets as defined  under  Statement  of Financial  Accounting
      Standards ("SFAS") Number 109 - "Accounting for Income Taxes" in excess of
      certain thresholds

      Core capital  consists of tangible  capital plus various  adjustments  for
certain  intangible  assets.  At June 30,  1997 and 1996,  the  Bank's  tangible
capital was  equivalent  to its core  capital,  as the Bank did not maintain any
qualifying  adjustments.  In general,  total assets  calculated  for  regulatory
capital  purposes  exclude those assets deducted from capital in determining the
applicable capital ratio.

      The risk based  capital  standard  for savings  institutions  requires the
maintenance  of Tier One capital (core  capital) and total  capital  (defined as
core capital plus  supplementary  capital) to risk  weighted  assets of 4.0% and
8.0%, respectively.  In determining the amount of an institution's risk weighted
assets,  all  assets,   including  certain  off  balance  sheet  positions,  are
multiplied  by a risk weight of 0.0% to 100.0%,  as assigned by OTS  regulations
based upon the amount of risk  perceived as inherent in each type of asset.  The
components of supplementary capital include:

o     cumulative preferred stock

o     long term perpetual preferred stock

o     mandatory convertible securities

o     certain subordinated debt

o     intermediate preferred stock

o     the general allowance  for  loan and  lease  losses, subject to a limit of
      1.25% of risk weighted assets

      Overall,  the amount of  supplementary  capital  included as part of total
capital cannot exceed 100.0% of core capital.

      As  disclosed  in the  footnotes  to the  Company's  audited  consolidated
financial statements, at June 30, 1997, the Bank exceeded all minimum regulatory
capital requirements.


                                      14

<PAGE> 15



      FDICIA  PCA  Regulations.   The  Federal  Deposit  Insurance   Corporation
Improvement  Act of 1991  ("FDICIA")  dictated  that the OTS  implement a system
requiring  regulatory  sanctions  against  institutions  that are not adequately
capitalized,  with the  sanctions  growing  more severe the lower  institution's
capital.  The  OTS  has  established  specific  capital  ratios  under  the  PCA
Regulations for five separate capital categories:

1.    well capitalized
2.    adequately capitalized
3.    under capitalized
4.    significantly under capitalized
5.    critically undercapitalized

      Under the OTS  regulations  implementing  FDICIA,  an  insured  depository
institution  will be classified in the following  categories  based, in part, on
the following capital measures:

Well Capitalized
----------------
Total risk based  capital  ratio of at least 10.0%
Tier One risk based  capital ratio of at least 6.0%
Leverage ratio of at least 5.0%

Adequately Capitalized
----------------------
Total risk  based  capital  ratio of at least  8.0%
Tier One risk based  capital ratio of at least 4.0%
Leverage ratio of at least 4.0%

Under Capitalized
-----------------
Total risk  based  capital  ratio of less than 8.0%
Tier One risk based  capital ratio of less than 4.0%
Leverage ratio of less than 4.0%

Significantly Under Capitalized
-------------------------------
Total risk based capital  ratio  of  less than  6.0% 
Tier One risk based capital ratio of less than 3.0% 
Leverage  ratio of less than 3.0%

Critically Under Capitalized
----------------------------
Tangible capital of less than 2.0%



                                      15

<PAGE> 16



      An institution  that, based upon its capital levels,  is classified in one
of the top three categories may be regulated as though it were in the next lower
capital category if the appropriate federal banking agency,  after notice and an
opportunity  for  hearing,  determines  that  the  operation  or  status  of the
institution  warrants such treatment.  There are numerous mandatory  supervisory
restrictions on the activities of under capitalized institutions. An institution
that is under capitalized must submit a capital restoration plan to the OTS that
the OTS may approve only if it determines  that the plan is likely to succeed in
restoring the institution's  capital and will not appreciably increase the risks
to which the institution is exposed. In addition, the institution's  performance
under the capital  restoration  plan must be  guaranteed  by every  company that
controls the  institution.  Under  capitalized  institutions  may not acquire an
interest in any company,  open a new branch  office,  or engage in a new line of
business without OTS or FDIC approval. An under capitalized  institution is also
limited in its ability to increase average assets, accept brokered deposits, pay
management fees, set deposit rates, and make capital  distributions.  Additional
restrictions   apply  to   significantly   and  critically   under   capitalized
institutions.  In addition, the OTS maintains extensive  discretionary sanctions
which may be applied to under capitalized  institutions,  including the issuance
of a capital  directive and the  replacement  of senior  executive  officers and
directors.

      As  disclosed  in the  footnotes  to the  Company's  audited  consolidated
financial  statements,  at June 30, 1997,  the Bank met the  requirements  to be
classified as a "well capitalized" institution under PCA regulations.


SAFETY AND SOUNDNESS STANDARDS

      In  addition  to  the  PCA   provisions   discussed   above  based  on  an
institution's  regulatory  capital  ratios,  FDICIA  contains  several  measures
intended to promote early  identification  of management  problems at depository
institutions  and to  ensure  that  regulators  intervene  promptly  to  require
corrective  action by institutions  with  inadequate  operational and managerial
controls. The OTS has established minimum standards in this regard related to:

o     internal controls, information systems, and internal audit systems

o     loan documentation

o     credit underwriting

o     asset growth

o     earnings

o     compensation, fees, and benefits


                                      16

<PAGE> 17



      If the OTS  determines  that an  institution  fails  to meet  any of these
minimum  standards,  the agency may  require  the  institution  to submit to the
agency an acceptable plan to achieve compliance with the standard.  In the event
the  institution  fails to submit an acceptable  plan within the time allowed by
the agency or fails in any material  respect to implement an accepted  plan, the
agency must, by order, require the institution to correct the deficiency and may
implement a series of supervisory sanctions.

      Effective  October 1, 1996, the federal  banking  agencies  (including the
OTS) promulgated safety and soundness  regulations and accompanying  interagency
compliance guidelines on asset quality and earnings standards.  These guidelines
provide six  standards  for  establishing  and  maintaining a system to identify
problem  assets and prevent  those assets from  deteriorating.  The  institution
should:

1.    conduct periodic asset quality reviews to identify problem assets

2.    estimate the inherent losses in those assets and establish  reserves  that
      are sufficient to absorb estimated losses

3.    compare problem asset totals to capital

4.    take appropriate corrective action to resolve problem assets

5.    consider the size and potential risks of material asset concentrations

6.    provide periodic  asset reports  with adequate  information for management
      and the board of directors to assess the level of asset risk

      These  guidelines  also set forth  standards for evaluating and monitoring
earnings and for ensuring that earnings are  sufficient  for the  maintenance of
adequate capital and reserves.  If the institution fails to comply with a safety
and soundness  standard,  the appropriate federal banking agency may require the
institution to submit a compliance plan.  Failure to submit a compliance plan or
to implement an accepted plan may result in enforcement action.



                                      17

<PAGE> 18



POTENTIAL ENFORCEMENT ACTIONS

      The OTS has primary enforcement  responsibility over savings  institutions
and maintains the authority to bring  actions  against the  institution  and all
institution affiliated parties, as defined under the applicable regulations, for
unsafe or unsound  practices in conducting their businesses or for violations of
any law, rule,  regulation,  condition  imposed in writing by the agency, or any
written  agreement  with  the  agency.   Enforcement  actions  may  include  the
imposition  of a  conservator  or  receiver,  the issuance of a cease and desist
order that can be judicially enforced,  the termination of insurance of deposits
(in the case of the Bank), the imposition of civil money penalties, the issuance
of  directives  to  increase  capital,  the  issuance  of  formal  and  informal
agreements,  the issuance of removal or prohibition  orders against  institution
affiliated  parties,  and the imposition of  restrictions of sanctions under the
PCA provisions of the FDICIA.  Federal law also establishes  criminal  penalties
for certain violations.  Additionally, a holding company's inability to serve as
a source of strength to its subsidiary financial  institutions could serve as an
ancillary basis for regulatory action against the holding company.  Neither HFB,
the Bank, or any subsidiaries  thereof are currently  subject to any enforcement
actions.




                                      18

<PAGE> 19



PREMIUMS FOR DEPOSIT INSURANCE

      Legislation  was enacted on September 30, 1996 to address the disparity in
bank  and  thrift  deposit  insurance  premiums.   This  legislation  imposed  a
requirement on all SAIF members,  including the Bank, to fully  recapitalize the
SAIF by paying a one time special  assessment of approximately 65.7 basis points
on all  assessable  deposits  as of  March  31,  1995.  This  one  time  special
assessment  resulted in the Bank  recording an  additional  $4.8 million in FDIC
insurance expense during its quarter ended September 30, 1996.

The FDIC currently  assesses its premiums  based upon the insured  institution's
position on two factors:

1.    the institution's capital category under PCA regulations

2.    the  institution's  supervisory  category as  determined by the FDIC based
      upon supervisory information provided by the institution's primary federal
      regulator and other information deemed pertinent by the FDIC.

The supervisory categories are:

o     Group A: financially sound with only a few minor weaknesses

o     Group B: demonstrates   weaknesses   that   could  result  in  significant
      deterioration

o     Group C: poses a substantial probability of loss

Annual SAIF assessment rates as of July 1, 1997 were as follows:

                  Assessment Rates Effective July 1, 1997 *

<TABLE>
<CAPTION>

                             Group       Group      Group
                               A           B          C
                           ---------   ---------  ---------
<S>                            <C>        <C>        <C>
Well Capitalized                0          3         17
Adequately Capitalized          3         10         24
Under Capitalized              10         24         27

</TABLE>


---------------------
*  Assessment  figures  are  expressed  in  terms  of cents per $100 of assessed
   deposits.

      During the quarter ended June 30, 1997, the Bank was not assessed any SAIF
insurance premiums under the above schedule.


                                      19

<PAGE> 20



      In addition  to the  deposit  insurance  premiums  presented  in the above
table,  SAIF insured  institutions  must also pay FDIC  premiums  related to the
servicing of Financing Corporation ("FICO") bonds which were issued to help fund
the federal  government costs associated with the savings & loan problems of the
late  1980's.  At July 1, 1997,  the Bank's  premium  rate for the FICO  related
payments was 6.3 basis points of assessable deposits per annum.

      The Budget Act passed by Congress prohibits the FDIC from setting premiums
under  the  above  risk  based  schedule  above  the  amount  needed to meet the
designated reserve ratio (currently  1.25%).  The latest statistics  released by
the FDIC  indicate  that  both the SAIF  and the  Bank  Insurance  Fund  ("BIF")
maintain reserve ratios in excess of the designated ratio. Legislation is before
Congress  which  might,  among many other  events,  merge the SAIF and BIF,  and
thereby present a potential impact upon the Bank's deposit  insurance  premiums.
The Company's  management  cannot predict what legislation will be approved,  if
any, and what the impact of such legislation might be upon the Company.


TRANSACTIONS WITH RELATED PARTIES

      The Bank's  authority to engage in  transactions  with related  parties or
"affiliates"  (e.g. any company that controls or is under common control with an
institution, including the Company and its non-savings institution subsidiaries)
is limited by Sections 23A and 23B of the Federal  Reserve Act ("FRA").  Section
23A limits the  aggregate  amount of covered  transactions  with any  individual
affiliate  to 10% of the capital and  surplus of the  savings  institution.  The
aggregate amount of covered  transactions with all affiliates are required to be
secured by  collateral  in an amount and of a type  described in Section 23A and
the purchase of low quality  assets from  affiliates  is  generally  prohibited.
Section 23B  generally  provides  that  certain  transactions  with  affiliates,
including loans and asset purchases,  must be on terms and under  circumstances,
including  credit  standards,  that  are  substantially  the same or at least as
favorable to the  institution  as those  prevailing  at the time for  comparable
transactions with non-affiliated  companies.  In addition,  savings institutions
are prohibited  from lending to any affiliate that is engaged in activities that
are not  permissible for bank holding  companies and no savings  institution may
purchase the securities of any affiliate other than a subsidiary.

      The Bank's  authority to extend credit to executive  officers,  directors,
and 10% shareholders,  as well as entities such persons control,  is governed by
Sections  22(g) and 22(h) of the FRA and  Regulation O  thereunder.  Among other
things,  such loans are required to be made on terms  substantially  the same as
those  offered to  unaffiliated  individuals  and to not  involve  more than the
normal risk of  repayment.  Regulation O also places  individual  and  aggregate
limits  on the  types and  amounts  of loans  the Bank may make to such  persons
based,  in part,  on the Bank's  capital  position,  and requires  certain board
approval procedures to be followed.



                                      20

<PAGE> 21



COMMUNITY REINVESTMENT ACT

      The Community  Reinvestment Act ("CRA") requires each savings institution,
as well as certain other  lenders,  to identify and  delineate  the  communities
served through and by the  institution's  offices and to affirmatively  meet the
credit needs of its delineated communities and to market the types of credit the
institution is prepared to extend within such communities. The CRA also requires
the OTS to assess the performance of the institution in meeting the credit needs
of its communities and to take such assessment into  consideration  in reviewing
applications   for   mergers,   acquisitions,   and   other   transactions.   An
unsatisfactory  CRA rating  may be the basis for  denying  such an  application.
Performance  is  assessed  on the  basis  of an  institution's  actual  lending,
service,  and  investment  performance  rather  than the  extent  to  which  the
institution  conducts  needs  assessments,   documents  community  outreach,  or
complies with other procedural  requirements.  In connection with its assessment
of CRA performance,  the OTS assigns a rating of "outstanding,"  "satisfactory,"
"needs  improvement"  or "substantial  noncompliance."  Based on its most recent
examination, the Bank received a "satisfactory" rating.


QUALIFIED THRIFT LENDER TEST

      The qualified  thrift lender  ("QTL") test requires that, in at least nine
out of every twelve months, at least 65% of a savings  institution's  "portfolio
assets",  as defined,  must be invested in a limited  list of  qualified  thrift
investments,  including  residential  mortgages and qualifying  mortgage  backed
securities. Portfolio assets for the QTL test consist of tangible assets minus

o     assets  utilized  to  satisfy  liquidity  requirements (subject to certain
      limitations)
o     the value of property used by the institution to conduct its business

      In 1996,  the  Economic  Growth and  Regulatory  Paperwork  Reduction  Act
("EGRPRA") was adopted,  amending the QTL test requirements to allow educational
loans,  small business loans, and credit card loans to count as qualified thrift
assets  without  limit.  The EGRPRA also amended the QTL  requirements  to allow
loans for personal,  family, or household  purposes to count as qualified thrift
assets in the reporting category limited to 20.0% of portfolio assets.  Finally,
EGRPRA provided that as an alternative to the QTL test, thrifts such as the Bank
may choose to comply with the Internal Revenue  Service's  domestic building and
loan tax code test.

      A savings  institution  which  fails the QTL test is  subject  to  certain
operating  restrictions and may be required to convert to a bank charter.  As of
June 30, 1997, the Bank  maintained  80.0% of its portfolio  assets in qualified
thrift investments and therefore met the QTL test.



                                      21

<PAGE> 22



LIMITATION ON CAPITAL DISTRIBUTIONS

      OTS  regulations  impose  limitations  upon all capital  distributions  by
savings  institutions,  such  as  cash  dividends,  payments  to  repurchase  or
otherwise acquire its shares, payments to shareholders of another institution in
a  cash-out  merger  and  other  distributions   charged  against  capital.  The
regulators separate  institutions into three tiers, which are based primarily on
an institution's  capital level. An institution that exceeds all fully phased-in
capital  requirements before and after a proposed capital  distribution ("Tier 1
Association")  and has not  been  advised  by the OTS that it is in need of more
than normal supervision, could after prior notice but without obtaining approval
of the OTS,  make  capital  distributions  during a  calendar  year equal to the
greater of (i) 100% of its net  earnings to date during the  calendar  year plus
the amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in  capital  requirements) at the beginning of the
calendar year or (ii) 75% of its net income for the previous four quarters.  Any
additional capital distributions would require prior regulatory approval. In the
event the Bank's  capital  fell  below its  regulatory  requirements  or the OTS
notified  it that it was in need of more than  normal  supervision,  the  Bank's
ability to make capital distributions could be restricted.  In addition, the OTS
could prohibit a proposed capital  distribution by any institution,  which would
otherwise  be  permitted  by the  regulation,  if the OTS  determines  that such
distribution  would constitute an unsafe or unsound practice.  At June 30, 1997,
the Bank was a Tier 1 Association.


LIQUIDITY

      OTS  regulations  require  savings  institutions  to  maintain,  for  each
calendar  month,  an average  daily balance of liquid  assets  (including  cash,
certain time deposits, bankers' acceptances, specified United States government,
state and federal agency obligations, and balances maintained in satisfaction of
the FRB  reserve  requirements  described  below)  equal  to at  least 5% of the
average  daily  balance  of  its  net  withdrawable   accounts  plus  short-term
borrowings  during  the  preceding  calendar  month.  The  OTS may  change  this
liquidity requirement from time to time to an amount within a range of 4% to 10%
of such  accounts and  borrowings  depending  upon economic  conditions  and the
deposit  flows of member  institutions,  and may exclude from the  definition of
liquid  assets  any  item  other  than  cash  and  the  balances  maintained  in
satisfaction  of  FRB  reserve  requirements.   The  Bank's  average  regulatory
liquidity ratio for the month of June 1997 was 5.93% and, accordingly,  the Bank
was in compliance  with the  liquidity  requirement.  Monetary  penalties may be
imposed for failure to meet liquidity ratio  requirements.  OTS regulations also
require each member institution to maintain, for each calendar month, an average
daily balance of short-term  liquid assets (generally those having maturities of
12 months or less) equal to at least 1% of the average  daily balance of its net
withdrawable  accounts plus short-term  borrowings during the preceding calendar
month. The average short-term  liquidity ratio of the Bank for the month of June
1997 was 3.11%.



                                      22

<PAGE> 23



      The OTS has recently proposed  changing the 5.0% liquidity  requirement to
4.0% and has also invited Congress to consider eliminating all formal regulatory
liquidity  requirements,  as such are not  mandated  of  commercial  banks.  The
Company's  management  cannot  predict what changes,  if any, will be eventually
implemented to regulatory liquidity requirements.


BRANCHING

      OTS regulations permit nationwide branching by federally chartered savings
institutions  to the extent  allowed by federal  statute.  This permits  federal
savings  institutions  to establish  interstate  networks and to  geographically
diversify  their  loan  portfolios  and  lines of  business.  The OTS  authority
preempts  any state law  purporting  to regulate  branching  by federal  savings
institutions.  At this time, the Company's  management has no plans to establish
physical branches outside of California,  although the Bank does serve customers
domiciled  outside of  California  via  alternative  delivery  channels  such as
telephone, mail, and ATM networks.


RESTRICTIONS ON INVESTMENTS AND LOANS

      In addition to those  restrictions  presented  above in  reference  to the
Liquidity  and QTL  Test  requirements  of  federal  savings  institutions,  OTS
regulations do not permit the Bank to invest directly in equity securities,  non
investment  grade debt  securities,  or real estate (other than real estate used
for the  institution's  offices and facilities).  Indirect equity  investment in
real estate  through a  subsidiary,  such as the Bank's First Hemet  Corporation
subsidiary, is permissible, but is subject to certain limitations and deductions
from  regulatory   capital.   The  Bank  maintains  two  remaining  real  estate
development  projects,  Mayberry  Estates  and  Vista  Bonita,  which  are being
marketed  for  sale.  Following  the  sale of these  two  projects,  the  Bank's
management intends to refrain from further real estate investment or development
activity for the foreseeable future.

      Loans by a savings  institution to a single borrower are generally limited
to 15% of an  institution's  "unimpaired  capital and  unimpaired  surplus",  as
defined by applicable  regulations.  Aggregate  loans secured by non residential
real property are generally  limited to 400% of an institution's  total capital,
as defined. Because of its high portfolio concentration in residential loans and
its  strong  total  and  risk  based  capital  positions,   the  Bank  maintains
significant  capacity to increase  non  residential  real estate  lending  while
remaining within all applicable regulatory limitations.



                                      23

<PAGE> 24



CLASSIFICATION OF ASSETS

      Savings  institutions  are required to classify  their assets on a regular
basis, to establish appropriate allowances for losses, and to report the results
of such  classifications  quarterly  to the OTS. A savings  institution  is also
required  to  set  aside  adequate  valuation   allowances,   and  to  establish
liabilities for off balance sheet items, such as letters of credit,  when a loss
becomes  probable  and  estimable.  The OTS  has the  authority  to  review  the
institution's  classification of its assets and to determine whether  additional
assets must be  classified,  or whether  the  institution's  allowances  must be
increased.  Such instruction by the OTS to increase  valuation  allowances could
have a material  impact upon both the Bank's  reported  earnings  and  financial
condition.

        Assets are classified into one of five categories:

Pass.  These assets present no apparent weakness of deficiency.

Special Mention.  These  assets  present  weaknesses  or  deficiencies deserving
continued monitoring and heightened management attention.

Substandard.  These assets, or portions thereof, possess well defined weaknesses
which could jeopardize the timely liquidation of the asset or the realization of
the  collateral  at values at least  equal to the  Company's  investment  in the
asset.  These assets are therefore  characterized  by the  possibility  that the
institution will sustain some loss if the  deficiencies  are not corrected.  The
Company classifies all real estate owned for investment and real estate acquired
through foreclosure as substandard.

Doubtful. These assets, or portions thereof, present probable loss of principal,
but the amount of loss, if any, is subject to the outcome of future events which
are not fully determinable at the time of classification.

Loss.  These  assets,  or portions  thereof,  present  quantified  losses to the
institution.  The institution  must either  establish a specific reserve for the
amount of loss or charge off a like amount of the asset.

      In December  1993,  the federal  banking  agencies  issued an  interagency
policy  statement on the  allowance  for loan and lease losses  ("ALLL")  which,
among other things,  establishes  certain benchmark ratios of loan loss reserves
to classified  assets (defined at those  categorized as other than "Pass").  The
Company's  internal credit policy is to comply with this policy statement and to
maintain adequate reserves for estimable losses.  However,  the determination of
estimable losses is by nature an uncertain practice,  and hence no assurance can
be given that the Company's loss  allowances will prove adequate to cover future
losses.



                                      24

<PAGE> 25



FEDERAL HOME LOAN BANK SYSTEM

      The Federal  Home Loan Banks  ("FHLB's")  provide a  comprehensive  credit
facility to member institutions.  As a member of the FHLB of San Francisco,  the
Bank is required  to own capital  stock in that FHLB in an amount at least equal
to the greater of:

1.    1.0% of the  aggregate  principal amount of outstanding residential loans,
      as defined, at the  beginning of each calendar year

2.    5.0% of its advances from the FHLB

3.    0.3% of total assets

      The Bank was in  compliance  with this  requirement,  with a $6.2  million
investment in FHLB-San Francisco  capital  stock at June 30, 1997. FHLB advances
must be secured by specific  types of  collateral,  including  various  types of
mortgage  loans  and  investment  securities.  It is the  policy  of the  Bank's
management to maintain an excess of collateral at the FHLB-San  Francisco at all
times to serve as a ready source of additional liquidity.

      The FHLB's are required to provide funds to contribute  toward the payment
of certain bonds issued in the past to fund the resolution of insolvent thrifts.
In  addition,  the FHLB's are  required by statute to  contribute  funds  toward
affordable  housing  programs.  These  requirements  could  reduce the amount of
dividends the FHLB's pay on their capital stock and could also negatively impact
the pricing offered for on and off balance sheet credit products -- events which
could unfavorably impact the profitability of the Company.

      Legislation is currently before Congress which could  significantly  alter
the requirements for FHLB membership, the financial burdens placed on the FHLB's
associated with outstanding  bonds,  and the scope of allowable  investments for
FHLB's. The Company's  management is unable to predict what, if any, legislation
might eventually be passed and the potential impact of such legislation upon the
Company.


FEDERAL RESERVE SYSTEM

      The FRB requires  savings  institutions to maintain,  on a recurring cycle
basis, non interest bearing reserves against certain deposit accounts (primarily
deposit accounts that may be accessed by writing unlimited  checks).  The amount
of required reserves are calculated  according to a formula updated periodically
by the FRB,  while  such  requirement  must be met on an average  balance  basis
during each two week  measurement  cycle.  The Bank was in compliance with these
reserve  requirements  for the cycle which  included June 30, 1997. The balances
maintained  to meet the FRB  reserve  requirements  may be used to  satisfy  the
liquidity requirements imposed by the OTS.



                                      25

<PAGE> 26



      Various  proposals have been  introduced in Congress to permit the payment
of interest on required reserve balances,  and to permit savings institutions to
pay  interest  to  checking  account  customers  other  than  individuals,  sole
proprietorships,  non profit organizations,  and government units. The Company's
management cannot predict the outcome, if any, of such legislative proposals.

      As a  financial  institution,  the  Bank is  subject  to many  regulations
promulgated by the FRB, including, but not limited to:

o     Regulation B: Equal Credit Opportunity Act

o     Regulation D: Reserve Requirements

o     Regulation E: Electronic Funds Transfer

o     Regulation F: Limitations On Correspondent Bank Credit Exposure

o     Regulation Z: Truth In Lending Act

o     Regulation CC: Expedited Funds Availability Act

o     Regulation DD: Truth In Savings Act


FEDERAL SECURITIES LAWS

      The Company's  common stock is registered with the SEC under Section 12(g)
of the  Securities  Exchange Act of 1934, as amended (the "Exchange  Act").  The
Company is subject to periodic reporting requirements, proxy solicitation rules,
insider trading  restrictions,  tender offer rules, and other requirements under
the Exchange Act. In addition,  certain activities of the Company, its executive
officers, and directors are covered under the Securities Act of 1933, as amended
(the "Securities Act").


NON BANKING REGULATION

      The Company is impacted by a series of laws and  regulations  not specific
to the banking industry, including environmental and bankruptcy laws. There have
been recent  legislative  proposals to modify both  environmental and bankruptcy
laws,  which  could  present  potential  material  impacts to the  Company.  The
Company's  management cannot,  however,  predict what legislation,  if any, will
eventually be adopted and the likely  financial impact of such  legislation,  if
any. However,  most of the recent legislative  proposals have sought to insulate
financial  institutions  from liability for  environmental  remediation for real
property  acquired through  foreclosure.  If approved,  this  legislation  would
complement  the  Company's  policies  of taking  steps to  identify  and  review
environmental  issues  pertaining  to its  borrowers  and  the  real  properties
securing the loans of its borrowers prior to the extension of credit.


                                      26

<PAGE> 27




FEDERAL AND STATE TAXATION

      Under a tax sharing agreement,  the Company files consolidated federal and
state tax  returns  for itself and all its  subsidiaries  on a fiscal year basis
under the accrual method of  accounting,  and is subject to taxation in a manner
similar to other like financial institutions. The Company is also subject to the
corporate Alternative Minimum Tax ("AMT"), the environmental tax, and California
State franchise taxes (at special rates  applicable to financial  institutions).
HFB also pays certain fees,  not  classified  as income  taxes,  to the State of
Delaware as a Delaware holding company not earning income in that state.

      Effective for taxable years beginning after 1995,  legislation  enacted in
1996 repealed,  for federal  purposes,  the reserve method of accounting for bad
debts for thrift  institutions.  While  thrifts  qualifying as "small banks" may
continue to use the experience method, Hemet Federal,  deemed a "large bank", is
required to use the specific  charge off method  commencing with its federal tax
return for the fiscal  year ended June 30, 1997.  In addition,  the  legislation
enacted in 1996 contains certain income recapture provisions which are discussed
below.

      Thrift  institutions  deemed  "large  banks" are  required to include into
income ratably over six years,  beginning with the first taxable year commencing
after 1995,  the  institution's  "applicable  excess  reserves".  The applicable
excess reserves are the excess of:

1.    the balance  of  the institution's reserves for losses on loans other than
      supplemental  reserves  at  the  close  of its last taxable year beginning
      before January 1, 1996, over

2.    the adjusted balance  of such reserves as of the close of its last taxable
      year beginning before January 1, 1988.

      The Bank's applicable excess reserves at June 30, 1996 are $350,000.  This
amount  will be  recognized  into  taxable  income over six years at the rate of
approximately  $58,000 per year  starting  with the taxable  year ended June 30,
1997.

      The adjusted  pre-1988  total reserve  balance of $13.8 million as of June
30, 1996 will be recaptured into taxable income:

1.    in the  event  the Bank ceases to be a "bank" or "thrift" under applicable
      IRS definitions

2.    to the  extent the  Bank  makes distributions to shareholders in excess of
      post-1951 earnings and profits, redemptions, or liquidations

      Federally supervised banks and savings associations are required to report
deferred  tax assets and  liabilities  in accordance  with SFAS Number 109.  The
federal banking  agencies issued final rules applicable to the Bank which became
effective  April 1, 1995.  These rules  limit the amount of deferred  tax assets
that are allowable in computing an institution's  regulatory  capital.  Deferred
tax assets that can be realized for taxes paid in prior carryback years and from
future  reversals of existing  taxable  temporary  differences are generally not
limited. Deferred tax assets that can only be

                                      27

<PAGE> 28



recognized  through future taxable  earnings are limited for regulatory  capital
purposes to the lesser of:

1.    the amount that  can be  realized with  one year of the quarter end report
      date, based upon  projected taxable income for that year

2.    10.0% of Tier One capital

      The amount of any  deferred  tax  assets in excess of this limit  would be
excluded  from  Tier One  capital  and total  assets  under  regulatory  capital
calculations.

      Congress  recently passed and the President signed the Taxpayer Relief Act
of 1997. This legislation presents a series of potential impacts to the Company,
including the  encouragement  of consumer  savings through  expanded IRA's and a
reduction in the federal net operating loss carryback period from three years to
two years for future tax  returns.  Because of the newness of this  legislation,
the uncertainty of future consumer behavior, and the lack of presently available
interpretation  and implementation  guidance,  management cannot predict the net
financial impact of the Taxpayer Relief Act of 1997 upon the Company.


FINANCIAL INDUSTRY REFORM LEGISLATION

      Congress is currently developing a bill which could extensively reform the
laws and regulations applicable to the financial services industry. Topics under
consideration include:

o     a relaxation or elimination of the laws separating banking from commerce

o     the elimination of the federal thrift charter

o     a merger of the Bank Insurance Fund ("BIF") and SAIF

o     the  ability  of banks to sell various insurance  and  investment  related
      products

o     the termination of ATM surcharges

o     the merger  of the  OTS into the Office Of The Comptroller Of The Currency
      ("OCC")

o     grandfathering  of  investments  and  activities  currently  available  to
      federal savings institutions but not permitted for national banks

      At this time, the Company's management cannot predict what legislation, if
any,  will emerge from the current  hearings,  and what impact such  legislation
might present to the Company.



                                      28

<PAGE> 29



FEDERAL JUDICIAL REVIEW

      The US Supreme  Court has agreed to hear a case  involving  the breadth of
members permitted for credit unions under applicable  "common bond" regulations.
In recent years, many credit unions have attempted to increase in size and scope
by permitting  progressively broader classes of membership.  Federal limitations
upon the membership  range of credit unions,  which enjoy privileged tax status,
would be generally beneficial to the Company, and vice-versa.

FACTORS THAT MAY AFFECT FUTURE RESULTS

      The  following  discusses  certain  factors which may affect the Company's
financial  results and  operations  and should be considered  in evaluating  the
Company.

      Economic Conditions and Geographic Concentration. The Company's operations
are  located in  Southern  California  and are  concentrated  in  Riverside  and
northern San Diego  counties.  Although  management  has  recently  made initial
efforts to  geographically  diversify  the Bank's loan  portfolio  into Northern
California,  the vast majority of the Bank's credits remain  concentrated in the
two Southern California counties. As a result of this geographic  concentration,
the Company's  results depend  largely upon economic  conditions in these areas,
which have been  relatively  volatile  over the past decade.  While the Southern
California economy has recently exhibited improved trends in employment and real
estate  valuation,  there  is  no  assurance  such  progress  will  continue.  A
deterioration  in  economic  conditions  in  Riverside  and  northern  San Diego
counties  could have a material  adverse  impact on the quality of the Company's
loan portfolio and the demand for its products and services.

      Interest  Rates.  By nature,  all financial  institutions  are impacted by
changing  interest  rates,  due to the  impact of such upon the  demand  for new
loans, the credit profile of existing loans, and the rates received on loans and
securities  and the rates paid on deposits and  borrowings.  As presented  under
Item 7.  "Management's  Discussion  And Analysis Of Financial  Condition And The
Results Of  Operations",  the Company is  financially  exposed to both  parallel
shifts in general  market  interest  rates  (particularly  upward shifts) and to
changes in the relative pricing of the term structure of general market interest
rates.

      Government   Regulations  and  Monetary  Policy.  The  financial  services
industry is subject to extensive  federal and state  supervision and regulation.
Significant new laws, changes in existing laws, or repeals of present laws could
cause the Company's  financial results to materially  differ.  Further,  federal
monetary policy, particularly as implemented through the Federal Reserve System,
significantly affects credit conditions for the Company.

      Competition. The financial services business in the Company's market areas
is highly  competitive,  and is becoming more so due to technological  advances,
changes  in  the  regulatory   environment,   and  the   accelerating   pace  of
consolidation among financial services providers. The results of the Company may
differ in future periods depending upon the nature or level of competition.


                                      29

<PAGE> 30



      Credit Quality.  A significant  source of risk arises from the possibility
that losses will be sustained because borrowers, guarantors, and related parties
may fail to perform in accordance with the terms of their loans. The Company has
adopted  underwriting  and credit  monitoring  procedures  and credit  policies,
including the establishment and review of the allowance for credit losses,  that
management  believes  are  appropriate  to control  this risk by  assessing  the
likelihood of non performance,  tracking loan performance,  and diversifying the
credit  portfolio.  Such  policies  and  procedures  may not,  however,  prevent
unexpected  losses that could have a material  adverse  effect on the  Company's
results.  For  example,  relatively  few of the  real  properties  securing  the
Company's real estate loan portfolio are covered by earthquake  insurance,  with
has  generally  been  unavailable,   significantly  limited  in  scope,  or  not
affordable to many of the Company's borrowers.

      Other  Risks.  From time to time,  the  Company  details  other risks with
respect to its business and / or financial results in its filings with the SEC.

ADDITIONAL ITEM - EXECUTIVE OFFICERS OF THE REGISTRANT

      The following  table sets forth certain  information  with respect to each
executive officer of the Company who is not also a director of the Company.  The
Board of Directors appoints or reaffirms the Appointment of all of the Company's
Executive  Officers  each  November.  Each  executive  officer  serves until the
following year or until a respective successor is appointed.

<TABLE>
<CAPTION>

      Name           Age at June 30, 1997       Position Held With The Company
      ----           --------------------       ------------------------------

      <S>                      <C>              <C>
      Gerry Agnes              38               Executive Vice President
      Janet Riley              59               Corporate Secretary
      Mark Andino              38               Vice President/Treasurer

</TABLE>


      Officers of the Bank who were Executive Officers of the Company as defined
by Rule 405 of Regulation C of the Securities and Exchange Commission.

<TABLE>
<CAPTION>

         NAME                    AGE           POSITIONS HELD WITH THE BANK
----------------------          -----          ----------------------------

<S>                               <C>          <C>
Jack A. Sanden                    56           Senior Vice President

Robert Armstrong                  53           Senior Vice President

William T. Tierney                54           Senior Vice President

Leticia J. Arciniega              43           Senior Vice President

Pamala Trotter                    36           Senior Vice President

</TABLE>


                                      30

<PAGE> 31



ITEM 2.  PROPERTIES

    The following table sets forth information relating to each of the Company's
offices as of June 30, 1997:


<TABLE>
<CAPTION>
                                                                                                                     Net Book Value
                                                                                                                     of Property or
                                                                                  Original Date                         Leasehold
                                                                     Leased or      Leased or      Date of Lease     Improvements at
Location                             Description                       Owned        Acquired        Expiration        June 30, 1997
--------                             -----------                       -----        --------        ----------        -------------
<S>                                  <C>                              <C>             <C>               <C>             <C>  
445 E Florida Avenue                 Main Office                       Owned          1963               --             $1,177,287
Hemet, CA

3600 Tyler St.                       Tyler Branch                     Leased          1996              2011                52,745
Riverside, CA

28031 Bradley Road                   Sun City Office                   Owned          1973               --                291,848
Sun City, CA

1479 S San Jacinto Avenue            San Jacinto Branch               Leased          1986              1998                     0
San Jacinto, CA

5395 Canyon Crest Drive              Canyon Crest Branch               Owned          1978               --                542,264
Riverside, CA

1111 S State Street                  Diamond Valley                   Leased          1978              1999                27,271
Hemet, CA

3013 W Florida Avenue                Hemet West Branch                Leased          1979              2007                42,489
Hemet, CA

41815 E Florida Avenue               Hemet East Branch                Leased          1980              1997                13,661
Hemet, CA

5242 Arlington Avenue                Hardman Center Branch            Leased          1981              1997                 1,221
Riverside, CA

31740 Railroad Canyon Road           Canyon Lake Branch               Leased          1982              1998                10,364
Canyon Lake, CA

54245 North Circle Drive             Idyllwild Branch                  Owned          1984               --                306,735
Idyllwild, CA

40461 Murrieta Hot Springs Road      Murrieta Branch                  Leased          1990              2000                65,696
Murrieta, CA

916 S Santa Fe Ave.                  Vista Branch                      Owned          1996               --                495,340
Vista, CA

810 Mission Ave.                     Oceanside Branch                 Leased          1996              2003               114,245
Oceanside, CA

15703 Bernardo Height Pkway          Rancho Bernardo Branch            Owned          1996               --                997,218
San Diego, CA

420 S Palm Canyon Drive              Palm Springs Branch              Leased          1984              2008               210,162
Palm Springs, CA

66565 Pierson Boulevard              Desert Hot Springs Branch         Owned          1996               --                334,084
Desert Hot Springs, CA

68327 Highway 111                    Cathedral City Branch            Leased          1993              1998                 5,990
Cathedral City, CA

39800 Bob Hope Drive                 Rancho Mirage Branch             Leased          1983              1999               195,331
Rancho Mirage, CA

800 S Sanderson Ave.                 Loan Center                       Owned          1996               --                889,869
Hemet, CA

130 S Buena Vista Street             Office Services                   Owned          1983               --                276,095
Hemet, CA                            Support Center

                                                                                                        Total            6,049,915
                                                                                                                         =========

</TABLE>


                                                               31

<PAGE> 32





ITEM 3.  LEGAL PROCEEDINGS

      From time to time,  the Company and the Bank are party to claims and legal
proceedings  arising  in the  ordinary  course of  business.  After  considering
information  furnished  by  counsel  to the  Company  and the  Bank,  management
believes that the ultimate aggregate liability represented thereby, if any, will
not present a material  adverse effect on the Company's  consolidated  financial
position or results of operations.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


                                   PART II


ITEM 5.  MARKET  FOR THE COMMON  STOCK AND RELATED  SHAREHOLDER  MATTERS

      The Common  Stock of HF  Bancorp,  Inc.  is traded over the counter on the
NASDAQ stock market under the symbol "HEMT". The stock commenced trading on June
30, 1995,  when the Company went public and sold 6,612,500  shares at a price of
$8.00 per share. On February 8, 1996, the OTS approved a five percent repurchase
program authorized by the Board of Directors of the Company. 330,625 shares were
repurchased by May 28, 1996, for a total of $3,347,578.  At June 30, 1997, there
were  6,281,875  shares of the  Company's  Common Stock  outstanding,  excluding
Treasury shares.


                                      32

<PAGE> 33



      The following  table sets forth the high and the low daily closing  prices
of the Company's common stock for each of the following quarters:

<TABLE>
<CAPTION>

Quarter Ended                 High                     Low
-------------                 ----                     ---

<S>                           <C>                      <C>  
1995
September 30, 1995            10 1/4                   8 3/16
December 31, 1995             10 1/8                   9 1/8


1996:
March 31, 1996                10 1/4                   9 1/2
June 30, 1996                 10 1/4                   9 1/4
September 30, 1996            10                       9 1/4
December 31, 1996             11 3/8                   9 3/4


1997:
March 31, 1997                14                      11
June 30, 1997                 14 3/4                  12 1/4

</TABLE>


      The number of holders of record of the Company's Common Stock at September
5, 1997 was 729.

      The Company has paid no dividends on the Common Stock since its inception.
In the future,  the Board of  Directors  may consider a policy of paying cash or
stock dividends on the Common Stock.  However,  there is no plan to commence the
payment of cash dividends during fiscal 1998.


                                      33

<PAGE> 34



ITEM 6.  SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY

      Set forth below are selected consolidated  financial and other data of the
Company for the  periods  and at the dates  indicated.  This  financial  data is
derived in part from, and should be read in conjunction  with, the  Consolidated
Financial  Statements  and  related  Notes of the  Company  presented  elsewhere
herein.

<TABLE>
<CAPTION>

                                                                 At June 30,
                                    ------------------------ ----------------------------------------
                                         1997         1996         1995          1994         1993
                                         ----         ----         ----          ----         ----
                                                            (Dollars In Thousands)

<S>                                     <C>          <C>          <C>          <C>          <C>     
SELECTED FINANCIAL CONDITION DATA: 
  Total assets                          $984,749     $826,916     $666,062     $597,452     $538,475
  Loans held for sale                        335            0            0            0            0
  Loans receivable, net                  484,334      225,161      202,397      206,370      230,773
  CMOs available for sale, net            27,512       33,257       39,989       55,246           --
  CMOs held to maturity, net               5,794        6,666          432          607       68,959
  Mutual funds available for sale             --       15,283       15,408       15,097           --
  Other investment securities
    and interest-earning assets (1)      143,005      270,130      101,074       15,215       32,822
  Mortgage-backed securities
    available for sale, net              109,493      100,259       70,603       78,243       51,725
  Mortgage-backed securities held
    to maturity, net                     151,369      159,262      208,090      199,696      125,618
  Real estate acquired through
    foreclosure, net                       5,298        1,079        1,361        2,877        1,092
  Real estate acquired for sale
    or investment, net                       418          996        2,539        2,411        2,978
  Deposit accounts                       839,655      669,725      472,337      480,959      470,449
  Advances from the FHLB                  50,000       70,000       70,000       70,000       20,000
  Total equity/stockholders' equity       81,027       81,071       87,146       39,640       40,841


                                                    (footnotes at end of table)

</TABLE>

                                      34

<PAGE> 35



<TABLE>
<CAPTION>
                                                                      Fiscal Year Ended June 30,
                                                       -------------------------------------------------------
                                                        1997        1996       1995         1994        1993
                                                        ----        ----       ----         ----        ----   
                                                                         (Dollars In Thousands)
SELECTED OPERATING DATA:
<S>                                                    <C>         <C>        <C>          <C>         <C>    
   Interest income                                     $66,522     $50,355    $40,424      $38,084     $41,606
   Interest expense (2)                                 44,084      34,059     28,795       26,451      28,515
                                                        ------      ------     ------       ------      ------
   Net interest income before
     provision for estimated loan losses                22,438      16,296     11,629       11,633      13,091
   Provision for estimated loan losses                     384       1,054      1,202          877       1,920
   Net interest income after provision
     for estimated loan losses                          22,054      15,242     10,427       10,756      11,171
   Other income (expense) (3)                              805         765        176      (5,778)       4,242
   General and administrative expenses(4)               27,137      12,931     11,649       12,255      12,205
                                                       -------      ------     ------       ------      ------
   Earnings (loss) before income tax expense           (4,278)       3,076    (1,046)      (7,277)       3,208
     (benefit)
   Income tax expense (benefit)                        (1,762)       1,129      (353)      (2,704)       1,338
   Net earnings (loss) before cumulalative effect
     of change in method of accounumug for
     income taxes and cumulative effect of
     change in method of accounting for
     securities                                        (2,516)       1,947      (693)      (4,573)       1,870
   Cumulative effect of change in method
     of accounting for income taxes                         --          --         --           --         448
   Cumulative effect of change in method
     of accounting for securities (net of
     income tax effect of $2,432) (3)                       --          --         --        3,435          --
                                                         -----       -----      -----    ---------      ------
Net earnings (loss)                                  $ (2,516)     $ 1,947     $(693)     $(1,138)     $ 2,318
                                                     =========      ======      =====      =======      ======

Net earnings (loss) per share                          $(0.44)       $0.33        N/A          N/A         N/A

Average shares outstanding for EPS                   5,755,859   5,953,823        N/A          N/A         N/A
     calculations


                                                                                    (footnotes at end of table)

</TABLE>
                                      35

<PAGE> 36

<TABLE>
<CAPTION>

                                                                       At or For the Fiscal Year Ended June 30,
                                                              -------------------------------------------------------
                                                                   1997       1996       1995       1994       1993 
                                                                   ----       ----       ----       ----      -----

                                                                                (Dollars In Thousands)

<S>                                                             <C>         <C>        <C>        <C>        <C> 
SELECTED FINANCIAL RATIOS AND OTHER DATA (5):
 PERFORMANCE RATIOS :
    Return on average assets (6)                                   (.26)%     .27%       (.12)%     (.19)%      .41%
    Return on average equity (7)                                  (3.11)     2.24       (1.63)     (2.83)      5.96
    Average equity to average assets                               8.47     12.14        7.14       6.77       6.91
    Equity to total assets at end of period                        8.23      9.80       13.08       6.63       7.58
    Interest rate spread during the period(8)                      2.14      1.74        1.75       1.86       2.19
    Net interest margin (9)                                        2.50      2.37        2.02       2.05       2.44
    Average interest-earning assets / average interest-
     bearing liabilities                                           1.07x     1.13x       1.06x      1.04x      1.05x
    General & administrative expenses to average assets            2.84%     1.81%       1.95%      2.07%      2.17%
  REGULATORY CAPITAL RATIOS (10):
    Tangible capital                                               6.36      6.66        9.02       6.39       7.29
    Core capital                                                   6.36      6.66        9.02       6.39       7.29
    Risk-based capital                                            16.55     24.27       29.24      19.27      18.29
  ASSET QUALITY RATIOS :
    Nonperforming loans / gross loans receivable(11)               1.06      0.56        1.10       1.25       3.28
    Nonperforming assets / total assets (12)                       1.17      0.33        0.63       1.04       1.69
    Net loan charge-offs / average loans                           0.40      0.31        0.58        .61        .04
    Allowance for estimated loan losses / gross loans
     receivable (11)                                               0.97      1.33        1.30       1.27       1.33
    Allowances for total estimated losses / nonperforming
     assets                                                       50.90     94.18      110.71      73.07      43.52
    Allowance for estimated loan losses / nonperforming
     loans                                                        91.63    235.75      118.11     101.75      40.66
  OTHER DATA:
    Number of deposit accounts                                  59,994     45,822      38,572     39,311     40,723
    Full service offices                                            19         15          12         12         12

-------------------------------------

(1)  Includes U.S.  Government and agency notes,  federal funds sold,  repurchase  agreements and  interest-earning
     accounts at the FHLB, which are included in cash and cash equivalents.
(2)  Includes net hedging  expense of $5.1 million,  $4.7 million,  $4.5 million and $3.2 million and $2.9 million,
     for the fiscal years ended, 1993, 1994, 1995, 1996, 1997 respectively.
(3)  Other  expense of $5.8 million  reported for the fiscal year ended 1994 was  primarily  due to a net loss from
     real estate operations of $1.6 million and the lower of cost or market adjustment for securities available for
     sale of $5.9  million.  Upon the  adoption  of SFAS No. 115,  the Bank  reclassified  certain  mortgage-backed
     securities previously classified as available for sale to a held to maturity classification.  As a result, the
     cumulative  effect of the  accounting  change as of June 30,  1994,  was to reverse  the  previously  recorded
     unrealized holding gains and losses on these securities, net of a tax effect of $2.4 million, of $3.4 million.
(4)  Fiscal 1997  includes  non-recurring  costs of $4.8  million for the SAIF  recapitalization  and $3.0  million
     associated with the termination of two retirement plans.
(5)  Asset quality  ratios and regulatory  capital  ratios are end of period  ratios.  With the exception of end of
     period  ratios,  all  ratios are based on average  monthly  balances  during  the  indicated  periods  and are
     annualized where appropriate.
(6)  Return on average assets is net earnings (loss) divided by average total assets.
(7)  Return on average equity is net earnings (loss) divided by average equity.
(8)  The interest rate spread represents the differences  between the average rate on  interest-earning  assets and
     the average rate on interest-bearing liabilities.
(9)  Represents net interest income before provision for estimated loan losses as a percentage of average interest-
     earning assets.
(10) For definitions and further information relating to the Bank's regulatory capital  requirements,  see "Item 1.
     Capital Requirements And Capital Categories."
(11) Includes all non-accrual loans, and loans delinquent 90 days or more, net of undisbursed loan funds.
(12) Nonperforming  assets consist of nonperforming  loans and foreclosed real estate before specific  reserves and
     valuation allowances. Excludes real estate held for investment.
</TABLE>


                                                          36

<PAGE> 37



ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND THE RESULTS OF OPERATIONS.


FORWARD LOOKING STATEMENTS

      Management's  discussion and analysis is written to provide greater detail
of the financial  condition  and the results of operations of the Company.  This
analysis  should be read in conjunction  with the audited  financial  statements
contained within this report,  including the notes thereto.  Certain  statements
included or  incorporated  by  reference  in this Form 10-K,  including  without
limitation statements containing the words "believes", "anticipates", "intends",
"expects", "forecasts", and words of similar import, constitute "forward looking
statements" within the meaning of the Private Securities  Litigation Reform Act.
Such forward looking statements involve risk,  uncertainties,  and other factors
that may cause the actual results,  performance,  or achievements of the Company
to  materially  differ from the future  results,  performance,  or  achievements
expressed or implied by such forward  looking  statements.  Factors  which might
cause such  differences  include  but are not  limited to  economic  conditions,
competition,  fluctuations  in interest rates,  credit  quality,  and government
regulation. For additional information concerning these factors, see "Item 1.
Business -- Factors That May Affect Future Results".

OVERVIEW

      HF  Bancorp,  Inc.  is a  savings  & loan  holding  company.  Its  primary
subsidiary,  Hemet Federal  Savings & Loan, is a federally  chartered  savings &
loan which  operates  19 branch  offices in  Riverside  and  northern  San Diego
counties. HFB was formed for the purposes of acquiring all of the stock of Hemet
Federal  Savings & Loan upon that company's  conversion from a mutual to a stock
form on June  30,  1995.  HFB had no  operations  prior to June  30,  1995  and,
accordingly,  the results of operations prior to such date reflect only those of
the Bank and its subsidiaries. The Company operates on a June 30 fiscal year.

      The Company  reported a net loss of $2.5 million for the fiscal year ended
June 30, 1997, as compared to net income of $1.9 million during the prior fiscal
year. The decline in profitability primarily resulted from three factors:

1.    A one-time, $4.8 million  assessment by the FDIC to recapitalize the SAIF.

2.    A non  recurring  $3.0 million  charge to accrue  expenses  related to the
      termination  of  the  Company's  defined  benefit  pension  plan  and  its
      non-qualified supplemental retirement restoration plan.

3.    One time  operating  expenses  associated  with the  integration  of three
      branches  purchased from  Hawthorne  Savings on June 21, 1996 and with the
      acquisition  and  assimilation  of Palm Springs  Savings  Bank,  with that
      transaction closing on September 27, 1996.


                                      37

<PAGE> 38



      SAIF Assessment.  On September 30, 1996, the President signed into law the
Deposit Insurance Funds Act of 1996 (the "Funds Act").  This legislation,  among
other things, imposed a special one-time assessment on SAIF member institutions,
including  the  Bank,  to  increase  the  reserve  ratio  of the  SAIF up to the
federally  mandated  1.25% of  covered  deposits.  The FDIC  imposed  a  special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995,  payable  November 27, 1996, but accrued during the Company's first fiscal
quarter  ending  September  30. The pre tax charge to the Bank was $4.8 million,
which is deductible for both federal income and state franchise taxes.

      The Funds Act also spread the financial obligations for the payment of the
FICO bonds across all SAIF and BIF members,  with BIF deposits assessed at 20.0%
of the rate assessed against SAIF insured deposits. Full pro rata sharing of the
FICO payments  between BIF and SAIF members will occur on the earlier of January
1, 2000 or the date the BIF and SAIF are  merged.  The Funds Act also  specifies
that the BIF and SAIF will be merged on  January  1, 1999  provided  no  savings
institutions exist as of that time.

      As a result of the Funds Act, the Bank's ongoing  assessment rate for FDIC
insurance declined from 23 basis points to 0 basis points, excluding assessments
in support of the FICO bonds.  At June 30, 1997, the Bank's  assessable  deposit
base for FDIC insurance totaled $828.2 million. The annualized savings resulting
from the Funds Act therefore equates to approximately $1.9 million pre-tax.

      Defined Benefit Pension Plan and Retirement Restoration Plan Terminations.
In the  quarter  ended June 30,  1997,  the  Company's  management  and Board Of
Directors  determined to terminate two  retirement  plans.  The defined  benefit
pension plan was a traditional  pension  program which  provided  employees with
monthly  retirement  income  based  upon  years of  service  and the  employee's
earnings  during  the  sixty  months  prior to  retirement.  This is the type of
defined benefit  program which has been terminated by many companies,  including
many of the  Company's  competitors,  over the past decade,  in favor of defined
contribution  plans  such as 401(k)  programs.  The  Company's  defined  benefit
pension plan cost the Company  approximately  $77,000 per year in administrative
costs for  actuarial,  trust,  and audit  support  services,  plus the  periodic
benefit  expense  recognition for retirement  payments as calculated  under SFAS
Number  87  -  "Employers  Accounting  For  Pensions".   In  contrast,   defined
contribution  programs  such as 401(k)  plans can be provided  at  significantly
lower administrative costs and are more portable than defined benefit plans.

      The  retirement  restoration  plan was a non qualified  supplemental  plan
designed to compensate  certain highly salaried  employees for the impact of the
wage caps under  ERISA,  which are  applicable  to  qualified  plans such as the
defined benefit pension plan.



                                      38

<PAGE> 39



      Other factors  which  influenced  the Company's  decision to terminate the
retirement plans included:

o     The  existence of the qualified  ESOP plan,  which  generated  $708,000 in
      periodic expense  recognition  during the fiscal year ended June 30, 1997.
      The  combined  expense of the  terminated  plans in  addition  to the ESOP
      placed the Company's retirement benefits costs above peer institutions.

o     The defined benefit pension plan investment assets had enjoyed significant
      returns  during  the past  several  years due to the rally in the  capital
      markets. These returns had reduced the funding shortfall associated with a
      plan  termination.  Continuation of the defined benefit pension plan would
      also have exposed  those assets to  reductions in value if the bull market
      experienced throughout most of the 1990's reversed course.

o     A significant number of employees from the Hawthorne Savings Bank and PSSB
      acquisitions  would have  entered  the  defined  benefit  pension  plan on
      January 1, 1998, thereby increasing both the periodic expense  recognition
      under SFAS Number 87 and the cost of  terminating  the plan at some future
      date.

      The Company's management estimates the first year expense savings from the
two retirement  plan  terminations at  approximately  $400,000 -- a figure which
would have increased in future periods if the Company continued to add employees
and  grant pay  increases.  In  addition,  the final  cost  associated  with the
termination of the two retirement plans will not be ascertained until all of the
plan  assets  have  been  distributed  and all  regulatory  approvals  have been
obtained.  While the amount accrued represents management's best estimate of the
total termination  costs,  various future events could produce an actual expense
total either higher or lower than that accrued.











                                      39

<PAGE> 40



      Acquisition  Integration  Costs.  In fiscal  1997,  the  Company  incurred
significant non recurring operating costs associated with the integration of the
three branches  purchased from Hawthorne  Savings Bank and PSSB,  which included
four branches in the Coachella Valley. The one time costs included, but were not
limited to, expenses for:

o     computer  systems  conversion   programming,   testing,  integration,  and
      balancing

o     printing costs for replacement checks for customers

o     the write off of PSSB assets not utilized in the continuing operation

o     overtime for staff involved in the integration and conversion efforts

o     telecommunications consulting, analysis, and design

      The Hawthorne  Savings Bank branch  acquisition  provided the Company with
8,605  accounts  representing  $185.2  million  in  deposits  and a  significant
presence in the northern San Diego County area. The PSSB acquisition brought the
Company a strong  presence in the  Coachella  Valley,  a net loan  portfolio  of
$160.7  million  with a weighted  average  rate of 8.47%,  and a $164.7  million
deposit  portfolio  with a  weighted  average  rate  of  4.09%.  Since  the  two
acquisitions, a significant percentage of the Company's total revenues have been
derived from the new markets,  with the  stronger  property  values and economic
trends in those markets  contributing to meaningful increases in loan production
and average loan size, thereby bolstering the Company's operating efficiency.


                                      40

<PAGE> 41



Business Strategy
-----------------

      During  fiscal 1997,  the  Company's  management  implemented  several key
strategies  targeted at  increasing  long term  shareholder  returns  while also
enhancing the Company's  involvement in and  contributions to the communities it
serves. The actions,  which were also focused upon moving the Company forward in
its mission to evolve  into a high performing, premier community bank, included:

o     The  aforementioned  acquisitions,  which provided  opportunities  for the
      Company  to  prudently  deploy  some  of its  excess  capital  while  also
      expanding into adjacent, and more vibrant, markets.

o     The proliferation of some of the commercial  banking products and services
      acquired via PSSB into the other 15 branches within the Company's network.
      These products and services  included  merchant  bankcard,  small business
      lending, and commercial demand deposit accounts.

o     The extension of some of the historic Hemet Federal  products and services
      into the new Coachella Valley branches;  such as mutual fund and insurance
      product sales.

o     The continued  enhancement of the Company's  management  team and Board of
      Directors, which included the appointment of Richard S. Cupp as President,
      CEO,  and  Director of the Company and George P.  Rutland as a Director in
      July, 1997. These  individuals  bring many years of successful  commercial
      and community banking experience to the Company.

o     The aforementioned termination of the two retirement plans.

o     A continued  focus on the  Company's  efficiency  ratio,  with a series of
      efforts  implemented to both enhance  revenues and reduce operating costs.
      Examples of  achievements  in this  regard  during  fiscal  1997  included
      expanded  correspondent banking relationships with concomitant  reductions
      in item processing costs and lost float, more sophisticated  liquidity and
      cash management,  renegotiated  third party contracts,  and replacement of
      under performing and higher cost vendors.

o     Aggressive management of the Bank's portfolio of troubled assets,  leading
      to expanded sales of foreclosed real estate in fiscal 1997.

      The Company intends to implement additional steps to improve its financial
performance  during the  upcoming  fiscal  year while  continuing  the long term
strategy  outlined  above.  Actions  under  consideration   include  alternative
delivery  channels,   increased  secondary  market  activity,  enhanced  capital
utilization,  product repricing,  new services, and further modifications of the
Company's compensation and benefit programs.  However, there can be no assurance
that any of such steps will be  implemented,  or if  implemented,  whether  such
implementation will improve the Company's financial performance.



                                      41

<PAGE> 42



ANALYSIS OF THE RESULTS OF OPERATIONS


OVERVIEW

      The Company  reported a net loss of $2.5 million for the fiscal year ended
June 30, 1997, compared to net earnings of $1.9 million during fiscal 1996 and a
net loss of $0.7 million during fiscal 1995. The decline in profitability during
the most recent fiscal year stemmed from the  significant,  non recurring events
described  above.  Excluding  the charge for the SAIF  recapitalization  and the
accrued  expenses  associated with the termination of the retirement  plans, the
Company earned $2.0 million, or $0.35 per share in fiscal 1997, an increase from
earnings per share of $0.33 in fiscal 1996.

      Earnings in fiscal 1997 were also impacted by the initial  amortization of
the  intangible  assets  (See  "Item  7.  Analysis  Of  Financial  Condition  --
Intangible  Assets")  created in  conjunction  with the  Hawthorne  Savings Bank
branch  purchase  and  the  PSSB  acquisition.   A  total  of  $2.0  million  in
amortization  expense  associated with intangible  assets was recorded in fiscal
1997. Net income excluding the SAIF  recapitalization  charge,  the expenses for
the retirement plan  terminations,  and the  amortization of intangible  assets,
analytically  referred to as normalized  tangible  earnings,  would have totaled
$3.2 million -- a significant improvement over prior fiscal year results.


NET INTEREST INCOME

      Net interest income is the net result of:

 1)   interest  earned  on  loans, mortgage  backed securities,  and  investment
      securities  (collectively "interest  earning assets")

 2)   interest paid  on  deposits and borrowings (collectively "interest bearing
      liabilities")

 3)   net  hedging income  or expense  resulting from various  off balance sheet
      positions

      Net  interest  income is the single  largest  source of Company  earnings,
consistent with the Company's role as a financial intermediary.



                                      42

<PAGE> 43



      Net interest income is primarily affected by:

a.    the average volume, cash flow frequency,  and repricing characteristics of
      the Company's  interest-earning assets and interest-bearing liabilities

b.    the absolute and relative levels and volatility of general market interest
      rates

c.    the amount of non accruing loans and net non earning assets

d.    the interest rate spread between the yields earned and the rates paid

      For the year  ended June 30,  1997,  net  interest  income  totaled  $22.4
million,  representing an increase of $6.1 million, or 37.7%, from $16.3 million
during fiscal 1996. Net interest income in fiscal 1995 totaled $11.6 million. As
detailed in the tables which follow, the significant  expansions in net interest
income achieved over the past two fiscal years primarily resulted from:

o     the Company's conversion  to a  public  company at  June 30, 1995, and the
      subsequent  deployment of the $51.1 million in capital raised

o     the  purchase of the Hawthorne Savings Bank branches in northern San Diego
      County

o     the acquisition of Palm Springs Savings Bank

o     the gradual migration of the balance sheet towards one more representative
      of a community  bank,  combined  with an expansion in the ratio of average
      loans to average  deposits  from  43.0% in fiscal  1995 to 52.1% in fiscal
      1997

o     A significant reduction in net hedging expense, as the Company shifted its
      focus from purchasing  securities hedged by off balance sheet positions to
      serving the household and small business needs of the communities in which
      it operates

      Over the past three fiscal years,  the  Company's net interest  margin  on
average  interest  earning assets expanded from 2.02% in fiscal 1995 to 2.37% in
fiscal 1996 to 2.50% in fiscal  1997.  Reported  net  interest  income in future
periods will be favorably impacted by the conclusion of the amortization periods
associated  with  losses on  terminated  interest  rate  swaps (See "Item 7. Off
Balance  Sheet").  Management  intends to continue the  Company's  emphasis upon
serving its  communities,  thereby  attempting to further  improve the Company's
ratio of loans to  deposits,  which had climbed to 57.7% at June 30,  1997.  Net
interest  income  in  future  periods  will also be  favorably  impacted  by the
Company's  success in providing  expanded  transaction  account  services to the
households and small businesses located in its market areas. However,  there can
be no assurances that the Company will achieve future  increases in its ratio of
loans to deposits, or in its amount of transaction related deposit accounts.



                                       43



<PAGE> 44



      The following table presents the average rate earned upon each category of
earning  assets,  the average  rate paid for each  category of interest  bearing
liabilities,  and the resulting net interest spread,  net interest  margin,  and
average interest margin on total assets for the years indicated.


<TABLE>
<CAPTION>

                                                                                  (Dollars In Thousands)

                                   -------------------------------  --------------------------------  ------------------------------
                                       Year Ended June 30, 1997          Year Ended June 30,1996         Year Ended June 30, 1995
                                   -------------------------------  --------------------------------  ------------------------------
                                      Average              Average     Average              Average     Average              Average
                                      Balance   Interest      Rate     Balance   Interest      Rate     Balance   Interest      Rate
                                      -------   -------       ----     -------   --------      ----     -------   --------      ----
<S>                                  <C>         <C>        <C>       <C>         <C>        <C>       <C>         <C>        <C> 
ASSETS:
 Interest earning assets:
   Real estate loans, net(1)         $393,622    $31,281     7.95%    $206,361    $17,111     8.29%    $198,546    $15,755     7.94%
   Non real  estate loans, net(1)      10,768      1,126    10.46%       5,001        537    10.74%       5,745        590    10.27%
   Mortgage backed securities(2)      250,379     16,969     6.78%     274,617     19,113     6.96%     277,232     18,191     6.56%
   CMO's(3)                            36,545      2,335     6.39%      43,075      2,905     6.74%      48,495      3,217     6.63%
   FHLB stock                           5,651        363     6.42%       5,394        299     5.54%       4,152        219     5.27%
   Other interest earning assets(4)   200,659     14,448     7.20%     153,744     10,390     6.76%      40,856      2,452     6.00%
                                      -------     ------     -----     -------     ------     -----      ------      -----     -----
 Total interest earning assets        897,624     66,522     7.41%     688,192     50,355     7.32%     575,026     40,424     7.03%
 Non interest earning assets           57,048                           26,970                           22,204
                                       ------                           ------                           ------
TOTAL ASSETS                          954,672                          715,162                          597,230

LIABILITIES & EQUITY:
 Interest bearing liabilities:
   Deposit accounts                   775,490     38,083     4.91%     487,040     23,781     4.88%     474,947     20,628     4.34%
   Net hedging expense(5)                          2,872                            3,192                            4,526
   Borrowings(6)                       60,769      3,129     5.15%     123,587      7,086     5.73%      70,000      3,641     5.20%
                                       ------      -----     -----     -------      -----     ----       ------      -----     -----
 Total interest bearing liabilities   836,259     44,084     5.27%     610,627     34,059     5.58%     544,947     28,795     5.28%
 Non interest bearing liabilities      37,524                           17,732                            9,638
                                       ------                           ------                            -----
Total Liabilities                     873,783                          628,359                          554,585
Equity                                 80,889                           86,803                           42,645
                                      -------                          -------                           ------
TOTAL LIABILITIES & EQUITY            954,672                          715,162                          597,230

Net interest income                               22,438                           16,296                           11,629
Interest rate spread(7)                                      2.14%                            1.74%                            1.75%
Net interest earning assets            61,365                           77,565                           30,079
Net interest margin(8)                              2.50%                           2.37%                            2.02%
Net interest income / average total                 2.35%                           2.28%                            1.95%
assets
Interest earning assets / interest       1.07                             1.13                             1.06
bearing liabilities


-----------------------------

Average balances in the above table were calculated using month end figures.
(1)In computing the average balance of loans, non accrual loans have been
   included.
(2)Includes both mortgage backed securities available for sale and held to
   maturity.
(3)Includes both CMO's available for sale and held to maturity.
(4)Includes federal funds sold, banker's acceptances, commercial paper,
   interest earning deposit accounts, and us government and agency obligations.
(5)Represents the net expense of hedging activities from interest rate swaps,
   caps, and floors, both active and terminated.
(6)Includes advances from the FHLB, reverse repurchase agreements, federal
   funds purchased, and dollar reverse repurchase agreements.
(7)Interest rate spread represents the difference between the average rate on
   interest earning assets and the average rate on interest bearing liabilities.
(8)Net interest margin equals net interest income before provision for estimated
   losses divided by average interest earning assets.

</TABLE>


                                                            44

<PAGE> 45



      The following  table presents a comparison of interest income and interest
expense  resulting  from  changes in the  volume  and rates on average  interest
earning assets and average interest bearing liabilities for the years indicated.
Changes in interest  income or interest  expense  attributable to volume changes
are  calculated  by  multiplying  the change in volume by the prior  fiscal year
average  interest  rate.  The  changes in interest  income or  interest  expense
attributable  to changes in interest  rates are  calculated by  multiplying  the
change in interest rate by the prior fiscal year average volume.  The changes in
interest  income or interest  expense  attributable  to the  combined  impact of
changes in volume and changes in interest rate are calculated by multiplying the
change in rate times the change in volume.

<TABLE>
<CAPTION>

                                -------------------------------------------------   -------------------------------------------
                                           Year Ended June 30, 1997                            Year Ended June 30, 1996
                                                  Compared To                                        Compared To
                                           Year Ended June 30, 1996                            Year Ended June 30, 1995
                                -------------------------------------------------   -------------------------------------------
               
                                                                       (Dollars In Thousands)

                                        Increase (Decrease) Due To:                         Increase (Decrease) Due To:
                                -------------------------------------------------   ------------------------------------------- 
                                                            Volume/                                       Volume/
                                      Volume      Rate       Rate        Net           Volume     Rate     Rate       Net
                                      ------      ----       ----        ---           ------     ----     ----       ---

<S>                                  <C>         <C>        <C>        <C>            <C>        <C>       <C>      <C>   
INTEREST INCOME:
   Real estate loans, net            $15,528     $(712)     $(646)     $14,170          $620       $709     $28     $1,357
   Non real estate loans, net            619       (14)       (16)         589           (76)        27      (3)       (52)
   Mortgage backed securities(1)      (1,685)     (503)        44       (2,144)         (172)     1,103     (10)       921
   CMO's                                (441)     (152)        23         (570)         (360)        53      (6)      (313)
   FHLB Stock                             14        48          2           64            66         11       3         80
   Other interest earning assets       3,171       680        207        4,058         6,776        309     853      7,938
                                       ------      ----       ----       ------        ------       ----    ----     ------
TOTAL INTEREST INCOME                 17,206      (653)      (386)      16,167         6,854      2,212     865      9,931

INTEREST EXPENSE:
   Deposit accounts                   14,085       136         81       14,302           525      2,565      65      3,155
   Net hedging expense                     0      (320)         0         (320)            0     (1,334)      0     (1,334)
   Borrowings                         (3,601)     (723)       367       (3,957)        2,787        373     283      3,443
                                      -------     -----       ----      -------        ------      -----    ---      ------  
TOTAL INTEREST EXPENSE                10,484      (907)       448       10,025         3,312      1,604     348      5,264

CHANGE IN NET INTEREST INCOME          $6,722      $254      $(834)      $6,142        $3,542       $608    $517     $4,667
                                      -------     -----     ------      -------       -------      -----   -----    ------



------------------------------

(1) Includes mortgage backed securities  classified as both  held  to  maturity  and  available  for  sale.

</TABLE>






                                                            45

<PAGE> 46



ASSET / LIABILITY MANAGEMENT

      Asset / liability  management  is often  referred to as the  management of
"interest  rate risk"  ("IRR").  Interest  rate risk and credit  risk  typically
constitute the two greatest  exposure  factors for financial  institutions.  The
objective of IRR  management  is to maximize the net income of the Company while
controlling the volatility of both net income and net portfolio value. Financial
institutions  are exposed to various  types and  sources of interest  rate risk,
including:

Repricing Risk.  This occurs when assets  and liabilities  reprice at  different
times and / or at different magnitudes.

Basis Risk.  This risk stems from  the divergent  movement  of  various  indices
(e.g. LIBOR, 1 Year  CMT)  underlying  the  repricing  of  a  firm's  assets and
Liabilities.

Option  Risk.  This risk  arises  from the  implicit  options  embedded  in many
financial products,  such as a mortgage borrower's ability to refinance his loan
when general market interest rates decline.

      IRR management  focuses upon decisions to control or accept  interest rate
risk  based  on an  understanding  of  the  probabilities  associated  with  the
occurrence  of various  future  scenarios.  Stated  another way, IRR  management
encompasses the evaluation of the likely  additional  return  associated with an
incremental  change in the IRR profile of the institution.  As with credit risk,
the  complete  elimination  of interest  rate risk would  curtail the  Company's
profitability, as the Company earns its returns, in part, through effective risk
management.  On the other hand,  excessive  interest  rate risk would expose the
Company to  potentially  significant  volatility in net income and market value,
and possible regulatory response under safety and soundness considerations.

      The Company monitors its interest rate risk through an internal simulation
model,  various management  reports,  and the OTS Net Portfolio Value Model. The
Company  employs a variety of tools to control its aggregate  interest rate risk
exposure,  including  both on and off balance  sheet  instruments  (See "Item 7.
Management's Discussion And Analysis -- Off Balance Sheet"). Consistent with the
static gap table displayed below, throughout fiscal 1997, the Company maintained
a net liability sensitive position. This means that, in aggregate, the Company's
sources of funding  repriced  faster  and / or of a greater  magnitude  than the
Company's assets. This net liability sensitive position translates into expanded
net interest  income and average  interest  margins  during periods of declining
market  interest  rates.  Conversely,  this position  presents the likelihood of
constrained   net  interest  income  and  average  spreads  during  rising  rate
environments.


                                       46

<PAGE> 47



      The  following  table  presents the maturity and rate  sensitivity  of the
Company's  interest earning assets and interest  bearing  liabilities as of June
30, 1997. The "static gap" figures, as reflected in the following table, present
the  estimated  difference  between  the amount of interest  earning  assets and
interest  bearing  liabilities  repricing  during future  periods,  adjusted for
interest  rate swaps.  Amounts are included in the table based upon  contractual
repricing.


<TABLE>
<CAPTION>

                                                                                  At June 30, 1997
                                          ----------------------------------------------------------------------------------------
                                            3 Months    4 Through    13 Through    37 Through   61 Through     More Than
                                             Or Less    12 Months     36 Months     60 Months   120 Months    120 Months    Total
                                             -------    ---------     ---------     ---------   ----------    ----------    -----

                                                                    (Dollars In Thousands)
<S>                                        <C>           <C>           <C>           <C>           <C>          <C>         <C>
INTEREST EARNING ASSETS: (1)
   Loans Held For Sale                            0             0             0             0             0         335         335
   Fixed Rate Residential Loans                   6           219         1,310         1,796         9,953     112,976     126,260
   Adjustable Rate Residential Loans         69,467       107,129        28,121         9,838         9,272           0     223,827
   Fixed Rate Multifamily Loans                   0             0            18           137           650       2,126       2,931
   Adjustable Rate Multifamily Loans          8,862         9,292         2,866           147           825           0      21,992
   Fixed Rate Commercial RE Loans             1,280            13           655         1,579           995         196       4,718
   Adjustable Rate Commercial RE Loans       22,004        32,310         2,543         1,324             0           0      58,181
   Fixed Rate Construction Loans                185           304             0             0             0      11,068      11,557
   Adjustable Rate Construction Loans         4,732           243             0             0             0           0       4,975
   Fixed Rate Land / Lot Loans                  114           484           605           447           120         712       2,482
   Adjustable Rate Land / Lot Loans           6,969         4,207             0             0             0           0      11,176
   HELOCs                                     3,672             0             0             0             0           0       3,672
   Adjustable Rate Mobile Home Loans            291           396             0             0             0           0         687
   Fixed Rate Consumer Loans                    723           495           358           580         1,128       2,298       5,582
   Adjustable Rate Commerciial Loans          5,524           333             0             0             0           0       5,857
   Fixed Rate CMO's                               0             0             0             0             0       5,985       5,985
   Adjustable Rate CMO's                     27,321             0             0             0             0           0      27,321
   Fixed Rate MBS                               144             0        14,223        14,204         1,158      73,833     103,562
   Adjustable Rate MBS                       30,153       127,147             0             0             0           0     157,300
   Fixed Rate Agency Debentures                   0             0         2,988             0        20,916     114,581     138,485
   FHLB Stock                                 6,224             0             0             0             0           0       6,224
   Interest Bearing Cash Equivalents          4,510             0             0             0             0           0       4,510
                                              ------            --            --            --            --          --      ------
NET INTEREST EARNING ASSETS                 192,181       282,572        53,687        30,052        45,017     324,110     927,619

INTEREST BEARING LIABILITIES:
   NOW Accounts                              42,916             0             0             0             0           0      42,916
   Savings Accounts                         111,742             0             0             0             0           0     111,742
   Money Market Accounts                     38,620             0             0             0             0           0      38,620
   Certificate Of Deposit                   157,846       314,150       122,153        18,026         3,347           0     615,522
   FHLB Advances                                  0             0        50,000             0             0           0      50,000
                                                  --            --       -------            --            --          --     -------
TOTAL INTEREST BEARING LIABILITIES          351,124       314,150       172,153        18,026         3,347           0     858,800

Impact Of Interest Rate Swaps               (35,000)            0        35,000             0             0           0           0

INTEREST BEARING LIABILITIES ADJUSTED
   FOR INTEREST RATE SWAPS                  316,124       314,150       207,153        18,026         3,347           0     858,800

Periodic Repricing Gap                     (123,943)      (31,578)     (153,466)       12,026        41,670     324,110      68,819
Cumulative Repricing Gap                   (123,943)     (155,521)     (308,987)     (296,961)     (255,291)     68,819
Periodic Repricing Gap As A Percent Of
   Interest Earning Assets                   -13.36%        -3.40%       -16.54%         1.30%         4.49%      34.94%
Cumulative Repricing Gap As A Percent Of
   Interest Earning Assets                   -13.36%       -16.77%       -33.31%       -32.01%       -27.52%       7.42%

(1) Assets are presented net of premiums, discounts, and undisbursed funds.  Loan balances exclude non accrual loans.


</TABLE>


                                                           47

<PAGE> 48



      Static gap analysis such as that presented on the prior page provides only
a limited,  point in time view of the Company's  interest rate sensitivity.  The
static gap analysis also does not reflect factors such as the magnitude  (versus
the timing) of future  interest  rate changes and asset  prepayments,  which are
material to the Company's cash flows due to its significant  balance of mortgage
related  assets.  The actual  impact of interest rate changes upon the Company's
net income and net  portfolio  value may differ from that  implied by any static
gap  measurement.  In  addition,  the  Company's  net  interest  income  and net
portfolio  value under various  future  interest rate  scenarios are affected by
multiple  other  factors  not  embodied  in a  static  gap  analysis,  including
competition,  changes  in the  shape  of the  Treasury  yield  curve,  divergent
movement among various interest rate indices,  and the speed with which interest
rates change.

      Another means of identifying and quantifying interest rate risk is via the
use of a computer simulation model that employs various mathematical  techniques
and business  assumptions to value a company's  financial position under current
and multiple potential economic  scenarios.  The Company utilizes one such model
internally,  and  compares  its  results to the  interest  rate risk  management
reports  provided via the OTS Net Portfolio  Value Model.  Net  portfolio  value
refers to the estimated  liquidation value of the Company's financial positions,
both on and off balance sheet,  and therefore is not  necessarily  indicative of
the value of the Company as a going concern.  The  information  presented in the
following  table results from a lengthy series of assumptions  about current and
future economic,  behavioral, and financial factors, including many factors over
which the Company has no control. These assumptions include, but are not limited
to,  prepayment  rates  on  various  loan  portfolios  ranging  from  0% to 33%,
prepayment rates on various mortgage related  securities ranging from 6% to 30%,
and a  continuation  of Treasury  rates as of June 30, 1997 under the  "Constant
Interest  Rate"  scenario.  Because of the inherent  uncertainty  regarding  the
accuracy  of the  assumptions  utilized  in both  current  and  future  periods,
management  can  provide  no  assurance  that the  valuations  presented  in the
following table are representative of what might actually be obtainable.

                                       48

<PAGE> 49

<TABLE>
<CAPTION>


       Estimated Net Portfolio Value Of HF Bancorp, Inc. At June 30, 1997
       ------------------------------------------------------------------

                                   -----------------------------------------
(Dollars In Thousands)                 Estimated Net Portfolio Value
                                   -----------------------------------------
                        Financial        Minus 2%     Constant       Plus 2%
                        Statement        Parallel     Interest      Parallel
                            Value      Rate Shock        Rates    Rate Shock
                            -----      ----------        -----    ----------
<S>                       <C>           <C>            <C>           <C>    
Assets                    984,749       1,012,893      980,144       919,278
Liabilities               903,722         904,861      882,603       861,192
Off Balance Sheet               0          (2,497)      (1,470)         (433)

Net Portfolio Value        81,027         105,535       96,071        57,653


</TABLE>

      A significant portion of the estimated increase in the net portfolio value
of the  Company  over its book value at June 30,  1997  derives  from the Bank's
portfolio of low cost core deposits and from its  portfolios of adjustable  rate
loans and  securities,  which were generally in high investor demand at June 30,
1997.  Conversely,  the  Company's  portfolios  of fixed  rate  mortgage  backed
securities and callable  Agency  debentures  presented  estimated  market values
below historical book values.

      The above results of the computer  modeling are  directionally  consistent
with those  indicated  by the static gap table and the OTS Net  Portfolio  Value
Model. The Company is exposed to increases in general market interest rates (and
benefits from declines in general market  interest  rates)  primarily due to its
portfolios of longer term,  fixed rate,  Agency  callable  securities,  customer
residential mortgages, and mortgage backed securities, for which the Company did
not maintain a like amount of match funding at June 30, 1997. The results of the
computer  modeling also highlight the impact of the embedded  options present in
many of the  Company's  mortgage  related  portfolios,  whereby the  portfolios'
amount of  increase in value in  declining  rate  environments  is less than the
amount of reduction in value in rising rate  environments due to the ability and
tendency of borrowers to refinance  their loans,  often  without  penalty,  when
general market interest rates fall.

      During the year ending June 30,  1997,  the Company took a number of steps
to reduce its  sensitivity  to  increases  in  general  market  interest  rates,
including:

o     the sale  of  $34.0  million  in  long term,  fixed  rate  mortgage backed
      securities

o     the development and marketing of additional core deposit products

o     the sale of a portion of fixed rate residential loan originations into the
      secondary market

o     the adoption of a loan origination program which encourages the generation
      of adjustable  rate mortgages  through  favorable  pricing to the consumer
      combined with incentives to the Company's sales force

o     the  introduction  of new Prime Rate based  adjustable  rate loan  lending
      products, including three different home equity lines of credit

o     the focus of secondary market loan and security  purchases upon adjustable
      rate  assets, or fixed rate assets with limited remaining lives

                                       49

<PAGE> 50





PROVISION FOR ESTIMATED LOAN LOSSES

      Implicit in lending activities is the risk that losses will occur and that
the  amount of such  losses  will  vary over  time.  Consequently,  the  Company
maintains an allowance  for credit  losses by charging a provision for estimated
credit losses to earnings. Loans determined to be losses are charged against the
allowance  for credit  losses.  The  Company's  allowance  for credit  losses is
maintained  at a level  considered  by  management to be adequate to provide for
estimated losses inherent in the existing portfolio, including commitments under
commercial and standby letters of credit.

      In evaluating the adequacy of the allowance for credit losses,  management
estimates the amount of potential loss for each loan that has been identified as
having  greater  than  standard  credit  risk,  including  loans  identified  as
nonperforming.  Loss estimates  also consider the borrower's  financial data and
the  current  valuation  of  collateral  when  appropriate.  In  addition to the
allowance for specific  problem credits,  an allowance is further  allocated for
all  loans in the  portfolio  based on the risk  characteristics  of  particular
categories of loans  including  historical  loss  experience  in the  portfolio.
Additional  allowance is allocated on the basis of credit risk concentrations in
the portfolio and contingent  obligations under off-balance sheet commercial and
standby letters of credit.

      The Company's provision for estimated loan losses declined 63.6% from $1.1
million in fiscal 1996 to $384,000 in fiscal 1997,  after totalling $1.2 million
in fiscal 1995. The fiscal 1997 reduction  stemmed  primarily from the following
factors:

o     a cessation in the decline in real estate values in the Company's  primary
      lending markets, with some markets demonstrating price appreciation during
      the most recent fiscal year

o     $77,000 in recoveries of prior charge-offs

o     in  excess  of  70.0%  of  the  Company's  loan  portfolio  consisting  of
      residential  mortgages  at June  30,  1997.  The  Company  has  enjoyed  a
      relatively favorable credit experience with home loans

o     only 2.2% of the Company's loan portfolio at June 30, 1997 was composed of
      credits  that were either  unsecured or secured by  collateral  other than
      real estate or deposit accounts

o     a continuing reduction in total classified assets commencing in the second
      quarter of fiscal 1997 (see "Credit Quality")

      Loan loss  provisions  in future  fiscal  years may be higher  than  those
recorded  in  fiscal  1997 if the  Company  succeeds  in its  strategic  plan of
expanding the loan  portfolio in order to better serve the  communities in which
it operates and in order to better utilize the Company's capital  position.  The
potential increase in future loan loss provisions may, however, be offset by the
enhanced asset yields obtained via servicing household and small business credit
needs.


                                       50

<PAGE> 51



OTHER INCOME / EXPENSE

      Other income has three major components:

1.    non interest  income from ongoing  operations,  such as savings fees, loan
      servicing income, and commissions earned from the sale of mutual funds and
      insurance related products

2.    income and expenses associated with foreclosed real estate and real estate
      held for investment,  including  provision for real estate losses,  rental
      income from foreclosed  properties while such are being marketed for sale,
      and operating costs for real estate including insurance,  maintenance, and
      real property taxes

3.    gains and losses on sales of loan servicing,  securities, and other assets
      and liabilities

      Non interest  income from loan  operating  fees  increased  from  $199,000
during  fiscal 1995 and $193,000  during  fiscal 1996 to $359,000  during fiscal
1997  due to the  impact  of the two  major  acquisitions  and  the  significant
expansion in the Company's  loan  portfolio.  Savings Fee income also  increased
significantly,  from $613,000 in fiscal 1995 and $620,000 in fiscal 1996 to $1.4
million in fiscal 1997, due to the volume of deposit  accounts added via the two
acquisitions  and because of the Company's  successful  marketing for additional
deposit transaction accounts.  In addition,  the Company has benefitted from the
closure of Riverside County branches by major commercial banks.

      The  Company's  loss from real  estate  operations  declined  37.8%,  from
$498,000 in fiscal 1996 to $310,000 in fiscal 1997, as real estate values in the
Company's  primary  market  areas  had  generally  bottomed,  and in some  cases
commenced improving,  by the 1997 fiscal year. The current fiscal year's results
also compare favorably to the $747,000 loss from real estate operations reported
in fiscal 1995. For information concerning the Company's real estate development
results, see "Subsidiary Activities", below.

      Net  gains on the sale of  securities  designated  as  available  for sale
increased  from zero in fiscal  1996 to $1.0  million  in  fiscal  1997,  as the
Company partially restructured its balance sheet to improve capital utilization,
eliminate all mutual fund investments,  and reduce interest rate risk (See "Item
7. Management's Discussion & Analysis - Asset / Liability Management").

      Net gains on loans held for sale rose from zero in fiscal  1995 and fiscal
1996 to $39,000 in fiscal 1997, as in fiscal 1997 the Company  commenced selling
a portion of its  residential  fixed  rate loan  production  into the  secondary
markets in order to manage interest rate risk.

      In fiscal 1997, the Company commenced the amortization of the core deposit
intangibles  generated  as a  result  of the two  acquisitions.  A total of $2.0
million in core  deposit  intangible  amortization  was recorded in fiscal 1997,
including  twelve  months  of  amortization  for  the  core  deposit  intangible
associated  with the northern San Diego County branch  purchases and nine months
of  amortization  for the  core  deposit  intangible  associated  with  the PSSB
acquisition.




                                       51

<PAGE> 52



SUBSIDIARY ACTIVITIES

      First Hemet  Corporation  is a wholly  owned  subsidiary  of HF  Financial
Corporation,  in  turn a  wholly  owned  subsidiary  of the  Bank.  First  Hemet
Corporation  provides  trustee  services for the Bank, is engaged in real estate
development,  and receives commissions from the sale of mortgage life insurance,
fire  insurance and annuities.  For the fiscal years ended June 30, 1997,  1996,
and 1995,  First Hemet  Corporation  had $1.1 million,  $2.5  million,  and $3.2
million in total assets, respectively.

      At June 30, 1997,  First Hemet  Corporation  maintained the following real
estate development assets:

      Vista Bonita.  This is a 15 residential lot subdivision  located in Hemet,
California, which First Hemet Corporation is seeking to sell on a bulk basis. At
June 30, 1997,  First Hemet  Corporation's  net  investment in this property was
$269,000, which has been reduced by a valuation allowance of $288,000.

      Mayberry  Estates.  This real estate  investment  consists of six one-half
acre residential lots located in Hemet,  California.  First Hemet Corporation is
actively  marketing  the property for bulk sale.  At June 30, 1997,  First Hemet
Corporation's  net  investment  in this  project  was  $149,000,  which has been
reduced by a valuation allowance of $290,000.

      Because of First Hemet  Corporation's real estate development  activities,
OTS  regulations  require  the  Bank  to  deduct  from  regulatory  capital  its
investment in First Hemet  Corporation,  which at June 30, 1997 amounted to $1.0
million.  Following  the sale of the  above  two real  estate  investments,  the
Company  intends to  discontinue  real  estate  development  activities  for the
foreseeable future.


GENERAL & ADMINISTRATIVE EXPENSES

      General & administrative  expenses  excluding the SAIF special  assessment
and the costs  associated  with the defined  benefit and retirement  restoration
plan  terminations  increased  49.9% from $12.9  million in fiscal 1996 to $19.4
million in fiscal 1997, after rising $1.3 million between fiscal 1995 and fiscal
1996. The significant increase in fiscal 1997 stemmed from two sets of factors:

1.    The many non recurring  operating  costs borne by the Company to integrate
      the two acquisitions, including data processing conversion expenses, check
      printing costs,  and the write-off of acquired assets  not utilized in the
      ongoing business of the Company

2.    the ongoing costs of operating nineteen branches, a headquarters facility,
      and a stand alone loan center,  versus twelve  branches and a headquarters
      facility,  as a  result  of  the  two  acquisitions  and  the  significant
      expansion  in credit  originations  generated by the Company over the most
      recent fiscal year


                                       52

<PAGE> 53



      Salaries  and related  expenses  constitute  the  greatest  portion of the
Company's general & administrative  expenses.  During fiscal 1997,  salaries and
employee  benefits costs (excluding the termination costs for the two retirement
plans) rose to $9.4 million from $6.8 million in fiscal 1996 and $5.8 million in
fiscal 1995. While this increase in cost has primarily  resulted from the growth
of the Company, management has taken the following steps to control salaries and
benefits costs in future fiscal years:

o     the aforementioned termination of the defined benefit pension plan and the
      retirement restoration plan

o     a requirement  that  employees  pay a greater  percentage of their medical
      insurance costs

o     the  elimination of redundant  positions  during fiscal 1997 following the
      integration of PSSB with the Company

      Occupancy and equipment  expenses were relatively  constant in fiscal 1995
and 1996 at $2.0  million.  These  expenses  increased to $3.4 million in fiscal
1997 due to the addition of seven full service branches and the establishment of
the Loan Center.  Similarly,  data  processing  costs increased from $794,000 in
fiscal  1995 to $832,000 in fiscal  1996  before  rising  significantly  to $1.6
million in fiscal 1997, as the  Company's  volume of customer  deposit  accounts
alone  expanded  from less than 39,000 at June 30, 1995 to nearly 60,000 at June
30, 1997.

      Management   remains   intently   focused  upon   controlling   general  &
administrative expenses, as highlighted by the termination of the two retirement
plans as of June 30,  1997.  In the coming  fiscal year,  management  intends to
pursue other initiatives  aimed at reducing the Company's  efficiency ratio to a
level more in line with its peer institutions.  These initiatives  include,  but
are not limited  to,  alterations  in the  Company's  delivery  of products  and
services,  further  modifications  to benefits  plans, a transition to a greater
reliance upon incentive based compensation,  and outsourcing functions currently
performed internally.  However,  there can be no assurance that the Company will
be able to implement these  initiatives or, if implemented,  that they will have
the desired effect of significantly reducing general & administrative expenses.


INCOME TAXES

      The Company's nominal combined federal and state tax rate is approximately
41.3%.  Differences between this rate and the effective tax rate for each fiscal
year arise from:

o     certain  operating  expenses  for which there is limited  federal and / or
      state tax deductibility

o     revisions to tax expenses recognized for prior fiscal years

o     adjustments to valuation  allowances  associated  with deferred tax assets
      under SFAS Number 109

See  "Note  12  of  the  Consolidated   Financial   Statements"  for  additional
information.


                                       53

<PAGE> 54




ANALYSIS OF FINANCIAL CONDITION

OVERVIEW

      The Company reported total assets of $984.7 million at June 30, 1997. This
represented an increase of $157.8 million, or 19.1%, from total assets of $826.9
million at June 30, 1996.  During  fiscal 1996,  total assets  increased  $160.9
million,  or 24.2%,  from total assets of $666.1  million at June 30, 1995.  The
increase  in total  assets  in fiscal  1997 was  largely  generated  by the PSSB
acquisition,  while the rise in total assets in fiscal 1996  primarily  resulted
from the purchase of the three branches from Hawthorne Savings Bank.

      The overall  composition of the Company's assets changed  significantly in
fiscal 1997, with a reduction of the excess liquidity  present at the conclusion
of the prior fiscal year, a significant increase in the loan portfolio resulting
from both  enhanced  origination  volume  and  expanded  loan  purchases,  and a
migration  in  the   securities   portfolio  to  more  interest  rate  sensitive
investments.  On the liability side of the balance sheet,  the evolution  toward
more  transaction  accounts  continued  within  the  deposit  portfolio.   These
aggregate balance sheet changes were reflective of the Company's  strategic plan
of developing into one of Southern California's premier community banks.


SECURITIES PORTFOLIO

      The Company  maintains a portfolio of  investment  securities  in order to
serve as a source of  liquidity,  to generate  income  (primarily  net  interest
income),  and to contribute to the management of interest rate risk.  Note 3 and
Note 4 of the Consolidated  Financial  Statements included in this Form 10-K set
forth information concerning the composition, estimated fair value, and maturity
distribution of the securities portfolio at June 30, 1997 and 1996.

      At June 30, 1997, securities totaled $432.7 million, down 7.4% from $467.4
million at June 30, 1996, as in fiscal 1997 the Company  worked to redirect cash
flows from the security  portfolio  into customer  loans in order to bolster net
interest  income,  serve the Company's  expanded market area, and better utilize
the Bank's strong risk based capital position.

      General trends in the security  portfolio  during fiscal 1997 included the
focus of new purchases on adjustable  rate securities or securities with limited
durations, such as seasoned Agency fixed rate balloon securities, where the then
outstanding  entire  principal  balance  is  payable at a given date one or more
years in the future.  This focus for new purchases was  complemented by the sale
of longer term fixed rate  instruments,  the liquidation of all of the Company's
mutual  fund  investments,  and  the  sale  of  all of  the  Company's  Treasury
securities. The focus upon more interest rate sensitive securities resulted from
the Company's  aggregate  interest rate risk profile,  which was a net liability
sensitive  position  throughout  the 1997 fiscal year.  The Treasury  securities
represented a less advantageous  investment than other  alternatives given their
relatively  low yields,  the Bank's high  liquidity,  and the Bank's strong risk
based capital position.


                                       54

<PAGE> 55



      The  securities  portfolio  at June 30, 1997  included  three  significant
concentrations:

1.    $138.5 million in callable Agency bonds.  These securities are fixed rate,
      and present the issuer with the option to prepay the debentures at various
      points in time or on various periodic cycles (e.g. quarterly).  The issuer
      would  typically  prepay the bonds when current market  interest rates for
      bonds with similar  remaining  terms fall below the cost of the  Company's
      securities.   Therefore,  in  purchasing  these  securities,  the  Company
      obtained  comparatively  higher  interest rates in exchange for forfeiting
      any significant capital appreciation above par in the event general market
      interest rates decline.

2.    $123.6 million in GNMA adjustable rate mortgage backed  securities.  These
      securities reprice annually based upon a margin over the One Year Treasury
      Constant Maturities Index as published by the Federal Reserve. The Company
      has  attempted to relatively  uniformly  distribute  the annual  repricing
      dates of these  securities  in order to avoid  exposure to  interest  rate
      movements at any one point in time.

3.    $72.6 million in FNMA fixed rate,  thirty year mortgage backed  securities
      with a  weighted  average  coupon  rate of 6.51%  and a  weighted  average
      remaining  maturity  of  320  months  carried  in  the  held  to  maturity
      portfolio.

      Substantially  all of the  Company's  securities  other than the  callable
debentures  consist of  securities  backed by mortgages.  The cash flows,  total
return,  and final maturities  associated with mortgage backed securities can be
significantly  impacted by the speed at which the underlying  mortgages  prepay.
Mortgages  tend to repay faster as interest  rates fall,  and slower as interest
rates  rise.  As a result,  the  Company  may be  subject to  "prepayment  risk"
resulting from greater funds available for reinvestment at a time when available
yields are lower.  Conversely,  the Company may be subject to  "extension  risk"
resulting in lower cash flows being  available for  reinvestment  at a time when
available yields are higher.  While the Company  undertakes efforts to diversify
these risks,  such as by purchasing  multiple pools of securities with different
coupons and interest rate reset dates, the Company remains exposed to volatility
in the fair market value, net interest  income,  and total returns stemming from
its mortgage backed securities.

      The  Company  intends to  concentrate  future  securities  purchases  upon
adjustable  rate and low duration  securities  as part of its interest rate risk
management program. While such securities may often present lower initial yields
than are  available  via longer  term,  fixed rate  instruments,  the  Company's
management  believes  that  shareholder  value is best  maximized  over  time by
effectively managing interest rate risk. However, there can be no assurance that
an adequate supply of adjustable rate and low duration  securities at acceptable
prices will be available to the Company in future periods.




                                       55

<PAGE> 56



LOANS

      At June 30,  1997,  the Company  reported  total net loans  receivable  of
$484.3 million.  This represented an increase of $259.1 million, or 115.1%, over
$225.2 million in net loans receivable at June 30, 1996. In conjunction with the
PSSB  acquisition,  $160.7  million in net loans were added in fiscal 1997.  The
Company's loan  originations  have increased quite  significantly  over the past
several years, from $19.3 million in fiscal 1995 to $38.8 million in fiscal 1996
to $135.0 million in fiscal 1997. This increase in originations has stemmed from
the rebuilding of the Company's retail (via internal offices) and wholesale (via
mortgage brokers) loan production networks. In addition, loan purchases expanded
from  $0.2  million  in fiscal  1995 to $13.9  million  in fiscal  1996 to $53.6
million in fiscal 1997, as the Company's  management  moved to better deploy the
Bank's strong risk based capital position.

      The following  table presents the Company's loan related  activity  during
the fiscal years indicated.

<TABLE>
<CAPTION>


                                       Fiscal        Fiscal        Fiscal        Fiscal        Fiscal
                                         1997          1996          1995          1994          1993
                                         ----          ----          ----          ----          ----

                                                         (Dollars In Thousands)

<S>                                  <C>           <C>           <C>           <C>           <C>     
Beginning Balance                    $236,383      $210,791      $215,645      $241,618      $242,366

Originations                          134,988        38,820        19,321        40,440        57,981
Purchases                              53,637        13,892           207           513           100
PSSB Acquisition                      175,603             0             0             0             0
Sales                                  (4,674)            0             0        (9,789)            0
Transfers To Foreclosed Real Estate    (7,048)       (1,931)       (1,946)       (5,582)       (2,585)
Loans Held For Sale                      (335)            0             0             0             0
Principal Repayments                  (82,222)      (25,189)      (22,436)      (51,555)      (56,244)

Ending Balance                       $506,332      $236,383      $210,791      $215,645      $241,618

</TABLE>

      The Company's  residential loan  origination  operation has emphasized the
production of adjustable  rate mortgages over the past year via more  aggressive
pricing,  higher loan agent  commissions  versus fixed rate loans, and augmented
marketing  support.  The Company  has  focused  upon  adjustable  rate  mortgage
originations  and  purchases  in order  to  reduce  its  aggregate  exposure  to
increases in general market interest rates (See "Item 7. Analysis Of The Results
Of  Operations  -- Asset /  Liability  Management").  For the same  reason,  the
Company  commenced  selling  a  portion  of  its  residential  fixed  rate  loan
production during fiscal 1997.


                                       56

<PAGE> 57



      Principal repayments in fiscal 1997 were inflated by:

o     the Company's  experience  with a $12.5  million pool of adjustable  rate,
      residential, single family mortgages purchased in September, 1996. By June
      30, 1997,  all but $2.7 million of the pool's  principal  balance had been
      repaid.  The Company has ceased  purchasing loans from both the originator
      and the broker of this loan pool.

o     periods of relatively low interest rates,  which  encouraged  customers to
      refinance their mortgages into loans presenting reduced interest rates

o     the  repayment  of a  significant  volume of  construction  loans,  as the
      projects financed by the Company were completed

      The following table sets forth the Company's allowances for estimated loan
losses at the dates indicated.

<TABLE>
<CAPTION>

                                                       AT OR FOR THE YEAR ENDED JUNE 30,
                                              -----------------------------------------------
                                                1997      1996     1995      1994      1993
                                                ----      ----     ----      ----      ----
                                                           (DOLLARS IN THOUSANDS)

<S>                                           <C>       <C>       <C>       <C>       <C>   
Allowance for estimated loan losses:
  Balance at beginning of period...........   $3,068    $2,694    $2,682    $3,157    $1,339
   Net Charge-offs:
   One- to-four-family.....................     (865)     (320)      (46)      (36)      (10)
   Multi-family............................      (26)       --        --        --        --
   Commercial real estate..................     (130)     (304)     (636)   (1,062)      (56)
   Construction............................     (217)      (10)       --        --        --
   Acquisition, development and land.......     (210)      (20)     (394)     (188)      (21)
   Loans reclassified to oreo (1)               (149)       --        --        --        --
   Consumer................................      (38)      (26)     (114)      (66)      (15)
                                                ----      ----     -----     -----    ------
Total net charge-offs......................   (1,635)     (680)   (1,190)   (1,352)     (102)
Acquired from PSSB                             2,963        --        --        --        --
Provision charged to income................      384     1,054     1,202       877     1,920
                                               -----     -----     -----     -----    ------
Balance at end of period...................   $4,780    $3,068    $2,694    $2,682    $3,157
                                              ======     =====     =====     =====     =====

-------------------------
(1) Per SFAS Number 66.

</TABLE>

   For financial ratios addressing the Company's credit quality, please refer to
Item 6. "Selected Consolidated Financial And Other Data Of The Company".

                                       57

<PAGE> 58



     In  conjunction  with the PSSB  acquisition,  the Company  acquired a small
business  loan  portfolio  and  commercial  business  lending  expertise,  which
management has been leveraging throughout the branch system since the conclusion
of the acquisition.  The Company has been marketing a more  comprehensive  small
business  service line during the last six months of fiscal 1997, which includes
not only commercial lines of credit,  but also demand deposit account  analysis,
integration  with third  party  payroll  service  providers,  merchant  bankcard
services, deposit collection via courier, and safe deposit boxes.

     In fiscal  1997,  the  Company  commenced  originating  home equity line of
credit ("HELOC") loans under three separately priced and marketed programs:

1.  80% or lower loan to value credits with commitments up to $100,000

2.  81% -- 90% loan to value credits with commitments up to $100,000

3.  80% or lower loan to value credits with commitments over $100,000

     These revolving  credit lines are priced based upon the Wall Street Journal
Prime Rate,  reprice monthly,  provide annual fees after the first year, present
early closure fees,  and are  originated at no cost to the consumer (in the case
of the first two programs).  In addition,  all HELOC's receive credit reviews at
least  annually.  At June 30, 1997, the Company had $7.7 million in HELOC credit
commitments outstanding.

     The Company also commenced originating consumer loans for autos, boats, and
recreational  vehicles for its own account during fiscal 1997. In prior periods,
the Company  referred  such  business to third parties in exchange for a fee. In
fiscal 1998,  the  Company's  management  intends to evaluate  the  provision of
credit cards to its consumer and business  customers,  either of its own account
or via a third party,  in order to offer a complete  community  banking  product
line to its clients.

     The Company continues to originate construction,  apartment, and commercial
real estate loans. A majority of the Company's construction loans are associated
with the construction of single family residences. The Company also offers fully
amortizing loans for the purchase of land and developed  housing lots. In fiscal
1998,  management  intends to pursue the origination of a greater volume of high
credit  quality  apartment and  commercial  real estate loans in order to better
utilize  the  Bank's  strong  risk based  capital  position  and high  available
liquidity.  However,  there  can be no  assurances  that  the  Company  will  be
successful in generating such originations.  In addition, commercial real estate
and  multifamily  loans,  even  though  prudently  underwritten,  are  generally
considered  to involve a higher  degree of credit  risk than one to four  family
mortgage loans.


                                       58

<PAGE> 59



     The  following  table  presents  the  distribution  of the  Company's  loan
portfolio at the dates indicated.

<TABLE>
<CAPTION>
               
                                    ----------------------  -------------------   -------------------
                                       June 30, 1997           June 30, 1996         June 30, 1995
                                    ----------------------  -------------------   -------------------
                                     Principal     Percent  Principal   Percent   Principal   Percent
                                       Balance    Of Total    Balance  Of Total     Balance  Of Total
                                       -------    --------    -------  --------     -------  --------

                                                      (Dollars In Thousands)

<S>                                    <C>         <C>       <C>        <C>        <C>        <C>   
REAL ESTATE LOANS:
   One To Four Unit Residential        $355,567     70.23%   $162,730    68.85%    $138,074    65.49%
   Multifamily / Apartments              25,584      5.05%      5,564     2.35%       5,434     2.58%
   Commercial Properties                 63,827     12.61%     46,222    19.55%      49,020    23.26%
   Construction                          31,566      6.23%      9,459     4.00%       5,920     2.81%
   Land / Lots                           13,827      2.73%      7,355     3.11%       6,527     3.10%
                                        -------      -----     ------     -----       -----     -----
      Sub Total                         490,371     96.85%    231,330    97.86%     204,975    97.24%

CONSUMER LOANS:
   Mobile Home Loans                      3,642      0.72%      4,158     1.76%       4,779     2.27%
   Loans On Deposit Accounts              1,179      0.23%        746     0.32%         764     0.36%
   Home Equity Lines Of Credit            3,597      0.71%          0     0.00%           0     0.00%
   Other Consumer Loans                   1,607      0.32%        149     0.06%         273     0.13%
                                         ------      -----        ---     -----         ---     -----
      Sub Total                          10,025      1.98%      5,053     2.14%       5,816     2.76%

COMMERCIAL BUSINESS LOANS                 5,936      1.17%          0     0.00%           0     0.00%


TOTAL GROSS LOANS                       506,332    100.00%    236,383   100.00%     210,791   100.00%

LESS:
  Undisbursed Loan Funds                 15,841                 5,584                 3,281
  Unamortized Net Yield Adjustments       1,377                 2,570                 2,419
  Allowance For Estimated Losses          4,780                 3,068                 2,694

TOTAL NET LOANS                        $484,334              $225,161              $202,397




                                                     (Table continued on the following page)

</TABLE>


                                       59

<PAGE> 60


<TABLE>
<CAPTION>

(Table continued from the prior page)

                                   ---------------------   ---------------------
                                        June 30, 1994          June 30, 1993
                                   ---------------------   ---------------------
                                    Principal    Percent    Principal    Percent
                                      Balance   Of Total      Balance   Of Total
                                      -------   --------      -------   --------  

                                               (Dollars In Thousands)

<S>                                  <C>         <C>         <C>         <C>   
REAL ESTATE LOANS:
   One To Four Unit Residential      $136,459     63.28%     $153,024     63.33%
   Multifamily / Apartments             5,498      2.55%        5,352      2.21%
   Commercial Properties               51,685     23.97%       55,488     22.97%
   Construction                         8,616      3.99%       11,446      4.74%
   Land / Lots                          6,860      3.18%        8,723      3.61%
                                        -----      -----        -----      -----
      Sub Total                       209,118     96.97%      234,033     96.86%

CONSUMER LOANS:
   Mobile Home Loans                    5,409      2.51%       5,998       2.48%
   Loans On Deposit Accounts              725      0.34%         792       0.33%
   Home Equity Lines Of Credit             --      0.00%          --       0.00%
   Other Consumer Loans                   393      0.18%         795       0.33%
                                      -------      -----         ---       -----
      Sub Total                         6,527      3.03%       7,585       3.14%

COMMERCIAL BUSINESS LOANS                   0      0.00%           0       0.00%


TOTAL GROSS LOANS                     215,645     100.00%    241,618     100.00%

LESS:
   Undisbursed Loan Funds               4,106                  5,126
   Unamortized Net Yield Adjustments    2,487                  2,562
   Allowance For Estimated Losses       2,682                  3,157

TOTAL NET LOANS                      $206,370               $230,773
                                     ========               ========

</TABLE>


      For information concerning the scheduled maturities of the Company's loans
at June  30,  1997,  please  refer  to the  static  gap  table  presented  under
"Asset/Liability Management".

      Since the Company lends primarily in Southern California,  its real estate
loan collateral is concentrated in this region. This concentration is considered
when  determining  the adequacy of the  Company's  Allowance  for Loan and Lease
Losses ("ALLL"). Commencing in the second half of fiscal 1997, the Company began
pursuing the  purchase of  residential  loan pools which  included at least some
properties  in Northern  California,  as a means of starting  to  diversify  its
geographic  concentration.  However, despite these efforts, the vast majority of
the  Company's  real estate  collateral  was located in Riverside  and San Diego
counties at June 30, 1997.


                                       60

<PAGE> 61



      The following table sets forth at June 30, 1997, the amount of gross loans
receivable, including non performing loans, and whether such loans have fixed or
adjustable  interest  rates.  Adjustable  rate loans  which  reprice  based upon
movements in the 11th District Cost Of Funds Index  ("COFI") are separated  from
variable  rate loans  which  reprice  based  upon  movements  in other  indices,
including the Prime Rate and the Treasury One Year Constant Maturities Index.

<TABLE>
<CAPTION>

                                                --------------------
                                                  Adjustable Rate
                                                --------------------
                                     Fixed     11th Dist.       Other
                                      Rate           COFI     Indices       Total
                                      ----           ----     -------       -----

                                                (Dollars In Thousands)
                     
<S>                                  <C>         <C>         <C>         <C>     
REAL ESTATE LOANS:
   One To Four Unit Residential      $128,327    $112,330    $114,910    $355,567
   Multifamily / Apartments             2,950      15,859       6,775      25,584
   Commercial Properties                5,663      46,412      11,752      63,827
   Construction                        13,192       4,059      14,315      31,566
   Land / Lots                          2,491       3,979       7,357      13,827
                                        ------      ------      ------     -------
      Sub Total                       152,623     182,639     155,109     490,371

CONSUMER LOANS:
   Mobile Home Loans                    2,949         693           0       3,642
   Loans On Deposit Accounts            1,179           0           0       1,179
   Home Equity Lines Of Credit              0           0       3,597       3,597
   Other Consumer Loans                 1,607           0           0       1,607
                                       -------          --          --      ------
      Sub Total                         5,735         693       3,597      10,025

COMMERCIAL BUSINESS LOANS                   0           0       5,936       5,936


TOTAL GROSS LOANS                    $158,358    $183,332    $164,642    $506,332

</TABLE>

      Additional information concerning fixed and adjustable rate loans, and the
scheduled maturities thereof,  including those loans contractually due more than
one year from  June 30,  1997,  is  presented  in the  static  gap  table  under
"Asset/Liability Management".

      During the past fiscal year, the Company has  emphasized  the  origination
and purchase of loans tied to  adjustable  rate indices other than COFI in order
to  diversify  its  portfolio  and because of concerns  regarding  the long term
status of the COFI, as the number of savings  institutions  in the 11th District
continues to decline in conjunction with merger and acquisition activity. As the
determination of the COFI becomes  concentrated in fewer  institutions,  funding
decisions by a  relatively  few large  institutions  could  potentially  further
reduce the  correlation of COFI to changes in general market  interest rates and
the Company's cost of funds.



                                       61

<PAGE> 62



CREDIT QUALITY

      General.  Although the Company's  management  believes that non performing
loans are  generally  well  secured and  reserved,  other real  estate  owned is
properly valued, and potential losses are provided for in the ALLL, there can be
no assurance  that future  deterioration  in economic  conditions  or collateral
values will not result in future credit losses and  associated  charges  against
the Company's income. In regards to real estate owned via foreclosure,  although
all such properties are being actively marketed, the Company's management cannot
predict  when  these  properties  will be sold or what the terms of sale will be
when they are sold.  It is the  Company's  general  policy  to  maintain  recent
(within eighteen months) appraisals for all foreclosed properties.

      Non Performing  Assets. At December 31, 1997, gross non performing assets,
which include non performing  loans,  real estate acquired via foreclosure,  and
repossessed consumer assets, totaled $11.5 million. This represented an increase
of $8.7  million  from total non  performing  assets of $2.8 million at June 30,
1996.  During fiscal 1996, non  performing  assets  decreased  $1.4 million,  or
33.9%,  from a total of $4.2 million at June 30, 1995. The significant  increase
in non performing assets in fiscal 1997 resulted primarily from loans originated
by PSSB prior to its acquisition. Approximately $3.6 million of the $5.2 million
in non  performing  loans at June 30, 1997 were  originated by PSSB prior to the
acquisition.  In  conjunction  with  its  due  diligence  of  PSSB,  the  Bank's
management  and third party  consultants  identified  the weaknesses in the PSSB
credit  portfolio and required  PSSB to recognize an additional  $2.2 million in
loss reserves immediately prior to the consummation of the acquisition.

The following table provides  information on gross non performing  assets at the
dates indicated:

<TABLE>
<CAPTION>


                                               ----------------------------------------------
                                                                   At June 30,
                                               ----------------------------------------------
                                                 1997      1996      1995      1994      1993
                                                 ----      ----      ----      ----      ----

                                                             (Dollars In Thousands)

<S>                                             <C>       <C>       <C>       <C>       <C>   
Non accrual loans before valuation reserves     $5,217    $1,301    $2,281    $2,636    $7,764

Investment in foreclosed real estate before
   valuation reserves                            6,308     1,460     1,893     3,554     1,324

Investment in repossessed consumer assets
   before valuation reserves                        10         0         0         0         0


TOTAL GROSS NON PERFORMING ASSETS              $11,535    $2,761    $4,174    $6,190    $9,088
                                               -------    ------    ------    ------    ------


Non accrual loans to gross loans                 1.06%     0.56%     1.10%     1.25%     3.28%

Non performing assets to total assets            1.17%     0.33%     0.63%     1.04%     1.69%


</TABLE>



                                               62

<PAGE> 63



      Delinquencies.  The  following  table  sets  forth  delinquencies  in  the
Company's loan portfolio  as  of  the  dates indicated:

<TABLE>
<CAPTION>
                                                 At June 30,
                                    -------------------------------------
                                                     1997
                                    -------------------------------------

                                        60-89 Days      90 Days or More
                                    ------------------  -----------------

                                     Number  Principal  Number  Principal
                                       of    Balance      of    Balance
                                     Loans   of Loans   Loans   of Loans
                                     -----   --------    -----   --------
                                             (Dollars In Thousand)

<S>                                   <C>    <C>          <C>    <C>    
Residential One To Four Unit           9     $1,055       31     $ 3,416

Multi Family                          --         --        2         439

Commercial Real Estate                 1        110        3       1,218

Construction                          --         --       --          --

Land / Lots                            2      1,281        2          32

Commercial Business                    3        295        2          57

Consumer                               3         67       13          55
                                    ----        ---     ----         ---

   Total                              18     $2,808       53      $5,217
                                    ====     ======     ====      ======


Delinquent loans to gross loans                .57%                1.06%
net of undisbursed funds

</TABLE>


<TABLE>
<CAPTION>


                                    ---------------------------------------
                                                     1996
                                    ---------------------------------------

                                        60-89 Days        90 Days or More
                                    ------------------   ------------------

                                    Number   Principal   Number   Principal
                                      of      Balance      of      Balance
                                    Loans     of Loan     Loans   of Loans
                                    -----     -------    -----    --------
                                            (Dollars In Thousands)

<S>                                   <C>     <C>          <C>     <C>  
Residential One To Four Unit           7      $ 866        11      $ 982

Multi Family                          --         --        --         --

Commercial Real Estate                --         --        --         --

Construction                          --         --        --         --

Land / Lots                            1         93         2        319

Commercial Business                   --         --        --         --

Consumer                              --         --        --         --
                                   -----      -----     -----      -----

   Total                               8     $  959        13     $1,301
                                   =====      =====     =====     ======

Delinquent loans to gross loans                .42%                 .56%
net of undisbursed funds


(Table continued on the following page)

</TABLE>

                                           63

<PAGE> 64


<TABLE>
<CAPTION>


(Table continued from the previous page)


                           -------------------------------------------------
                                                 1995
                           -------------------------------------------------

                                  60-89 Days            90 Days or More
                           ----------------------     ----------------------

                             Number     Principal     Number     Principal
                               of       Balance         of       Balance
                             Loans      of Loans      Loans      of Loans
                             -----      --------      -----      --------
                                          (Dollars In Thousands)                                        (

<S>                            <C>        <C>           <C>       <C> 
Residential One To Four Unit    5         $ 298         23        $1,993

Multi Family                   --            --         --            --
  
Commercial Real Estate         --            --          1           102

Construction                   --            --         --            --

Land / Lots                     1            55          1            47

Commercial Business            --            --         --            --

Consumer                        1            15          3           139
                              ---         -----       ----        ------

   Total                        7         $ 368         28        $2,281
                              ===         =====       ====         =====

Delinquent loans to gross loans            .18%                     1.10%
net of undisbursed funds

</TABLE>


   The following table stratifies the Company's foreclosed properties as of June
30, 1997 by underlying collateral.

<TABLE>
<CAPTION>


(Dollars in Thousands)
                                      GROSS   VALUATION       NET    PERCENT
TYPE OF PROPERTY                    BALANCE   RESERVES    BALANCE   OF TOTAL
----------------                    -------   ---------   -------   --------

<S>                                 <C>        <C>        <C>        <C>   
Residential 1 - 4 Units             $2,523       $351     $2,172      40.87%
Multifamily > 4 Units                    0          0          0       0.00%
Commercial / Industrial              1,712        142      1,570      29.70%
Land / Developed Lots                2,083        527      1,556      29.43%
                                     -----        ---      -----      ------

Total Foreclosed Real Estate        $6,318     $1,020     $5,298     100.00%

</TABLE>

      The figures  reported for foreclosed  real estate at June 30, 1997 include
six loans  with a net  investment  of  $804,000,  before  valuation  allowances,
reclassified  to  foreclosed  real  estate as a result of their not  meeting the
thresholds for classification as loans under SFAS Number 66.


                                       64

<PAGE> 65



      Classified Assets.  Since the PSSB acquisition,  the Company's  management
has diligently worked to reduce the classified asset total through various means
including  aggressive  collection efforts,  foreclosure with subsequent property
sales,  and  settlement of troubled  loans for less than the  principal  balance
owed. Total classified  assets have declined from $43.5 million at September 30,
1996  (immediately  following the PSSB acquisition) to $32.4 million at June 30,
1997, as detailed in the following table.


<TABLE>
<CAPTION>

(Dollars in Thousands)
                           SPECIAL
DATE                       MENTION   SUBSTANDARD    DOUBTFUL       LOSS        TOTAL
----                       -------   -----------    --------       ----        -----
<S>                        <C>            <C>             <C>    <C>         <C>  
June 30, 1996              $11,070        $8,189          $0     $3,139      $22,398
September 30, 1996          17,454        22,006           0      4,037       43,497
December 31, 1996           17,793        20,588           0      2,820       41,201
March 31, 1997              16,646        18,733           0      3,035       38,414
June 30, 1997                9,586        19,834           0      2,952       32,372


</TABLE>

                                          65

<PAGE> 66



      Impaired  Loans.  The Company  adopted SFAS Number 114, -  "Accounting  By
Creditors For Impairment Of a Loan" as amended by SFAS Number 118, - "Accounting
By Creditors For Impairment Of A Loan - Income  Recognition And  Disclosures" as
of July 1,  1995 and  recognized  no  impact  upon  adoption.  The  Company  has
historically  defined  a loan  as  impaired  when  it  meets  one or more of the
following criteria:

o     it is probable that the Company will be unable to collect all contractual
      principal and  interest in accordance with the terms of the loan agreement

o     the loan is ninety or more days past due

o     the loan is placed on non accrual status (although less than ninety days
      past due)

o     a specific valuation reserve has been allocated against the loan

o     the loan has been classified as "substandard" (or worse) by an internal
      credit review process

      At June 30, 1997,  the Company had impaired  loans totaling $16.3 million,
which have related  specific  reserves of $1.5 million.  Of this $16.3  million,
$5.7 million was fully current in regards to the timely payment of principal and
interest.  Total impaired loans at June 30, 1996 were $8.9 million.  The average
recorded investment in impaired loans during the twelve month period ending June
30, 1997 was $16.2  million.  The increase in impaired  loans during fiscal 1997
was disproportionately  represented by the portfolio of loans originated by PSSB
prior to its  acquisition,  as highlighted in the following table which presents
information as of June 30, 1997.

<TABLE>
<CAPTION>

                                                  PSSB
                                          Originations
                                              Prior To      Other
                                           Acquisition     Originations              Total
                                           -----------     ------------              -----

                                                          (Dollars In Thousands)

<S>                                             <C>              <C>                <C>
Impaired Loans With A Current Paid To Date
------------------------------------------
Number Of Loans                                     19               37                 56
Principal Balance                               $2,062           $3,631             $5,693
Specific Reserves                                 $144             $244               $388

Impaired Loans Without A Current Paid To Date
---------------------------------------------
Number Of Loans                                     44               53                 97
Principal Balance                               $6,542           $4,091            $10,633
Specific Reserves                                 $560             $555             $1,115

Total Impaired Loans
--------------------
Number Of Loans                                     63               90                153
Principal Balance                               $8,604           $7,722            $16,326
Specific Reserves                                 $704             $799             $1,503


</TABLE>


      The consolidated  financial  statements and related footnotes  included in
this Form 10-K present additional  information concerning the Company's impaired
loans.


                                       66

<PAGE> 67



INTANGIBLE ASSETS

      The purchase of three branches from Hawthorne  Savings and the acquisition
of  PSSB  each  generated   intangible  assets.  The  following  tables  provide
information  concerning  the initial  amount of such  intangible  assets,  their
periodic  amortization against income, and their current balances as of June 30,
1997.  Under OTS  regulations,  intangible  assets  reduce  regulatory  capital,
resulting in lower capital ratios than would otherwise be the case.

<TABLE>
<CAPTION>

ACQUISITION OF THREE HAWTHORNE SAVINGS BRANCHES
-----------------------------------------------
<S>                                                  <C> 
Transaction Date                                                          06/21/96

Deposits Acquired                                                     $185,189,446

Initial Core Deposit Intangible Created                                 $6,642,079

Book Amortization Method / Term                        Straight Line / Seven Years

Tax Return Amortization Method / Term                Straight Line / Fifteen Years

Monthly Pre-Tax Charge To Book Income                                      $79,072

Monthly Book Amortization Reported As                        Non Operating Expense

Core Deposit Intangible Balance As Of 6/30/97                           $5,693,210

Reduction In Regulatory Capital As Of 6/30/97                           $5,693,210

Reduction In Tangible Book Value As Of 6/30/97                          $5,693,210


</TABLE>


                                       67

<PAGE> 68

<TABLE>
<CAPTION>


ACQUISITION OF PALM SPRINGS SAVINGS BANK
----------------------------------------

<S>                                                  <C>                                             <C>                 <C>

Initial Accounting
------------------
Transaction Date                                                                     09/27/96
Nature Of Transaction                                                     Non Taxable Acquisition
Accounting Methodology Employed                                               Purchase Accounting

Total Purchase Price                                                                  $16,264,536
   Less:  Net Book Value Of Assets & Liabilities Acquired                              $9,287,912
                                                                                       ----------
Premium Paid Over Net Book Value                                                       $6,976,624

Accounting For The Acquisition:                                                            Debits            Credits
                                                                                           ------            -------
   Loan Premium Created                                                                $2,441,000
   Core Deposit Intangible Created                                                     $9,445,475
   Deferred Tax Liability On Loan Premium                                                                 $1,008,284
   Deferred Tax Liability On Core Deposit Intangible                                                      $3,901,567
   Cash Payment For PSSB Shares Above Net Book Value                                                      $6,976,624
                                                                                      -----------        -----------
        Total                                                                         $11,886,475        $11,886,475
                                                                                      -----------        -----------

Book Amortization Method / Term
   Loan Premium                                          Effective Yield / Life Of Loans Acquired
   Core Deposit Intangible                                            Straight Line / Seven Years

Tax Return Amortization Method / Term
   Loan Premium                                      Not Tax Deductible:  Non Taxable Acquisition
   Core Deposit Intangible                           Not Tax Deductible:  Non Taxable Acquisition

Monthly Pre-Tax Charge To Book Income
   Loan Premium                                             Variable Based Upon Loan Amortization
   Core Deposit Intangible:  Gross / Net                                                 $112,446            /              $65,999

Monthly Book Amortization Reported As
   Loan Premium                                                      Reduction In Interest Income
   Core Deposit Intangible                                                  Non Operating Expense

                                                                                          Nominal           Deferred
Balances As Of 6/30/97                                                                     Assets    Tax Liabilities            Net
                                                                                           ------    ---------------            ---
   Loan Premium                                                                        $2,186,575           $903,191     $1,283,384
   Core Deposit Intangible                                                             $8,433,460         $3,483,542     $4,949,918
                                                                                       ----------         ----------     ----------
        Total                                                                         $10,620,035         $4,386,733     $6,233,302

Reduction In Regulatory Capital As Of 6/30/97
   Loan Premium                                                                              none
   Core Deposit Intangible, Net                                                        $4,949,918

Reduction In Tangible Book Value As Of 6/30/97
   Loan Premium                                                                              none
   Core Deposit Intangible, Net                                                        $4,949,918

</TABLE>



                                         68

<PAGE> 69

<TABLE>
<CAPTION>


ACQUISITION OF PALM SPRINGS SAVINGS BANK
----------------------------------------

<S>                                                     <C>
Subsequent Adjustment
---------------------
Adjustment Date                                                                          03/01/97

Nature Of Adjustment                                       Recognition Of Additional Core Deposit
                                                        Intangible Resulting From Trigger Of PSSB
                                                             Officer 24 Month Salary Continuation
                                                                                        Agreement

Additional Core Deposit Intangible Created                                               $362,804

Book Amortization Method / Term                                         Straight Line / 79 months

Tax Return Amortization Method / Term                                   Straight Line / 24 months
     
Monthly Pre-Tax Charge To Book Income                                                      $4,592
 
Monthly Book Amortization Reported As                                       Non Operating Expense

Core Deposit Intangible Balance As Of 6/30/97                                            $344,434

Reduction In Regulatory Capital As Of 6/30/97                                            $344,434

Reduction In Tangible Book Value As Of 6/30/97                                           $344,434

</TABLE>


      In March of 1997,  the Company  commenced  payment to a former  officer of
PSSB  following the  resignation  of the executive  while he was covered under a
salary  continuation  contract.  The total  payments due under the contract were
capitalized as an adjustment to the core deposit intangible  associated with the
PSSB acquisition,  as the potential cost of the contract, which existed prior to
the  acquisition,  was included in the initial  valuation  of the core  deposits
acquired.  The payments due under the contract were not  capitalized at the date
of  acquisition  due to  uncertainty  regarding  whether the  contract  would be
triggered;  i.e.  whether the  executive  would  remain with the  Company.  This
adjustment to the core deposit  intangible  will be amortized over the remaining
initial life of the core deposit intangible. Because the payments are taxable to
the executive,  the Company can deduct the payments for tax purposes on a faster
schedule  than  they  will be  recognized  for  book  reporting  purposes,  thus
generating a deferred tax liability under SFAS Number 109.


                                       69

<PAGE> 70



DEPOSITS

      The Company  reported  total  deposits of $839.7 million at June 30, 1997.
This represented an increase of $169.9 million, or 25.4%, over total deposits of
$669.7 million at June 30, 1996. The increase in deposits stemmed primarily from
the PSSB acquisition.  Total deposits at June 30, 1995 were $472.3 million, with
the increase  during fiscal 1996 primarily  associated  with the purchase of the
three Hawthorne Savings Bank branches.  The following table presents the deposit
activity of the Company for the periods indicated.

<TABLE>
<CAPTION>

                                       For the Fiscal Year Ended June 30,
                                       ----------------------------------

                                              1997            1996
                                              ----            ----

                                             (Dollars In Thousands)

<S>                                      <C>                <C>     
Beginning Balance:                       $   669,725        $472,337

  Branch Deposits Purchased                  164,687         185,189

     Customer Deposits                     1,384,369         569,642

     Customer Withdrawals                  1,412,165         582,597
                                           ---------         -------

  Withdrawals in excess of deposit           (27,796)        (12,955)


  Interest credited on deposits               33,039          25,154
                                              ------          ------

Net increase in deposits                    $169,930        $197,388

Ending Balance:                             $839,655        $669,725


</TABLE>

At June 30, 1997, the Company had  outstanding  $110.0 million in certificate of
deposit  accounts in amounts of $100,000 or more,  maturing as  presented in the
following table.

<TABLE>
<CAPTION>
                                                               Average
                                                               Nominal
                                             Amount              Rate
                                             ------              ----

                                              (Dollars In Thousands)

<S>                                        <C>                  <C>  


Maturity Period:

Three months or less..................     $ 29,739             5.47%

Over three through six months.........       25,455             5.76%

Over six through 12 months............       28,856             5.78%

Over 12 months........................       25,930             6.08%
                                            -------             -----

      Total...........................     $109,980             5.78%
                                            =======             ====
</TABLE>



                                       70

<PAGE> 71



      The Bank is currently  eligible to accept  brokered  deposits,  and has in
place agreements with two investment  banking firms to obtain brokered  deposits
should the need for such funds  arise and  should the  relative  pricing of such
funds compare favorably to alternative  sources of liquidity.  However,  at June
30, 1997, the Bank had no brokered deposits outstanding.

      The Company's mix of deposits has changed over recent years.  For example,
at June 30, 1995, non interest  bearing  checking  accounts  constituted 1.1% of
total  deposits.  By June 30,  1997,  this  proportion  had  increased  to 3.7%.
Transaction account (non certificate) products comprised 21.0% of total deposits
at June 30, 1996,  following  the  Hawthorne  Savings Bank branch  acquisitions,
which  were  heavily  populated  with  certificate  accounts.   This  percentage
increased to 26.7% at June 30, 1997. Consistent with the objective of serving as
a premier  community  bank,  the Company in recent years,  and  particularly  in
fiscal 1997, has emphasized business operating accounts, consumer demand deposit
accounts,  24 hour  telephone  banking,  ATM access,  and ACH services,  thereby
gradually  evolving  the deposit  portfolio  toward a reduced  concentration  in
certificate of deposit  products,  which are typically more price sensitive than
transaction accounts.  The Company intends to continue encouraging the migration
of its deposit  portfolio in the coming fiscal year,  taking advantage of market
dissatisfaction   with  the  service  levels   provided  by  large  and  merging
competitors while also improving shareholder returns through lower cost and more
stable  funding.  However,  there can be no  assurance  that the Company will be
successful in this regard.


BORROWINGS

      At June 30 1997,  the  Company  had  $50.0  million  in total  borrowings,
composed of two standard term advances from the FHLB-San  Francisco.  This was a
decline of $20.0 million from the $70.0 million outstanding at June 30, 1996, as
the Company during fiscal 1997 prepaid a $20.0 million advance, at no prepayment
penalty, whose rate exceeded the Bank's marginal return on liquid investments at
the time.

      From  time  to  time,  the  Bank  utilizes  other  types  and  sources  of
borrowings,  including reverse repurchase  agreements and putable FHLB advances.
During the  upcoming  fiscal  year,  the Bank's  management  intends to employ a
broader  range of wholesale  borrowings  in an effort to increase the Bank's net
interest  income,  control  interest rate risk,  and fund the potential  balance
sheet expansion  associated with the more effective  deployment of the Company's
capital.



                                       71

<PAGE> 72



      The following table presents certain  information  regarding the Company's
borrowed funds at or for the periods ended on the dates indicated:

<TABLE>
<CAPTION>


                                                        At or For the Year Ended June
                                                    -------------------------------------

                                                        1997        1996        1995
                                                        ----        ----        ----

                                                           (Dollars In Thousands)


<S>                                                   <C>         <C>          <C>  
FHLB - Advances:
----------------
  Average balance outstanding during period           $60,769     $103,333     $70,000


  Maximum amount outstanding at any month-end
     during period                                     70,000      120,000      70,000

  Balance outstanding at end of period                 50,000       70,000      70,000


  Weighted average interest rate during period          5.15%        5.36%       5.20%


  Weighted average interest rate at end of period       4.97%        5.20%       5.20%




Other Borrowings:
-----------------

  Average balance outstanding during period                --       24,719          --

  Maximum amount outstanding at any month-end
     during period                                         --       49,438          --

  Balance outstanding at end of period                     --           --          --

  Weighted average interest rate during period             --         5.48          --

  Weighted average interest rate at end of period          --           --          --



Total Borrowings:
-----------------

  Average balance outstanding during period           $60,769     $128,052     $70,000

  Maximum amount outstanding at any month-end
     during period                                     70,000      169,438      70,000

  Balance outstanding at end of period                 50,000       70,000      70,000

  Weighted average interest rate during period          5.15%        5.38%       5.20%

  Weighted average interest rate at end of period       4.97%        5.20%       5.20%

</TABLE>


                                       72

<PAGE> 73



LIQUIDITY

  Liquidity is actively managed to ensure sufficient funds are available to meet
the ongoing  needs of both the  Company in general  and the Bank in  particular.
Liquidity management includes projections of future sources and uses of funds to
ensure  the   availability   of  sufficient   liquid  reserves  to  provide  for
unanticipated circumstances.

For the Bank, the primary sources of liquidity are:

o deposits

o principal and interest  payments on loans,  mortgage  backed,  and  investment
  securities

o retained earnings

o FHLB advances

o other borrowings, including reverse repurchase agreements

For the Bank, the primary uses of funds include:

o loan originations

o customer drawdowns on lines of credit

o loan purchases

o customer withdrawals of deposits

o interest paid on liabilities

o operating expenses

     The Bank's investment  portfolio is structured to provide an ongoing source
of cash from scheduled payments and anticipated prepayments from mortgage backed
securities,  in addition to cash flows from periodic maturities,  typically from
securities  with balloon final  payments.  The Company's  strategy over the past
year  has  been  to  reinvest  available  monthly  cash  flows,  to  the  extent
economically and  operationally  feasible,  into new whole loan originations and
purchases, in order to bolster net interest income and better utilize the Bank's
strong risk based capital position.

     In the  coming  year,  the  Company's  management  intends  to  pursue  the
acquisition  of short term,  unsecured  lines of credit  from the  institution's
correspondent  banks, as an additional means to provide for contingent liquidity
needs.  However,  there can be no assurances that the Company will be successful
in securing such lines of credit.



                                       73

<PAGE> 74



     At June 30, 1997, the Bank maintained  untapped  borrowing  capacity at the
FHLB-San  Francisco in the amount of $178.2  million.  In  addition,  due to the
Company's  relatively  low loan to deposit ratio of 57.7% at June 30, 1997,  the
Company  maintained  significant excess collateral in both loans and securities;
collateral  which is available for either  liquidation or secured  borrowings in
order to meet future liquidity requirements.

     At June 30, 1997, cash and cash equivalents totaled $18.4 million, compared
to $100.6  million at June 30, 1996,  and $88.6  million at June 30,  1995.  The
figure at June 30, 1997 represented a more normalized  amount, as the figures at
the two prior year ends were each  inflated by  particular  events.  At June 30,
1996,  the Company had  recently  acquired  the three  branches  from  Hawthorne
Savings  Bank and had not yet  completed  the  longer  term  deployment  of cash
received. At June 30, 1995, the Company had just accomplished its initial public
offering,  and had also not yet  completed  the longer  term  investment  of the
proceeds.   It  is  management's   intention,   while  ensuring   adequate  cash
availability for operating needs, to constrain cash and cash equivalent balances
in favor of higher yielding assets,  subject to meeting all regulatory liquidity
requirements.

     OTS  regulations  currently  present two  liquidity  requirements.  The key
requirement  is based  upon  cash,  cash  equivalents,  and  certain  short term
investments  equaling at least 5.0% of deposits plus short term borrowings.  The
Bank's regulatory liquidity ratio for the month of June, 1997 was 5.93%, placing
the Bank in compliance.

     Liquidity  needs for HFB on a stand alone  basis are met through  available
cash, periodic earnings, and cash flows from its investment portfolio.


CAPITAL RESOURCES

     The Bank's position as a "well capitalized" financial institution under the
PCA regulatory  framework is further enhanced by the additional  capital present
at the HFB holding  company level.  The value of the  additional  capital in the
holding company was highlighted  during June, 1997, when HFB  downstreamed  $5.0
million in capital to the Bank in  preparation  for the financial  impact of the
retirement plan  terminations.  At June 30, 1997, the consolidated  GAAP capital
position of the Bank was $72.5  million,  while the  consolidated  GAAP  capital
position of the Company was $81.0 million.

     Despite  the   presence   of  capital  in  excess  of  current   regulatory
requirements,  the Company does not presently  intend to evaluate the initiation
of cash dividend  payments until the core  profitability of the Company improves
and the Company displays a more regular stream of improved earnings per share.



                                       74

<PAGE> 75



OFF BALANCE SHEET

  Over the past  decade,  the  Company  has  utilized  a  variety  of  financial
instruments  to control  its  interest  rate risk and  manage  its net  interest
margin,   including  off  balance  sheet  transactions  such  as  interest  rate
agreements  including swaps,  caps, and floors.  The Company  originally entered
into its  existing  off balance  sheet  positions  to  synthetically  adjust the
duration of the Company's  liabilities to more closely match that of its assets.
On July 10, 1995, the Bank  terminated four interest rate swap contracts with an
aggregate  notional amount of $60.0 million,  invoking a termination fee of $4.9
million which, for accounting  purposes,  is being amortized to interest expense
over the individual remaining contract lives of each swap.

  During the twelve  months  ended June 30,  1997,  the Company  amortized  $1.8
million of the deferred loss to interest  expense,  and charged interest expense
for $1.1  million  related  to  current  existing  interest  rate  swaps with an
aggregate notional amount of $35.0 million. The comparable figures for the prior
fiscal year were $2.0 million and $1.2 million,  respectively.  The year to year
decrease in  recognition of the deferred loss stemmed from the conclusion of the
amortization periods for two of the terminated swaps during fiscal 1997. The end
of the amortization period associated with another terminated swap will occur in
fiscal 1998, with the accounting  impact of the final  terminated swap finishing
in fiscal 1999. The conclusion of these amortization  periods will result in the
Company's  reporting a  reduction  in interest  expense  and  effective  cost of
funding, all else held constant.

  Additional information concerning the Company's active and terminated interest
rate swap positions is provided in the following table.

Active Interest Rate Swaps
--------------------------

<TABLE>
<CAPTION>

                                  Rate            Basis       Rate              Basis
           Notional   Maturity    Bank            Bank        Bank              Bank       Swap
           Amount       Date      Receives        Receives    Pays              Pays       Resets
           ------       ----      --------        --------    ----              ----       ------

        <S>           <C>       <C>              <C>          <C>             <C>        <C>
        $20,000,000   1/06/99   3 month LIBOR    Actual/360   9.800% Fixed    360/360    quarterly
        $15,000,000   1/30/99   3 month LIBOR    Actual/360   7.274% Fixed    360/360    quarterly
        -----------

Total   $35,000,000
        ===========       

</TABLE>


<TABLE>
<CAPTION>


Terminated Interest Rate Swaps
------------------------------

                                  Original      6/30/97        Loss          Daily
         Notional   Termination   Deferred     Deferred    Amortization       Loss
           Amount      Date        Loss           Loss      Completion    Amortization
           ------      ----        ----           ----      ----------    ------------
        <S>           <C>        <C>           <C>            <C>            <C> 
        $10,000,000   7/10/95      $557,730            $0     03/27/97         $890
        $20,000,000   7/10/95    $1,338,145            $0     04/30/97       $2,024
        $10,000,000   7/10/95      $631,816      $107,480     11/25/97         $726
        $20,000,000   7/10/95    $2,328,601      $962,842     11/21/98       $1,892
        ------------              ----------      --------

Total   $60,000,000              $4,856,292    $1,070,322
        ===========             ===========     =========

</TABLE>


                                       75

<PAGE> 76



IMPACT OF INFLATION AND CHANGING PRICES

      The Consolidated  Financial  Statements and Notes thereto presented herein
have been prepared in accordance  with GAAP,  which require the  measurement  of
most financial  positions and operating  results in terms of historical  dollars
without  considering the changes in the relative  purchasing power of money over
time due to inflation.  Unlike  industrial  companies,  the Company's assets and
liabilities  are  nearly all  monetary  in nature.  Consequently,  relative  and
absolute  interest rates present a greater  impact on the Company's  performance
and condition 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 price
of goods and services.  The Company's operating costs,  however,  are subject to
the impact of  inflation,  particularly  in the case of  salaries  and  benefits
costs, which typically constitute  approximately one-half of the Company's total
general & administrative expenses.


RECENT ACCOUNTING PRONOUNCEMENTS

      The Financial  Accounting  Standards Board ("FASB") has recently  released
the  following  Statements,  which are  discussed in footnote 1 to the Company's
consolidated  financial statements included in this report,  incorporated herein
by reference.

o     SFAS Number 128: "Earnings Per Share"

o     SFAS Number 129: "Disclosure Of Information About Capital Structure"

o     SFAS Number 130: "Reporting Comprehensive Income"

o     SFAS  Number 131: "Disclosures About Segments Of An Enterprise and Related
      Information"

      The above Statements are primarily related to the disclosure and reporting
requirements  applicable to the Company. As such, the Company's  management does
not believe that the adoption of these Statements will have a significant impact
upon the Company's financial condition or results of operations.



                                       76

<PAGE> 77



ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
                       INDEX TO FINANCIAL STATEMENTS


Independent Auditors' Report..............................................    78

Consolidated Statements of Financial Condition as of June 30, 1996 and 1997   79


Consolidated Statements of Operations for the
   Fiscal Years Ended June 30, 1995, 1996 and 1997........................    81

Consolidated Statements of Stockholders' Equity...........................    83

Consolidated Statements of Cash Flows for the
   Fiscal Years Ended June 30, 1995, 1996 and 1997........................    84

Notes to Consolidated Financial Statements................................    87




                                       77


<PAGE> 78



INDEPENDENT AUDITORS' REPORT



The Board of Directors
HF Bancorp, Inc.
Hemet, California


We have audited the accompanying consolidated statements of financial condition
of HF Bancorp, Inc. and subsidiary (the "Company") as of June 30, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HF Bancorp, Inc. and
subsidiary as of June 30, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1997
in conformity with generally accepted accounting principles.


/s/ Deloitte & Touche LLP


August 8, 1997



                                       78


<PAGE> 79



HF BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                                                        JUNE 30,
                                                                                          --------------------------------
                                                                                                 1997            1996
                                                                                                    (IN THOUSANDS)

<S>                                                                                            <C>             <C>       
ASSETS
Cash and cash equivalents                                                                      $ 18,411        $100,633
Securities available-for-sale, at estimated fair value:
  Investment securities (Note 3)                                                                144,997         173,171
  Mortgage-backed securities (Notes 4 and 11)                                                   109,493         100,259
Securities held-to-maturity, at amortized cost:
  Investment securities (Note 3)                                                                 26,794          34,666
  Mortgage-backed securities (Notes 4 and 11)                                                   151,369         159,262
Loans receivable (net of allowance for estimated loan losses of $4,780
  and $3,068 at June 30, 1997 and 1996) (Notes 4, 5 and 10)                                     484,334         225,161
Loans held-for-sale                                                                                 335
Accrued interest receivable (Note 6)                                                              7,332           6,260
Investment in capital stock of the Federal Home Loan
  Bank, at cost (Notes 4 and 10)                                                                  6,224           4,436
Premises and equipment, net (Note 7)                                                              8,289           6,578
Real estate owned, net (Note 8):
  Acquired through foreclosure                                                                    5,298           1,079
  Acquired for sale or investment                                                                   418             996
Intangible assets (Note 17)                                                                      14,471           6,642
Prepaid swap termination loss (Note 15)                                                           1,070           2,881
Prepaid pension plan expense (Note 13)                                                                            1,236
Other assets (Note 12)                                                                            5,914           3,656
                                                                                               --------        --------
    Total assets                                                                               $984,749        $826,916
                                                                                               ========        ========
</TABLE>






See notes to consolidated financial statements.

                                                   79



<PAGE> 80



HF BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                                                       JUNE 30,
                                                                                          --------------------------------
                                                                                                 1997            1996
                                                                                                  (IN THOUSANDS)

<S>                                                                                            <C>             <C>     
LIABILITIES AND STOKCHOLDERS' EQUITY
Liabilities:
  Deposit accounts (Note 9)                                                                    $839,655        $669,725
  Advances from the Federal Home Loan Bank (Note 10)                                             50,000          70,000
  Accounts payable and other liabilities (Note 13)                                                6,888           5,278
  Income taxes (Note 12)                                                                          7,179             842
                                                                                               --------        --------
    Total liabilities                                                                           903,722         745,845

Commitments and contingencies (Notes 13, 14 and 15)

Stockholders' Equity (Notes 2 and 13):
  Preferred stock, $.01 par value; 2,000,000 shares authorized;
    none issued
  Common stock, $.01 par value;  15,000,000 shares authorized;
   6,612,500 issued (1997 and 1996); and 
   6,281,875 outstanding (1997 and 1996)                                                             66              66
  Additional paid-in capital                                                                     51,355          51,113
  Retained earnings, substantially restricted                                                    38,441          40,957
  Net unrealized loss on securities available-for-sale, net of taxes                             (1,050)         (2,309)
  Deferred stock compensation                                                                    (4,437)         (5,408)
  Treasury stock, 330,625 shares                                                                 (3,348)         (3,348)
                                                                                               --------        --------    
    Total stockholders' equity                                                                   81,027          81,071
                                                                                               --------        --------
Total liabilities and stockholders' equity                                                     $984,749        $826,916
                                                                                               ========        ========
</TABLE>




See notes to consolidated financial statements.
                                                  80

<PAGE> 81



HF BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>



                                                                                          YEAR ENDED JUNE 30,
                                                                         -----------------------------------------------
                                                                                    1997          1996           1995
                                                                                              (IN THOUSANDS,
                                                                                          EXCEPT PER SHARE DATA)
<S>                                                                               <C>           <C>            <C>     
INTEREST INCOME:
Interest on loans                                                                 $ 32,407      $ 17,648       $ 16,345
Interest on mortgage-backed securities                                              16,969        19,113         18,191
Interest and dividends on investment securities                                     17,146        13,594          5,888
                                                                                   -------      --------       --------

    Total interest income                                                           66,522        50,355         40,424
                                                                                   -------      --------       --------

INTEREST EXPENSE:
Interest on deposit accounts (Note 9)                                               38,083        23,781         20,628
Interest on advances from the Federal Home Loan Bank 
  and other borrowings (Notes 10 and 11)                                             3,129         7,086          3,641
Net interest expense of hedging transactions (Note 15)                               2,872         3,192          4,526
                                                                                   -------       -------       --------
    Total interest expense                                                          44,084        34,059         28,795
                                                                                   -------       -------       --------

NET INTEREST INCOME BEFORE PROVISION FOR
  ESTIMATED LOAN LOSSES                                                             22,438        16,296         11,629

PROVISION FOR ESTIMATED LOAN LOSSES (Note 5)                                           384         1,054          1,202
                                                                                   -------       -------       --------

NET INTEREST INCOME AFTER PROVISION FOR
  ESTIMATED LOAN LOSSES                                                             22,054        15,242         10,427
                                                                                   -------       -------       --------

OTHER INCOME (EXPENSE):
Other loan fee income                                                                  359           193            199
Net loss on sales of investment securities available-for-sale 
  (Note 3)                                                                            (293)                         (13)
Net gain on sales of mortgage-backed securities 
  available-for-sale (Note 4)                                                        1,332
Gain on sales of loans                                                                  39
Loss from real estate operations, net (Note 8)                                        (310)         (498)          (747)
Amortization of intangible assets                                                   (1,979)
Savings fee income                                                                   1,402           620            613
Other income                                                                           255           450            124
                                                                                   -------       -------       --------

    Total other income                                                                 805           765            176
                                                                                   -------       -------       --------
</TABLE>



See notes to consolidated financial statements.
                                                 81


<PAGE> 82


HF BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>



                                                                                            YEAR ENDED JUNE 30,
                                                                       -------------------------------------------------------
                                                                                 1997             1996            1995
                                                                                             (IN THOUSANDS,
                                                                                         EXCEPT PER SHARE DATA)

<S>                                                                             <C>             <C>             <C>    
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and employee benefits (Note 13)                                        $  9,438        $  6,790        $ 5,803
Occupancy and equipment expense (Note 14)                                          3,435           2,023          2,020
FDIC insurance and other assessments                                               1,260           1,322          1,239
Legal and professional services                                                      780             489            378
Data processing service costs                                                      1,597             832            794
Other                                                                              2,870           1,475          1,415
                                                                                --------        --------        -------

                                                                                  19,380          12,931         11,649
                                                                                --------        --------        -------

Savings Association Insurance Fund special assessment                              4,757
Benefit plans termination expense (Note 13)                                        3,000
                                                                                --------

                                                                                   7,757
                                                                                --------

    Total general and administrative expenses                                     27,137          12,931         11,649
                                                                                --------        --------        -------

(LOSS) EARNINGS BEFORE INCOME TAX
   (BENEFIT) EXPENSE                                                              (4,278)          3,076         (1,046)

INCOME TAX (BENEFIT) EXPENSE (Note 12)                                            (1,762)          1,129           (353)
                                                                                --------        --------        -------

NET (LOSS) EARNINGS                                                             $ (2,516)       $  1,947        $  (693)
                                                                                ========        ========        =======
                                                                               
(LOSS) EARNINGS PER SHARE                                                       $  (0.44)       $   0.33           N/A
                                                                                ========        =========       =======
</TABLE>



See notes to consolidated financial statements.
                                                                   82

<PAGE> 83



HF BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
(IN THOUSANDS)

<TABLE>
<CAPTION>



                                                                                NET UNREALIZED GAIN
                                                             ADDITIONAL        (LOSS) ON SECURITIES DEFERRED               TOTAL
                          PREFERRED STOCK      COMMON STOCK   PAID-IN  RETAINED AVAILABLE-FOR-SALE,  STOCK   TREASURY  STOCKHOLDERS'
                       --------------------  ----------------  
                         SHARES     AMOUNT    SHARES   AMOUNT CAPITAL  EARNINGS    NET OF TAXES   COMPENSATION  STOCK     EQUITY

<S>                        <C>      <C>                <C>             <C>             <C>           <C>        <C>      <C>      
BALANCE, July 1, 1994      -        $  -        -      $  -       -    $39,703         $  (63)       $     -    $   -     $39,640

Net loss                                                                  (693)                                              (693)

Change in net unrealized 
  gain on securities 
  available-for-sale, 
  net of taxes                                                                            832                                 832

Issuance of common stock, 
  net of underwriting 
  expenses                                     6,613      66   51,004                                                      51,070

Common stock acquired by 
  ESOP                                                                                                (3,703)              (3,703)
                         -------   --------    ------   ----   ------   ------          -----         ------    -------  --------
BALANCE, June 30, 1995                         6,613      66   51,004   39,010            769         (3,703)              87,146

Net earnings                                                             1,947                                              1,947

Change in net unrealized 
  loss on securities
  available-for-sale, 
  net of taxes                                                                         (3,078)                             (3,078)

Purchase of common stock 
  for deferred stock 
  compensation plans                                                                                  (2,260)              (2,260)

Amortization of deferred 
  stock compensation                                              109                                    555                  664

Acquisition of treasury 
  stock                                                                                                          (3,348)   (3,348)
                          -------   --------    ------   ----  -------   ------        ------         ------     -------  -------
BALANCE, June 30, 1996                           6,613     66  51,113    40,957        (2,309)        (5,408)    (3,348)   81,071

Net loss                                                                 (2,516)                                           (2,516)

Change in net unrealized
  gain on securities
  available-for-sale, 
  net of taxes                                                                          1,259                               1,259

Amortization of deferred 
  stock compensation                                              242                                    971                1,213
                          -------   --------    ------   ----  -------  -------       -------        -------    -------   -------

BALANCE, June 30, 1997       -      $   -        6,613   $ 66  $51,355  $38,441       $(1,050)       $(4,437)   $(3,348)  $81,027
                          =======   ========    ======   ====  =======  =======       =======        =======    =======   =======

</TABLE>



See notes to consolidated financial statements.
                                               83

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HF BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                                                          YEAR ENDED JUNE 30,
                                                                          ----------------------------------------------
                                                                                  1997           1996           1995
                                                                                            (IN THOUSANDS)
<S>                                                                           <C>             <C>             <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings                                                           $ (2,516)       $  1,947        $  (693)
Adjustments to reconcile net (loss) earnings
  to net cash (used in) provided by operating activities:
  Provisions for estimated loan and real estate losses                             581           1,318           1,835
  Write-down of stripped mortgage-backed security - interest only                                                    8
  Direct write-offs from real estate operations                                     53             142             121
  Depreciation and amortization                                                  1,271             777             820
  Amortization of deferred loan fees                                              (655)           (383)           (331)
  Amortization (accretion) of premiums (discounts) on loans and
    investment and mortgage-backed securities                                      355             147            (155)
  Amortization of intangible assets                                              1,979
  Amortization of cost of interest rate caps and floors                                                            111
  Federal Home Loan Bank stock dividend                                           (379)           (299)           (219)
  Dividends from investments in mutual funds                                                                      (311)
  Loss on sale of investment securities available-for-sale                         293                              13
  Gain on sales of mortgage-backed securities                                   (1,332)
  Origination of loans held-for-sale                                            (5,009)
  Proceeds from sales of loans                                                   4,713
  Gain on sales of loans                                                           (39)
  Gain on sales of real estate                                                     (94)           (200)           (182)
  Gain on sales of premises and equipment                                           (6)            (10)
  Deferred income taxes                                                         (1,593)            455             219
  (Increase) decrease in accrued interest receivable                            (1,072)         (2,940)            599
  Increase (decrease) in accounts payable and other liabilities                  1,075         (29,480)         27,679
  Decrease (increase) in other assets                                            1,836          (9,153)         (1,829)
  Other, net                                                                     3,853           1,182             758
                                                                               -------         -------         -------

    Net cash provided by (used in) operating activities                          3,314         (36,497)         28,443

CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans receivable                                   (100,975)        (24,634)          3,017
Purchases of mortgage-backed securities held-to-maturity                       (15,039)                        (23,124)
Purchases of mortgage-backed securities available-for-sale                     (76,946)        (21,272)
Principal repayments on mortgage-backed securities held-to-maturity             21,586          24,429          14,627
Principal repayments on mortgage-backed securities available-for-sale           14,024          14,701           8,867
Proceeds from sales of mortgage-backed securities available-for-sale            56,083
Proceeds from maturities of mortgage-backed securities
  held-to-maturity                                                               1,144
Purchases of investment securities held-to-maturity                                            (90,804)        (19,052)
Proceeds from maturities and calls of investment securities held-to-
  maturity                                                                       7,000          16,000
Principal repayments on investment securities held-to-maturity                     648             595             168
Purchases of investment securities available-for-sale                          (37,968)       (122,000)

</TABLE>


See notes to consolidated financial statements.
                                                   84
 


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HF BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>




                                                                                          YEAR ENDED JUNE 30,
                                                                           --------------------------------------------
                                                                                  1997           1996            1995
                                                                                            (IN THOUSANDS)
<S>                                                                            <C>             <C>             <C>     
Proceeds from maturities and calls of investment securities
  available-for-sale                                                           $ 36,428        $ 52,000        $ 2,020
Principal repayments on investment securities available-for-sale                  5,555           7,134          9,353
Proceeds from sales of investment securities available-for-sale                  30,831                          4,329
Proceeds from sales of real estate                                                3,378           2,900          3,012
Additions to real estate held for investment                                         (6)           (123)        (2,203)
Proceeds from sale of premises and equipment                                         31              17          1,487
Additions to premises and equipment                                              (1,850)         (2,694)          (222)
Redemption of Federal Home Loan Bank stock                                                        1,800
Purchase of Federal Home Loan Bank stock                                                         (1,618)           (55)
Cash payment for acquisition, net of cash received                              (14,707)
                                                                               --------        --------        -------

    Net cash (used in) provided by investing activities                         (70,783)       (143,569)         2,224

CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of deposit accounts                                                                    185,189
Net increase (decrease) in deposit accounts                                       5,247          12,199         (8,622)
Advances from the Federal Home Loan Bank                                                         50,000
Repayment of advances from the Federal Home Loan Bank                           (20,000)        (50,000)
Proceeds from other borrowings                                                                   98,875
Repayment of other borrowings                                                                   (98,875)
Issuance of common stock, net of underwriting expenses and
  excluding common stock acquired by ESOP                                                                       47,367
Payments to acquire common stock for deferred stock
  compensation plans                                                                             (1,983)
Payments to acquire treasury stock                                                               (3,348)
                                                                               --------        --------        -------

    Net cash (used in) provided by financing activities                         (14,753)        192,057         38,745
                                                                               --------        --------        -------
NET (DECREASE) INCREASE IN CASH AND CASH
  EQUIVALENTS                                                                   (82,222)         11,991         69,412

CASH AND CASH EQUIVALENTS, beginning of year                                    100,633          88,642         19,230
                                                                               --------        --------        -------

CASH AND CASH EQUIVALENTS, end of year                                         $ 18,411        $100,633        $88,642
                                                                               ========        ========        =======

SUPPLEMENTAL CASH FLOW DISCLOSURES

  Cash paid during the year for:
  Interest on deposit accounts and other borrowings                             $ 8,660        $  9,840        $11,222
                                                                                =======        ========        =======
  Income taxes                                                                  $   291        $  1,420        $   475
                                                                                =======        ========        =======
</TABLE>

See notes to consolidated financial statements.
                                                    85

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CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                                                          YEAR ENDED JUNE 30,
                                                                           ---------------------------------------------
                                                                                  1997         1996           1995
                                                                                          (IN THOUSANDS)

<S>                                                                            <C>            <C>            <C>    
SUPPLEMENTAL DISCLOSURES OF NONCASH
  INVESTING AND FINANCING ACTIVITIES:
Real estate acquired through foreclosure                                       $  7,048       $ 1,931        $ 1,946
                                                                               ========       =======        =======
Loans to facilitate sale of real estate acquired through foreclosure           $  2,076       $   732        $ 1,860
                                                                               ========       =======        =======
Transfer of mortgage-backed securities held-to-maturity to
  available-for-sale classification                                                           $24,321
                                                                                              =======
Transfer of investment securities held-to-maturity to available-
  for-sale classification                                                      $    250       $59,022
                                                                               ========       =======  
Common stock acquired by ESOP                                                                                 $3,703
                                                                                                              ======
Purchase of Palm Springs Savings Bank:

   Fair value of assets purchased, excluding cash                              $184,321
   Liabilities assumed                                                         (169,614)
                                                                               --------
     Cash payment for acquisition, net of cash received                        $ 14,707
                                                                               ========
</TABLE>







See notes to consolidated financial statements.
                                                            86




<PAGE> 87


HF BANCORP, INC. AND SUBSIDIARY

                                                          
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
--------------------------------------------------------------------------------


1.      DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        BASIS FOR PRESENTATION - HF Bancorp, Inc. (the "Company") is a savings
        and loan holding company incorporated in the State of Delaware that was
        organized for the purpose of acquiring all of the capital stock of Hemet
        Federal Savings and Loan Association (the "Bank") upon its conversion
        from a federally chartered mutual savings association to a federally
        chartered stock savings association. On June 30, 1995, HF Bancorp, Inc.
        completed its sale of 6,612,500 shares of its common stock through
        subscription and community offerings to the Bank's depositors, Board of
        Directors, management, employees and the public and used approximately
        50% of the net proceeds from such sales to purchase all of the Bank's
        common stock issued in the Bank's conversion to stock form. Such
        business combination was accounted for at historical cost in a manner
        similar to a pooling of interests.

        At June 30, 1995, the Bank established a liquidation account in an
        amount equal to its equity, as reflected in the latest statement of
        financial condition used in the final conversion prospectus. The
        liquidation account will be maintained for the benefit of eligible
        account holders who continue to maintain their accounts at the Bank
        after the conversion. The liquidation account will be reduced annually
        to the extent that eligible account holders have reduced their
        qualifying deposits as of each anniversary date. Subsequent increases
        will not restore an eligible account holder's interest in the
        liquidation account. In the event of a complete liquidation of the Bank,
        each eligible account holder will be entitled to receive a distribution
        from the liquidation account in an amount proportionate to the current
        adjusted qualifying balances for accounts then held. The liquidation
        account balance was $14,800,155 at June 30, 1997.

        DESCRIPTION OF BUSINESS - The Company's business consists principally of
        the business of the Bank; however, it does have investments in loans,
        mortgage-backed securities and other investments from which interest
        income is earned (Note 18). Headquartered in Hemet, California, the Bank
        conducts business from its main office and three branch offices located
        in Hemet, California and from fifteen branch offices located in the
        Riverside and San Diego counties of California. The Bank is regulated by
        the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance
        Corporation (FDIC), and its deposits are insured up to the applicable
        limits under the Savings Association Insurance Fund (SAIF) of the FDIC.

        The Bank's revenues are derived from interest on its loan and
        mortgage-backed securities portfolios, interest and dividends on its
        investment securities, and its fee income associated with the provision
        of various customer services. The Bank's primary sources of funds are
        deposits, principal and interest payments on its assets portfolios, and
        various sources of wholesale borrowings including Federal Home Loan Bank
        (FHLB) advances and reverse repurchase agreements. The Bank's most
        significant operating expenditures are its staffing expenses and the
        costs associated with maintaining its branch network.


                                       87


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


                                                            
        PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
        include the accounts of HF Bancorp, Inc. and its wholly-owned subsidiary
        Hemet Federal Savings and Loan Association and its wholly-owned
        subsidiaries, HF Financial Corporation, Palm Springs Savings Bank
        Insurance Services, Inc., and Coachella Valley Financial Services
        Corporation, and HF Financial Corporation's wholly-owned subsidiary,
        First Hemet Corporation (collectively, the "Company"). First Hemet
        Corporation, who provides trustee services for the Bank, is engaged in
        real estate development, and receives commissions from the sale of
        mortgage life insurance, fire insurance and annuities. All material
        intercompany transactions, profits and balances have been eliminated.

        SECURITIES AVAILABLE-FOR-SALE - Securities to be held for indefinite
        periods of time, including securities that management intends to use as
        part of its asset/liability strategy that may be sold in response to
        changes in interest rates, prepayments or other factors, are classified
        as available-for-sale and carried at estimated fair value. Gains or
        losses on the sale of securities are determined on the
        specific-identification method. Premiums and discounts are recognized in
        interest income using the interest method over the period to maturity.
        Unrealized holding gains or losses, net of tax, for securities
        available-for-sale are excluded from earnings and reported as a net
        amount in a separate component of stockholders' equity until realized.

        SECURITIES HELD-TO-MATURITY - Securities held-to-maturity are recorded
        at cost with any discount accreted or premium amortized over the life of
        the security using the interest method. The Company has the positive
        intent and ability to hold these securities to maturity. The Company
        designates securities as held-to-maturity or available-for-sale upon
        acquisition.

        MORTGAGE-BACKED SECURITIES - Securities available-for-sale and
        held-to-maturity include privately issued mortgage-backed securities
        ("MBS") and collateralized mortgage obligations ("CMO's") that expose
        the Company to certain risks that are not inherent in agency securities,
        primarily credit risk and liquidity risk. Because of this added risk,
        private-issue securities have historically paid a greater rate of
        interest than agency securities, enhancing the overall yield of the
        portfolio.

        LOANS RECEIVABLE - During the period of origination, loans originated as
        held-for-investment are carried at amortized cost.

        Interest on loans is credited to income as earned and is accrued only if
        deemed collectible. Generally, interest is not accrued on loans
        delinquent three payments or more. Discounts or premiums on loans are
        included in loans receivable held-for-investment and are credited or
        charged to income (for loans that are probable of collection) on the
        interest method over the term of the loan, adjusted for anticipated
        prepayments.

        Loan origination and commitment fees and certain incremental direct loan
        origination costs are deferred, and the net fee or cost is amortized
        into interest income over the contractual lives of the related loans
        held-for-investment.


                                       88

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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------

        LOANS HELD-FOR-SALE - Loans originated and intended for sale in the
        secondary market are carried at the lower of aggregate cost or estimated
        fair values. Gains and losses on such loans are accounted for under the
        specific-identification method. Qualified loan origination fees and
        costs are retained and not amortized over the contractual lives of the
        related loans held-for-sale.

        DERIVATIVE FINANCIAL INSTRUMENTS - The Company has entered into various
        interest rate exchange agreements as part of its asset and liability
        management strategy. These exchange agreements consist of interest rate
        swaps, caps and floors. Swap income and expense is recorded using the
        accrual method and is classified as interest income or expense, net in
        the consolidated statements of operations. The cost of the interest rate
        floor and cap agreements has been capitalized and is being amortized to
        interest expense over the terms of the agreements.

        REAL ESTATE OWNED - Properties acquired through foreclosure are
        initially recorded at the lower of cost or fair value less estimated
        costs to sell through a charge to the allowance for estimated loan
        losses. Subsequent declines in value are charged to operations.
        Properties acquired for sale or investment are recorded at cost not to
        exceed fair value.

        Costs incurred that are directly related to the development of real
        estate are capitalized. Costs of holding real estate under development
        (principally interest and real estate taxes) are also capitalized.
        Provisions for estimated losses are charged to current operations.

        Recognition of gains on the sale of real estate is dependent on the
        transaction meeting certain criteria relating to the nature of the
        property sold and the terms of sale. Under certain circumstances, the
        gain, or a portion thereof, may be deferred until the criteria are met.
        Losses on disposition of real estate, including expenses incurred in
        connection with the disposition, are charged to operations.

        ALLOWANCES FOR ESTIMATED LOAN AND REAL ESTATE LOSSES - The Company
        accounts for impaired loans in accordance with Statement of Financial
        Accounting Standards (SFAS) No. 114, ACCOUNTING BY CREDITORS FOR
        IMPAIRMENT OF A LOAN, as amended by SFAS No. 118, ACCOUNTING BY
        CREDITORS FOR IMPAIRMENT OF A LOAN-INCOME RECOGNITION AND DISCLOSURES.
        SFAS No. 114 generally requires all creditors to account for impaired
        loans, except those loans that are accounted for at fair value or at the
        lower of cost or fair value, at the present value of the expected future
        cash flows discounted at the loan's effective interest rate or, as a
        practical expedient, at the loan's observable market price or the fair
        value of the collateral if the loan is collateral-dependent. SFAS No.
        114 indicates that a creditor should evaluate the collectibility of both
        contractual interest and contractual principal when assessing the need
        for a loss accrual.

        The Company considers a loan to be impaired when it is deemed probable
        by management that the Company will be unable to collect all contractual
        principal and interest payments in accordance with the terms of the
        original loan agreement. However, in determining when a loan is
        impaired, management also considers the loan documentation, current loan
        to value ratios, and the borrower's current financial position. Included
        as impaired loans are all loans delinquent 90 days or more and all


                                       89

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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        loans that have a specific loss allowance applied to adjust the loan to
        fair value. The accrual of interest on impaired loans is discontinued
        after a 90-day delinquent period or when, in management's opinion, the
        borrower will be unable to meet payments as they become due. When
        interest accrual is discontinued, all unpaid accrued interest is
        reversed. Interest income is subsequently recognized to the extent of
        full cash payments received and accepted. The Company applies the
        measurement provision of SFAS No. 114 to all loans in its portfolio.

        Valuation allowances for estimated loan and real estate losses are
        provided when any significant decline in value is deemed to have
        occurred. Specific loss allowances are established for loans that are
        deemed to be impaired, if the fair value of the loan or the collateral
        is estimated to be less than the gross carrying value of the loan. In
        estimating losses, management considers the estimated sales price, cost
        of refurbishment, payment of delinquent taxes, cost of holding the
        property (if an extended period is anticipated) and cost of disposal.
        Additionally, general valuation allowances for loan and real estate
        losses have been established. The estimates for these allowances are
        normally influenced by current economic conditions, actual loss
        experience, industry trends and other factors, such as the current
        economic conditions experienced in the area in which the Company's
        lending and real estate activities are concentrated. These estimates may
        result in either additions to or recaptures of the current provision,
        based on management's current evaluation of the loan and real estate
        portfolios. Accordingly, the amounts of such loan and real estate loss
        provisions (credits) can vary from period to period.

        In addition, various regulatory agencies, as an integral part of their
        examination process, periodically review the Bank's allowance for loan
        losses. Such agencies may require the Bank to recognize additions to the
        allowance based on judgments different from those of management.

        While management uses the best information available to make these
        estimates, future adjustments to the allowances may be necessary because
        of economic, operating, regulatory and other conditions that may be
        beyond the Company's control.

        PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
        accumulated depreciation and amortization. Depreciation and amortization
        are computed principally on the straight-line method over the estimated
        useful lives of the various assets.

        Depreciable lives used for the principal classes of assets are as
        follows:

              Furniture, fixtures and equipment                   3 to 10 years
              Buildings and leasehold improvements                5 to 40 years

        Effective July 1, 1996, the Company adopted SFAS No. 121, ACCOUNTING FOR
        THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
        DISPOSED OF. The statement establishes accounting standards of the
        impairment of long-lived assets that either will be held and used in
        operations or that will be disposed of. Accordingly, the Company
        periodically evaluates the recoverability of long-lived

                                       90


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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------

        assets, such as premises and equipment and intangible assets, to ensure
        the carrying value has not been impaired. The adoption of SFAS No. 121
        did not have a material impact on the results of operations or financial
        position of the Company.

        AMORTIZATION - The Company computes amortization on the straight-line
        method over the estimated useful life of the related asset.

        STOCKHOLDERS' EQUITY - The Company's financial statement equity includes
        tax bad debt deductions for which no provision for federal income taxes
        has been made. If distributions to shareholders are made in excess of
        current or accumulated earnings and profits or if stock of the Bank is
        partially redeemed, this tax bad debt reserve, which approximates
        $13,827,000 at June 30, 1997, will be recaptured into income at the
        then-prevailing federal income tax rate. The related unrecognized
        deferred tax liability is approximately $4,839,000. It is not
        contemplated that the Bank will make any disqualifying distributions
        that would result in the recapture of these reserves.

        During 1996, the Company acquired 330,625 shares of treasury stock for
        $3,348,000. Retained earnings are restricted for dividends in the amount
        of $3,348,000, the cost of the treasury stock acquired. No additional
        shares were repurchased during 1997.

        Earnings per share for the year ended June 30, 1997 and 1996 are based
        on the weighted average common shares and equivalents outstanding of
        5,755,859 and 5,953,823, respectively. The total issued shares of
        6,612,500 have been adjusted for the weighted average of: unallocated
        shares under the Employee Stock Ownership Plan (ESOP) of 359,526 and
        424,069, reduction of outstanding shares purchased for the stock
        compensation plan of 166,490 and 198,375 and acquisition of shares of
        treasury stock of 330,625 and 36,233, respectively.

        Earnings per share are not presented for periods prior to conversion to
        stock form, as no stock was outstanding.

        FEDERAL AND STATE INCOME TAXES - The Company accounts for income taxes
        under SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Accordingly, deferred
        tax assets and liabilities represent the tax effects of the temporary
        differences in the basis of certain assets and liabilities for tax and
        financial statement purposes, calculated at currently effective tax
        rates, of future deductible or taxable amounts attributable to events
        that have been recognized on a cumulative basis in the financial
        statements.

        USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
        - The preparation of the consolidated financial statements in conformity
        with generally accepted accounting principles requires management to
        make estimates and assumptions that affect the reported amounts of
        assets and liabilities and disclosure of contingent assets and
        liabilities at the date of the financial statements and the reported
        amounts of revenues and expenses during the reporting years. Actual
        results could differ from those estimates.


                                       91


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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        PRESENTATION OF CASH FLOWS - All highly-liquid instruments with original
        maturities of three months or less are considered to be cash
        equivalents. Cash equivalents consisted of federal funds sold of
        $3,355,000 and $88,460,000 at June 30, 1997 and 1996, respectively, and
        a repurchase agreement of $4,075,000 at June 30, 1996.

        RECENT ACCOUNTING DEVELOPMENTS - On July 1, 1996, the Company adopted
        SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which establishes
        financial accounting and reporting standards for stock-based employee
        compensation plans. This statement establishes a fair-value-based method
        of accounting for stock-based compensation plans. It encourages, but
        does not require, entities to adopt that method in place of the
        provisions of Accounting Principles Board (APB) Opinion No. 25,
        ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, for all arrangements under
        which employees receive shares of stock or other equity instruments of
        the employer or the employer incurs liabilities to employees in amounts
        based on the price of its stock. SFAS No. 123 also applies to
        transactions in which an entity issues its equity instruments to acquire
        goods or services from nonemployees. Those transactions must be
        accounted for based on the fair value of the consideration received or
        the fair value of the equity instruments issued, whichever is more
        reliably measurable.

        The Company has elected to continue to apply the accounting provisions
        of APB No. 25 to its stock-based compensation awards to employees and
        discloses the pro forma effect on net earnings and earnings per share as
        if the fair-value-based method of accounting defined in SFAS No. 123 had
        been applied (Note 13).

        As of December 31, 1996, the Company adopted SFAS No. 125, ACCOUNTING
        FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
        LIABILITIES, which was amended by SFAS No. 127, DEFERRAL OF THE
        EFFECTIVE DATE OF CERTAIN PROVISIONS OF FASB STATEMENT NO. 125. These
        statements provide accounting and reporting standards for transfers and
        servicing of financial assets and extinguishments of liabilities. The
        reporting requirements are effective for transfers and servicing
        occurring after December 31, 1996 or December 31, 1997 for certain
        transactions.

        In February 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE. The
        statement establishes standards for computing and presenting earnings
        per share (EPS) and applies to entities with publicly held common stock
        or potential common stock. This statement simplifies the standards for
        computing earnings per share previously found in APB Opinion No. 15,
        EARNINGS PER SHARE, and makes them comparable to international EPS
        standards. It replaces the presentation of primary EPS with a
        presentation of basic EPS. It also requires dual presentation of basic
        and diluted EPS on the face of the income statement for all entities
        with complex capital structures and requires a reconciliation of the
        numerator and denominator of the basic EPS computation to the numerator
        and denominator of the diluted EPS computation. The disclosure
        requirements of SFAS No. 128 are effective for periods ending after
        December 15, 1997. Management does not believe that the adoption of SFAS
        No. 128 will have a significant impact on its financial statements.


                                       92


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------

        In February 1997, the FASB issued SFAS No. 129, DISCLOSURE OF
        INFORMATION ABOUT CAPITAL STRUCTURE. The statement establishes standards
        for disclosing information about an entity's capital structure. The
        disclosure requirements of SFAS No. 129 are effective for periods ending
        after December 15, 1997. Management does not believe that the adoption
        of SFAS No. 129 will have a significant impact on its financial
        statements.

        In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
        INCOME and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
        RELATED INFORMATION. SFAS No. 130 establishes standards for reporting
        and display of comprehensive income and its components in a full set of
        general-purpose financial statements. SFAS No. 131 establishes standards
        of reporting by publicly-held business enterprises and disclosure of
        information about operating segments in annual financial statements and
        to a lesser extent, in interim financial reports issued to shareholders.
        SFAS Nos. 130 and 131 are effective for fiscal years beginning after
        December 15, 1997. As both SFAS Nos. 130 and 131 deal with financial
        statement disclosure, the Company does not anticipate the adoption of
        these new standards will have a material impact on its financial
        position or results of operations.

        RECLASSIFICATIONS - Certain reclassifications have been made to the 1996
        and 1995 financial statements to conform them to the 1997 presentation.


2.      REGULATORY MATTERS

        The Bank is subject to various regulatory capital requirements
        administered by the federal banking agencies. Failure to meet minimum
        capital requirements can initiate certain mandatory - and possibly
        additional discretionary - actions by regulators that, if undertaken,
        could have a direct material effect on the Bank's financial statements.
        Under capital adequacy guidelines and the regulatory framework for
        prompt corrective action, the Bank must meet specific capital guidelines
        that involve quantitative measures of the Bank's assets, liabilities,
        and certain off-balance sheet items as calculated under regulatory
        accounting practices. The Bank's capital amounts and classification are
        also subject to qualitative judgments by the regulators about
        components, risk weightings, and other factors.

        Quantitative measures established by regulation to ensure capital
        adequacy require the Bank to maintain minimum amounts and ratios (set
        forth in the table below) of total and Tier I capital (as defined in the
        regulations) to risk-weighted assets (as defined), and of Tier I capital
        (as defined) to average assets (as defined). Management believes, as of
        June 30, 1997, that the Bank meets all capital adequacy requirements to
        which it is subject.

        As of June 30, 1997, the most recent notification from the OTS
        categorized the Bank as well-capitalized under the regulatory framework
        for prompt corrective action. To be categorized as well-capitalized, the
        Bank must maintain minimum total risk-based, Tier I risk-based, and Tier
        I leverage ratios as set forth in the table. There are no conditions or
        events since that notification that management believes have changed the
        Bank's category.


                                       93

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


        The Bank's actual capital amounts and ratios are also presented in the
        table. No deductions were made for qualitative judgments by regulators.

                                                                                                              TO BE WELL-
                                                                                                           CAPITALIZED UNDER
                                                                                 FOR CAPITAL               PROMPT CORRECTIVE
                                                       ACTUAL                ADEQUACY PURPOSES             ACTION PROVISIONS
                                                  ----------------       -------------------------     ------------------------
                                                   AMOUNT   RATIO          AMOUNT         RATIO          AMOUNT         RATIO
                                                                         (DOLLARS IN THOUSANDS)
 
           <S>                                     <C>       <C>           <C>             <C>            <C>           <C>   
           As of June 30, 1997:
             Total Capital (to Risk Weighted
               Assets)                             $64,984   16.55%        $31,418         8.00%          $39,273       10.00%
             Core Capital (to Adjusted Tangible
               Assets)                              61,559    6.36%         38,729         4.00%           48,411        5.00%
             Tangible Capital (to Tangible
               Assets)                              61,559    6.36%         14,523         1.50%             N/A          N/A
             Tier I Capital (to Risk Weighted 
               Assets)                              61,559   15.67%          N/A            N/A            23,564        6.00%

           As of June 30, 1996:
             Total Capital (to Risk Weighted
               Assets)                              55,207   24.27%         18,196         8.00%           22,744       10.00%
             Core Capital (to Adjusted Tangible 
               Assets)                              53,363    6.66%         32,062         4.00%           40,077        5.00%
             Tangible Capital (to Tangible
               Assets)                              53,363    6.66%         12,023         1.50%            N/A           N/A 
             Tier I Capital (to Risk Weighted 
               Assets)                              53,363   23.46%           N/A           N/A            13,647        6.00%
</TABLE>

        Additionally, in accordance with the Financial Institutions Reform,
        Recovery and Enforcement Act ("FIRREA"), the OTS established regulations
        requiring the Bank to maintain (i) core capital equal to 3% of adjusted
        total assets, (ii) tangible capital equal to 1.5% of adjusted total
        assets, and (iii) total capital equal to 8% of risk-weighted assets.

        The following table summarizes the OTS regulatory capital requirements
        under FIRREA for the Bank at June 30, 1997.



                                       94


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FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

        As indicated in the tables, the Bank's capital levels exceed all three
        of the currently applicable minimum capital requirements.

                                                                       JUNE 30, 1997
                                     ----------------------------------------------------------------------------------
                                                                                                     CURRENT
                                         TANGIBLE CAPITAL             CORE CAPITAL             RISK-BASED CAPITAL
                                     -------------------------  -------------------------  ----------------------------
                                         AMOUNT         %           AMOUNT         %           AMOUNT          %
                                                                  (DOLLARS IN THOUSANDS)
           <S>                         <C>          <C>          <C>           <C>            <C>            <C>  
           Stockholder's equity
             per Bank financial
             statements                $ 72,540                  $ 72,540                     $ 72,540
           Adjustments:
             Net unrealized loss
               on debt securities
               available-for-sale         1,037                     1,037                        1,037
             Nonincludable
               subsidiaries              (1,026)                   (1,026)                      (1,026)
             Nonqualifying
               intangible assets        (10,992)                  (10,992)                     (10,992)
             Qualifying general
               valuation allowance                                                               3,425
                                       --------                  --------                     --------

           Regulatory capital            61,559     6.36 %         61,559      6.36 %           64,984       16.55 %
           Minimum capital
             requirement, under
             FIRREA                      14,523     1.50 %         38,729      4.00 %           31,418        8.00 %
                                       --------     ----         --------      ----           --------        ----

           Excess regulatory
             capital                   $ 47,036     4.86 %       $ 22,830      2.36 %         $ 33,566        8.55 %
                                       ========     ====         ========      ====           ========        ====
</TABLE>

        Management believes that, under the current regulations, the Bank will
        continue to meet its minimum capital requirements in the coming year.
        However, events beyond the control of the Bank, such as changing
        interest rates or a downturn in the economy in the areas where the Bank
        has most of its loans, could adversely affect future earnings and,
        consequently, the ability of the Bank to meet its future minimum capital
        requirements.

        OTS regulatory capital regulations require that all equity investments
        in equity securities and real property (except real property used as
        offices for the conduct of the business and certain real estate owned)
        be deducted from total capital for purposes of the risk-based capital
        standard. At June 30, 1997, the Bank's equity investments in real
        property and subsidiary subject to this deduction amounted to
        $1,026,000.


                                       95


<PAGE> 96




HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


3.      INVESTMENT SECURITIES

        Investment securities are summarized as follows:

                                                                                 JUNE 30, 1997
                                                       ----------------------------------------------------------------
                                                                         GROSS            GROSS          ESTIMATED
                                                          AMORTIZED     UNREALIZED       UNREALIZED        FAIR
                                                            COST         GAINS            LOSSES           VALUE
                                                                               (IN THOUSANDS)
           <S>                                           <C>              <C>             <C>            <C>
           AVAILABLE-FOR-SALE:
           Stripped mortgage-backed security -
             interest only                               $     228        $  -            $    -              228
           Collateralized mortgage obligations:
             Agency                                         10,887          24                             10,911
             Nonagency                                      16,393          13                33           16,373
           Federal agencies bonds/notes                    119,999                         2,514          117,485
                                                         ---------        ----            ------         --------
                                                         $ 147,507        $ 37            $2,547         $144,997
                                                         =========        ====            ======         ========

           HELD-TO-MATURITY:
           Collateralized mortgage obligations -
             Agency                                      $   5,794        $  9            $    -         $  5,803
           Federal agencies bonds/notes                     21,000                           246           20,754
                                                         ---------        ----            ------         --------
                                                         $  26,794        $  9            $  246         $ 26,557
                                                         =========        ====            ======         ========
</TABLE>



                                               96



<PAGE> 97

HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                                 JUNE 30, 1996
                                                     ------------------------------------------------------------------
                                                                           GROSS               GROSS          ESTIMATED
                                                        AMORTIZED        UNREALIZED          UNREALIZED         FAIR
                                                          COST             GAINS               LOSSES           VALUE
                                                                                  (IN THOUSANDS)

           <S>                                          <C>                <C>                 <C>            <C>  
           AVAILABLE-FOR-SALE:
           Collateralized mortgage obligations:
             Agency                                     $  13,385          $ 138               $     5        $  13,518
             Nonagency
                                                           19,495            244                                 19,739
           Investments in mutual funds
                                                           15,601                                  318           15,283
           Federal agencies bonds/notes                   129,006             26                 4,401          124,631
                                                        ---------          -----               -------        ---------
                                          
                                                        $ 177,487          $ 408               $ 4,724        $ 173,171
                                                        =========          =====               =======        =========

           HELD-TO-MATURITY:
           Stripped mortgage-backed security -
             interest only                              $     325          $  10               $     -        $     335
           Collateralized mortgage obligations -
             Agency                                         6,341                                  113            6,228
           Federal agencies bonds/notes                    28,000                                  721           27,279
                                                        ---------          -----               -------        ---------

                                                        $  34,666          $  10               $   834        $  33,842
                                                        =========          =====               =======        =========
</TABLE>

<TABLE>
<CAPTION>

                                                                                                          JUNE 30,
                                                                                                   ---------------------
                                                                                                      1997       1996

           <S>                                                                                        <C>        <C>  
           Weighted average interest rate at end of period:
             Investment securities held-to-maturity                                                   7.12%      7.04%
                                                                                                      =====      =====
             Investment securities available-for-sale                                                 7.24%      7.21%
                                                                                                      =====      =====
</TABLE>

        In conjunction with the implementation of SFAS No. 125, ACCOUNTING FOR
        TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
        LIABILITIES, during the quarter ended March 31, 1997, the Company
        transferred a $250,000 interest only security investment from the
        held-to-maturity to the available-for-sale classification.

        Gross realized gains and losses on sales of investment securities
        available-for-sale were $10,000 and $303,000, respectively, for the year
        ended June 30, 1997. There were no sales of investment securities during
        the year ended June 30, 1996. Gross realized losses from sales of
        investment securities available-for-sale were $13,000 for the year ended
        June 30, 1995.




                                                          97
<PAGE> 98



HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        As of June 30, 1997, the Company has pledged a $5,000,000 note with
        Union Bank of California in conjunction with certain deposit accounts.

        The Company's collateralized mortgage obligations are in the form of
        nonequity debt instruments with stated principal amounts and stated
        interest rate terms. On a monthly basis, the Company reviews the
        expected recoverability of its investment in the interest only,
        stripped, mortgage-backed security.

        At June 30, 1997, investment securities held-to-maturity, with an
        amortized cost of $26,757,000, have fixed interest rates and $37,000
        have adjustable interest rates. At June 30, 1997, investment securities
        available-for-sale, with an estimated fair value of $117,713,000, have
        fixed interest rates and $27,284,000 have adjustable interest rates.

        The scheduled maturities of federal agency bonds and notes
        held-to-maturity and available-for-sale at June 30, 1997 were as
        follows:

<TABLE>
<CAPTION>
                                                              HELD-TO-MATURITY                AVAILABLE-FOR-SALE
                                                                 SECURITIES                       SECURITIES
                                                        -----------------------------   -------------------------------
                                                                         ESTIMATED                       ESTIMATED
                                                          AMORTIZED        FAIR         AMORTIZED          FAIR
                                                             COST          VALUE          COST             VALUE
                                                                                (IN THOUSANDS)

           <S>                                             <C>           <C>            <C>              <C>      
           Due from one to five years                      $      -      $      -       $   2,999        $   2,988
           Due from five to ten years                        16,000        15,836           5,000            4,916
           Due after ten years                                5,000         4,918         112,000          109,581
                                                           --------      --------       ---------        ---------

                                                           $ 21,000      $ 20,754       $ 119,999        $ 117,485
                                                           =========     ========       =========        =========

</TABLE>


        Collateralized    mortgage    obligations   and   the   interest   only,
        mortgage-backed  security have been  excluded  from the above table,  as
        they are not due at a single maturity date.








                                                       98

<PAGE> 99



HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


4.      MORTGAGE-BACKED SECURITIES

        Mortgage-backed securities are summarized as follows:

<TABLE>
<CAPTION>
                                                                                  JUNE 30, 1997
                                                             ---------------------------------------------------------
                                                                                 GROSS        GROSS      ESTIMATED
                                                                   AMORTIZED   UNREALIZED   UNREALIZED      FAIR
                                                                     COST        GAINS        LOSSES        VALUE
                                                                                     (IN THOUSANDS)

           <S>                                                    <C>            <C>         <C>         <C>
           AVAILABLE-FOR-SALE:
           Federal National Mortgage Association                  $  23,822      $  496      $    3      $  24,315
           Federal Home Loan Mortgage Corporation                    30,454         325          12         30,767
           Government National Mortgage Association                  54,495          11          95         54,411
                                                                  ---------      ------      ------      ---------

                                                                  $ 108,771      $  832      $  110      $ 109,493
                                                                  =========      ======      ======      =========

           HELD-TO-MATURITY:
           Federal National Mortgage Association                  $  75,627      $   19      $3,456      $  72,190
           Federal Home Loan Mortgage Corporation                     6,581         242                      6,823
           Government National Mortgage Association                  69,161         796          63         69,894
                                                                   --------      ------      ------      ---------

                                                                  $ 151,369      $1,057      $3,519      $ 148,907
                                                                  =========      ======      ======      =========
</TABLE>


<TABLE>
<CAPTION>
                                                                                  JUNE 30, 1996
                                                            ----------------------------------------------------------
                                                                               GROSS          GROSS      ESTIMATED
                                                              AMORTIZED      UNREALIZED    UNREALIZED       FAIR
                                                                 COST          GAINS         LOSSES        VALUE
                                                                                 (IN THOUSANDS)
           <S>                                                    <C>            <C>         <C>         <C> 
           AVAILABLE-FOR-SALE:
           Federal National Mortgage Association                  $  69,149      $  804      $  903      $  69,050
           Federal Home Loan Mortgage Corporation                    14,953         167          47         15,073
           Government National Mortgage Association                  15,786         350                     16,136
                                                                  ---------      ------      ------         ------

                                                                  $  99,888      $1,321      $  950      $ 100,259
                                                                  =========      ======      ======      =========

           HELD-TO-MATURITY:
           Federal National Mortgage Association                  $  81,515      $   29      $6,859      $  74,685 
           Federal Home Loan Mortgage Corporation                    10,454         263                     10,717
           Government National Mortgage Association                  67,293         431         605         67,119
                                                                  ---------      ------      ------      ---------

                                                                  $ 159,262      $  723      $7,464      $ 152,521
                                                                  =========      ======      ======      =========

</TABLE>


                                                          99


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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        The weighted average interest rates on mortgage-backed securities
        held-to-maturity were 6.82% and 6.81% at June 30, 1997 and 1996,
        respectively. The weighted average interest rates on mortgage-backed
        securities available-for-sale were 7.14% and 7.46% at June 30, 1997 and
        1996, respectively.

        Gross realized gains and losses on sales of mortgage-backed securities
        were $1,461,000 and $129,000, respectively, for the year ended June 30,
        1997. There were no sales of mortgage-backed securities during the years
        ended June 30, 1996 and 1995.

        As of June 30, 1997 and 1996, the Company has pledged $292,999,000 and
        $211,154,000, respectively, of real estate loans, mortgage-backed
        securities and its investment in the capital stock of the FHLB of San
        Francisco in conjunction with certain advances from the FHLB (Note 10).
        Additionally, as of June 30, 1997 and 1996, the Company has pledged
        $7,422,000 and $8,346,000 of mortgage-backed securities in conjunction
        with interest rate swap transactions with other brokerage agencies (Note
        15).


5.      LOANS RECEIVABLE

        Loans receivable are summarized as follows:
<TABLE>
<CAPTION>

                                                                                                       JUNE 30,
                                                                                           --------------------------------
                                                                                                 1997            1996
                                                                                                   (IN THOUSANDS)

           <S>                                                                                 <C>             <C>
           Real estate loans - collateralized by trust deeds:
             One- to four-family                                                               $355,567        $162,730
             Multi-family                                                                        25,584           5,564
             Commercial                                                                          63,827          46,222
             Construction                                                                        31,566           9,459
             Acquisition, development and land                                                   13,827           7,355
                                                                                               --------        --------

               Real estate loans, gross                                                         490,371         231,330
                                                                                               --------        --------

           Other loans:
             Mobile home loans                                                                    3,642           4,158
             Commercial business loans                                                            5,936
             Home equity lines of credit                                                          3,597
             Loans on deposit accounts                                                            1,179             746
             Other consumer loans                                                                 1,607             149
                                                                                               --------        --------

               Other loans, gross                                                                15,961           5,053
                                                                                               --------        --------
    
</TABLE>

                                                       100

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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                                       JUNE 30,
                                                                                         --------------------------------
                                                                                                1997            1996
                                                                                                   (IN THOUSANDS)

                                                                               
           <S>                                                                             <C>               <C>    
           Less:
             Undisbursed loan funds                                                        $(15,841)         $ (5,584)

             Unamortized yield adjustments
                                                                                             (3,563)           (2,570)
             Unamortized loan premiums
                                                                                              2,186
             Allowance for estimated loan losses
                                                                                             (4,780)           (3,068)
                                                                                           --------          --------

                                                                                            (21,998)          (11,222)
                                                                                           --------          --------

                                                                                           $484,334          $225,161
                                                                                           ========          ========

           Weighted average nominal interest rate at end of period                           7.90%           8.09%
                                                                                             =====           =====

</TABLE>

        The Company serviced loans for others in the amount of $42,922,000 and
        $21,175,000 as of June 30, 1997 and 1996, respectively.

        As of June 30, 1997 and 1996, included in loans receivable are
        adjustable rate loans with principal balances of $347,974,000 and
        $107,696,000, respectively. Adjustable rate loans are indexed primarily
        to the Federal Home Loan Bank's Eleventh District cost of funds index
        and to various U.S. Treasury-related indices, particularly the U.S.
        Treasury One-Year Constant Maturities Index.

        Activity in the allowance for estimated loan losses is summarized as
        follows:
<TABLE>
<CAPTION>


                                                                                         YEAR ENDED JUNE 30,
                                                                                ----------------------------------
                                                                                   1997       1996       1995
                                                                                            (IN THOUSANDS)

           <S>                                                                    <C>        <C>        <C>   
           Balance, beginning of year                                             $3,068     $2,694     $2,682
           Provision for estimated loan losses                                       384      1,054      1,202
           Allowance established at acquisition
              of Palm Springs Savings Bank                                         2,963
           Charge-offs                                                            (1,712)      (680)    (1,190)
           Recoveries                                                                 77
                                                                                  ------     ------     ------

           Balance, end of year                                                   $4,780     $3,068     $2,694
                                                                                  ======     ======     ======

</TABLE>

                                                    101

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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------



        A summary of loan activities of executive officers and directors is as
        follows:
<TABLE>
<CAPTION>
                                                                                                    YEAR ENDED
                                                                                                     JUNE 30,
                                                                                              -----------------------
                                                                                                   1997      1996
                                                                                                     (IN THOUSANDS)

           <S>                                                                                     <C>       <C> 
           Balance, beginning of year                                                              $483      $455
           New loans                                                                                  7       116
           Repayments, including payoffs                                                           (129)      (88)
                                                                                                   ----      ----

           Balance, end of year                                                                    $361      $483
                                                                                                   ====      ====
</TABLE>


        The majority of the Company's loans are collateralized by real estate in
        southern California.

        Impairment of loans having recorded balances of $16,326,000 and
        $8,935,000 at June 30, 1997 and 1996, respectively, has been recognized
        in conformity with SFAS No. 114, as amended by SFAS No. 118. The average
        recorded investment in impaired loans during the years ended June 30,
        1997 and 1996 was $16,247,000 and $8,257,000, respectively. The total
        allowance for loan losses related to these loans was $1,503,000 and
        $1,224,000 at June 30, 1997 and 1996, respectively. At June 30, 1997 and
        1996, loans totaling $5,694,000 and $7,634,000, respectively, with
        specific reserves of $388,000 and $1,038,000, respectively, that the
        Company has classified as impaired, are performing in accordance with
        the terms of their contractual agreements. Interest income on impaired
        loans of $925,000 and $707,000 was recognized in the years ended June
        30, 1997 and 1996, respectively.

        Nonaccrual loans totaled $5,217,000, $1,301,000 and $2,281,000 as of
        June 30, 1997, 1996 and 1995, respectively. If nonaccrual loans had been
        performing in accordance with their original terms, the Company would
        have recorded interest income of $438,000, $124,000 and $177,000,
        instead of interest income actually recognized of $169,000, $83,000 and
        $100,000, for the years ended June 30, 1997, 1996 and 1995,
        respectively.


                                               102



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


6.      ACCRUED INTEREST RECEIVABLE

        Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>

                                                                                                      JUNE 30,
                                                                                             ---------------------------
                                                                                                 1997         1996
                                                                                                   (IN THOUSANDS)

           <S>                                                                                   <C>         <C>   
           Investment securities available-for-sale                                              $2,426      $2,722
           Mortgage-backed securities available-for-sale                                            678         682
           Investment securities held-to-maturity                                                   500         510
           Mortgage-backed securities held-to-maturity                                              873         944
           Loans receivable                                                                       2,854       1,364
           Other                                                                                      1          38
                                                                                                 ------      ------

                                                                                                 $7,332      $6,260
                                                                                                 ======      ======
</TABLE>


7.      PREMISES AND EQUIPMENT

        Premises and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                                                                                     JUNE 30,
                                                                                          ------------------------------
                                                                                               1997           1996
                                                                                                 (IN THOUSANDS)

           <S>                                                                                <C>            <C>   
           Land                                                                               $1,956         $1,729
           Buildings                                                                           5,464          4,870
           Leasehold improvements                                                              2,670          1,164
           Furniture, fixtures and equipment                                                   6,909          4,443
           Automobiles                                                                            95             86
                                                                                              ------         ------

                                                                                              17,094         12,292
           Less accumulated depreciation and amortization                                     (8,805)        (5,714)
                                                                                              ------         ------

                                                                                              $8,289         $6,578
                                                                                              ======         ====== 
</TABLE>


                                                   103


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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


8.      REAL ESTATE OWNED

        Real estate owned is summarized as follows:
<TABLE>
<CAPTION>

                                                                                                      JUNE 30,
                                                                                             ---------------------------
                                                                                                 1997         1996
                                                                                                   (IN THOUSANDS)

           <S>                                                                                  <C>          <C>    
           Real estate acquired through foreclosure                                             $ 6,318      $ 1,460
           Less allowance for estimated real estate losses                                       (1,020)        (381)
                                                                                                -------      -------

                                                                                                $ 5,298      $ 1,079
                                                                                                =======      =======


           Real estate acquired for sale or investment                                          $   995      $ 2,532
           Less allowance for estimated real estate losses                                         (577)      (1,536)
                                                                                                -------      ------- 

                                                                                                $   418      $   996
                                                                                                =======      =======
                                                                                                   
</TABLE>


        Activity in the allowance for estimated real estate losses is summarized
as follows:

<TABLE>
<CAPTION>


                                                                                          YEAR ENDED JUNE 30,
                                                                                ----------------------------------------
                                                                                    1997         1996         1995
                                                                                            (IN THOUSANDS)

           <S>                                                                    <C>         <C>         <C> 
           REAL ESTATE ACQUIRED THROUGH FORECLOSURE:     
           Balance, beginning of year                                             $   381     $   532     $   988 
           Provision for estimated real estate losses                                 148         123          91
           Charge-offs, net of recoveries                                                        (274)       (547)
           Allowance established at acquisition of
              Palm Springs Savings Bank                                               491
                                                                                  -------     -------     -------

           Balance, end of year                                                   $ 1,020     $   381     $   532
                                                                                  =======     =======     =======
                                                                                                   

           REAL ESTATE ACQUIRED FOR SALE OR INVESTMENT:
           Balance, beginning of year                                             $ 1,536     $ 1,395     $   853
           Provision for estimated real estate losses                                  49         141         542
           Charge-offs, net of recoveries                                          (1,008)
                                                                                  -------     -------     -------

           Balance, end of year                                                   $   577     $ 1,536     $ 1,395
                                                                                  =======     =======     =======

</TABLE>


                                                            104


<PAGE> 105


HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------

        Loss from real estate operations, net is summarized as follows:

<TABLE>
<CAPTION>
                                                                                           YEAR ENDED JUNE 30,
                                                                                   -------------------------------------
                                                                                       1997      1996       1995
                                                                                            (IN THOUSANDS)

           <S>                                                                        <C>       <C>        <C>  
           Gain on sales of real estate                                               $ 162     $ 200      $ 182
           Net real estate operating costs                                             (222)     (292)      (175)
           Provision for estimated real estate losses                                  (197)     (264)      (633)
           Direct write-offs                                                            (53)     (142)      (121)
                                                                                      -----     -----      -----

                                                                                      $(310)    $(498)     $(747)
                                                                                      =====     =====      =====
</TABLE>


9.      DEPOSIT ACCOUNTS

        Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>

                                                                                     JUNE 30,
                                                          ----------------------------------------------------------------
                                                                       1997                            1996
                                                          -----------------------------   --------------------------------
                                                                             WEIGHTED                         WEIGHTED
                                                                             AVERAGE                           AVERAGE
                                                                BALANCE      INTEREST         BALANCE          INTEREST
                                                             (IN THOUSANDS)    RATE        (IN THOUSANDS)        RATE

           <S>                                                 <C>             <C>           <C>                <C> 
           Noninterest-bearing accounts                        $ 30,855          - %         $  7,746             - %
           NOW accounts                                          42,916        1.08%           35,448           1.18%
           Savings accounts                                     111,742        3.22%           64,257           2.71%
           Money market investment accounts                      38,620        3.50%           33,434           3.23%
           Certificate accounts*                                615,522        5.70%          528,840           5.52%
                                                               --------       -----          --------           -----

                                                               $839,655                      $669,725
                                                               ========                      ========

           Weighted average nominal interest
             rate at period-end                                                4.84%                            4.86%
                                                                               =====                            =====


          *  At June 30, 1997 and 1996, included in certificate accounts are 980 and 724 accounts totaling $109,980,000
             and $82,598,000, respectively, with  balances of $100,000 or more.

</TABLE>



                                                           105

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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>



                                                                                        YEAR ENDED JUNE 30,
                                                                            --------------------------------------------
                                                                                1997           1996           1995
                                                                                          (IN THOUSANDS)

           <S>                                                               <C>            <C>            <C>      
           NOW accounts                                                      $     501      $     357      $     395
           Savings accounts                                                      3,195          1,499          1,269
           Money market investment accounts                                      1,063            879            935
           Certificate accounts                                                 33,324         21,046         18,029
                                                                             ---------      ---------      ---------

                                                                             $  38,083      $  23,781      $  20,628
                                                                             =========      =========      =========
</TABLE>

        Certificate accounts are scheduled to mature as follows:
<TABLE>
<CAPTION>

                                                                                                   JUNE 30,
                                                                                      --------------------------------
                                                                                            1997              1996
                                                                                                (IN THOUSANDS)

           <S>                                                                           <C>               <C> 
           Within one year                                                               $  471,996        $  428,902
           Within two years                                                                  92,100            64,333
           Within three years                                                                30,053            21,287
           Within four years                                                                  5,240             7,685
           Within five years                                                                 12,786             4,865
           Thereafter                                                                         3,347             1,768
                                                                                         ----------        ----------

                                                                                         $  615,522        $  528,840
                                                                                         ==========        ==========
</TABLE>






                                                           106
<PAGE> 107

HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


10.     ADVANCES FROM THE FEDERAL HOME LOAN BANK

        At June 30, 1997, advances of $50,000,000 from the FHLB are scheduled to
        mature in 1998.

        The following summarizes activities in advances from the FHLB:
<TABLE>
<CAPTION>


                                                                                                   YEAR ENDED
                                                                                                    JUNE 30,
                                                                                         -------------------------------
                                                                                              1997           1996
                                                                                             (DOLLARS IN THOUSANDS)

           <S>                                                                              <C>            <C> 
           Average amount outstanding during the period                                     $  60,769      $  103,333
                                                                                            =========      ==========

           Maximum amount outstanding at any month-end
              during the period                                                             $  70,000      $  120,000
                                                                                            =========      ==========

           Weighted average interest rate during the period                                   5.15 %          5.36%
                                                                                              =====           ==== 

           Weighted average interest rate at the end of the period                            4.97 %          5.20%
                                                                                              ====            ==== 
</TABLE>


11.     OTHER BORROWINGS

        From time to time, the Company enters into reverse repurchase and dollar
        reverse   repurchase   agreements  on  investment  and   mortgage-backed
        securities.

<TABLE>
<CAPTION>


        The following is a summary of  activities in such  agreements as of June
        30, 1996:

           <S>                                                                                               <C>     
           Average amount outstanding during the period                                                      $ 24,719
                                                                                                             ========

           Maximum amount outstanding at any month-end
             during the period                                                                               $ 49,438
                                                                                                             ========

           Weighted average interest rate during the period                                                    5.48 %
                                                                                                               ====

</TABLE>
        The Company enters into reverse repurchase and dollar reverse repurchase
        agreements only with primary government  securities dealers.  The lender
        maintains possession of the collateral securing these agreements.







                                                     107


<PAGE> 108



HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


12.     INCOME TAXES

        Income taxes are summarized as follows:
<TABLE>
<CAPTION>



                                                                                          YEAR ENDED JUNE 30,
                                                                                ----------------------------------------
                                                                                   1997        1996         1995
                                                                                            (IN THOUSANDS)

           <S>                                                                   <C>          <C>         <C>    
           Current tax (benefit) expense:
             Federal                                                             $  (172)     $  632      $ (574)
             State
                                                                                       3          42           2
                                                                                 -------      -------      -----

                                                                                    (169)        674        (572)

           Deferred tax (benefit) expense:
             Federal                                                              (1,118)        284         219
             State                                                                  (475)        171
                                                                                 -------      ------       -----

                                                                                  (1,593)        455         219
                                                                                 -------      ------       -----

                                                                                 $(1,762)     $1,129       $(353)
                                                                                 =======      ======       =====

</TABLE>


        A  reconciliation  from the  statutory  federal  income  tax rate to the
        consolidated effective income tax rate follows:

<TABLE>
<CAPTION>

                                                                                     

                                                                                          YEAR ENDED JUNE 30,
                                                                                ----------------------------------------
                                                                                   1997        1996         1995
                                                                                            (IN THOUSANDS)

         <S>                                                                       <C>          <C>        <C>  
         Statutory federal inicome tax rate                                        (35.0)%      35.0%      (35.0)%
         State franchise tax, net of federal income tax benefit                     (7.3)        4.5         0.2
         Other                                                                       1.1        (1.8)        1.1
                                                                                  ------       -----      ------
                                                                                   (41.2)%      37.7%      (33.7)%
                                                                                  ======       =====      ======


</TABLE>



                                                  108

<PAGE> 109


HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        At June  30,  1997,  1996  and  1995,  the  deferred  components  of the
        Company's  total  income tax  liabilities  (assets),  as included in the
        consolidated  statements  of  financial  condition,  are  summarized  as
        follows:

<TABLE>
<CAPTION>

                                                                                        YEAR ENDED JUNE 30,
                                                                             -------------------------------------------
                                                                                 1997          1996           1995
                                                                                           (IN THOUSANDS)

<S>                                                                           <C>           <C>            <C>     
           Deferred tax liabilities:
             Federal Home Loan Bank stock dividends                           $  1,465      $  1,300       $  1,164
             Depreciation                                                                        359            383
             Prepaid pension, net                                                                136            100
             Capitalized interest                                                   15            47             48
             Loan fees                                                             122
             Net unrealized gains on securities available-for-sale                                              548
             Purchase accounting adjustments - Palm Springs                      4,404
             Other                                                                 276           354            145
                                                                              --------       -------        -------

                 Gross deferred tax liabilities                                  6,282         2,196          2,388


           Deferred tax assets:
             Net unrealized losses on securities available-for-sale               (738)       (1,635)
             Bad debt reserve                                                   (1,479)         (893)          (727)
             Loan fees                                                                          (405)          (622)
             Provision for losses                                                 (262)         (700)          (636)
             Premium/discount on loans                                                          (104)          (104)
             Real estate investments                                                             (72)           (72)
             State taxes                                                          (180)          (29)
             California net operating loss                                        (209)                        (190)
             Deferred gain on branch sale                                         (191)         (205)
             Depreciation                                                         (391)
             Prepaid pension, net                                               (1,655)
             Goodwill - Hawthorne                                                 (212)
             Other                                                                  (4)
                                                                              --------       -------        -------

               Gross deferred tax assets                                        (5,321)       (4,043)        (2,351)

           Valuation allowance                                                     424           424            268
                                                                              --------       -------        -------

               Net deferred tax liability (asset)                             $  1,385       $(1,423)       $   305
                                                                              ========       =======        ======= 
</TABLE>






                                                         109
<PAGE> 110


HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        Gross deferred tax assets are primarily  expected to be realized in 1998
        and 1999.

        Valuation allowances under SFAS No. 109 have been provided for state
        purposes to the extent uncertainty exists as to the recoverability of
        the deferred tax assets. As of June 30, 1997, 1996 and 1995, valuation
        allowances were provided for a portion of the net deferred state tax
        assets. Future reductions in the valuation allowance will be dependent
        upon a more-likely-than-not expectation of recovery of tax benefits.

13.     BENEFIT PLANS

        DEFINED BENEFIT PLAN - The Bank maintains a noncontributory,
        defined-benefit pension plan covering all employees who meet both
        minimum age and length of service requirements and a nonqualified,
        supplemental benefit plan for certain qualified officers. The Company
        has determined to terminate the defined benefit plan. As a result of the
        termination, an additional $2,991,000 in expense was recorded as of June
        30, 1997, including the acceleration of expense recognition of
        $1,236,000 in prepaid pension plan expense. Termination of the Plan is
        expected in fiscal year ended June 30, 1998. Costs under the
        defined-benefit pension plan are calculated and funded under the
        Projected Unit Credit Actuarial Cost Method, which includes amortization
        of past service costs. The Bank's funding policy is to fund pension
        costs within the minimum/maximum contribution permitted under Employment
        Retirement Income Security Act of 1974 ("ERISA"), as calculated by the
        actuaries.

        Net pension cost consists of the following:

<TABLE>
<CAPTION>

                                                                                          YEAR ENDED JUNE 30,
                                                                                 ------------------------------------
                                                                                       1997       1996       1995
                                                                                              (IN THOUSANDS)

           <S>                                                                       <C>          <C>        <C>
           Service cost benefits earned during the year                              $  202       $348       $387
           Interest cost on projected benefit obligations                               607        524        483
           Actual return on Plan assets                                                (640)      (971)      (817)
           Net amortization and deferral                                                (45)       434        456
           Adjustment to recognize the effect of curtailment                          2,891
                                                                                     ------       ----       ----

                                                                                     $3,015       $335       $509
                                                                                     ======       ====       ====


</TABLE>




                                                        110

<PAGE>  111


HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        The following  table sets forth the funded status of the Defined Benefit
        Plan:

<TABLE>
<CAPTION>


                                                                                        YEAR ENDED JUNE 30,
                                                                          --------------------------------------------
                                                                                1997          1996           1995
                                                                                          (IN THOUSANDS)
                                          
           <S>                                                               <C>            <C>            <C>  
           Accumulated benefit obligation:
             Vested                                                          $(10,125)      $(6,608)       $(5,772)
             Nonvested                                                         (1,040)         (323)          (328)

                                                                             $(11,165)      $(6,931)       $(6,100)
                                                                             ========       =======        =======

           Projected benefit obligation for service to June 30               $(11,165)      $(8,422)       $(7,102)
           Plan assets at fair value at June 30                                 8,593         8,252          7,148
                                                                             --------       -------        -------
                                                                              
           Projected benefit obligation (in excess of) less than
             Plan assets                                                       (2,572)         (170)            46

           Unrecognized net loss                                                1,367         1,382          1,024
           Unrecognized net asset at July 1, 1986 being recognized
              over 15 years                                                       (71)          (89)          (106)
           Unrecognized prior service cost                                                      113            147
                                                                             --------       -------        -------

           (Pension liability) prepaid pension cost recognized in
             consolidated statements of financial condition                  $ (1,276)      $ 1,236        $ 1,111
                                                                             ========       =======        =======

</TABLE>


        The weighted average discount rate used in determining the actuarial
        present value of the projected benefit obligation was 6.4% in 1997 and
        7.5% in 1996 and 1995. The expected long-term rate of return on assets
        was 8.5% in 1997, 1996 and 1995.

        EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST - The Company established for
        eligible employees an Employee Stock Ownership Plan and Trust (ESOP)
        which became effective upon the conversion of the Bank from a mutual to
        a stock association (the Conversion). Eligible full-time and eligible
        part-time employees employed with the Bank who have been credited with
        at least 1,000 hours during a 12-month period and who have attained age
        21 are eligible to participate.

        The ESOP subscribed for 7% (or 462,875) of the shares of common stock
        issued in the Conversion pursuant to the subscription rights granted
        under the ESOP plan. On June 30, 1995, the ESOP borrowed $3,703,000 from
        the Company in order to fund the purchase of common stock. The loan to
        the ESOP will be repaid principally from the Company's contributions to
        the ESOP over a period of


                                                        111

<PAGE> 112

HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        ten years and the collateral for the loan is the common stock purchased
        by the ESOP. The interest rate for the ESOP loan is 9%. At June 30, 1997
        and 1996, the outstanding balance of the loan was $2,962,400 and
        $3,332,700 and a total of 100,231 and 46,288, respectively, shares of
        common stock were cumulatively allocated to employee accounts.

        Shares purchased by the ESOP will be held in a suspense account for
        allocation among participants as the loan is repaid. Contributions to
        the ESOP and shares released from the suspense account in an amount
        proportional to the repayment of the ESOP loan will be allocated among
        participants on the basis of compensation in the year of allocations.
        Benefits generally become 100% vested after an employee's five years of
        credited service. Prior to the completion of five years of credited
        service, a participant who terminates employment for reasons other than
        death, retirement or disability will not receive any benefit. Benefits
        are payable upon death, retirement or disability.

        The expenses related to the ESOP for the year ended June 30, 1997 and
        1996 were approximately $708,000 and $665,000, respectively. At June 30,
        1997 and 1996, unearned compensation related to the ESOP approximated
        $2,651,000 and $3,147,000, respectively, and is shown as a reduction of
        stockholders' equity in the accompanying consolidated statements of
        financial condition.

        DEFERRED COMPENSATION PLAN - The Bank maintains a nonqualified deferred
        compensation plan (Deferred Compensation Plan) with certain directors,
        whereby such directors may defer all or a portion of compensation
        otherwise currently payable in exchange for the receipt at the time they
        cease to serve as directors of the Bank, with a benefit at the time of
        retirement as provided for in the Plan. Amounts deferred under this
        program will earn interest, compounded annually, based on the highest
        certificate account rate (excluding accounts requiring deposits of
        $100,000 or more) in effect on January 1 of each year of the deferral or
        distribution period. Directors may defer compensation for any number of
        years, designated in advance. The Deferred Compensation Plan provides
        that benefits are to be paid in a lump sum or annual installments over a
        period of years determined by the Bank, at its discretion. The Deferred
        Compensation Plan also provides that directors may elect to have their
        deferred compensation, or any portion thereof, invested in stock of the
        Company. Included in accounts payable and other liabilities at June 30,
        1997 and 1996 are $332,000 and $524,000, respectively, of deferrals
        related to the Deferred Compensation Plan.

        DIRECTORS' RETIREMENT PLAN - The Bank and Company maintain a retirement
        plan for those directors who have completed ten years of service or who
        have both attained the age of 65 and had five years of consecutive
        service as a director (Directors' Retirement Plan). The Directors'
        Retirement Plan provides that a participant will receive monthly
        benefits until death, equal to 60% of the basic monthly director's fee
        such participant received for the last month in which they served as
        director. Upon the retired participant's death, 50% of their benefit
        shall continue to be paid to their surviving spouse for the balance of
        the spouse's life. If the participant dies while still serving as a
        director, 50% of the monthly retirement benefit that said participant
        would have received had they retired the day

                                           112


<PAGE> 113


HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        immediately  preceding  the date of their  death  shall be paid to their
        surviving  spouse for the balance of the spouse's  life.  The Directors'
        Retirement   Plan  was   terminated   effective   March  31,  1995,  and
        consequently,  no new directors  will be entitled to benefits under this
        plan.

        Net pension  cost for the  Director's  Retirement  Plan  consists of the
        following:

<TABLE>
<CAPTION>


                                                                                          YEAR ENDED JUNE 30,
                                                                                    ------------------------------
                                                                                       1997      1996      1995
                                                                                            (IN THOUSANDS)

          <S>                                                                           <C>       <C>      <C> 
           Service cost benefits earned during the year                                 $  9      $  8     $ 18
           Interest cost on projected benefit obligations                                 46        44       46
           Net amortization and deferral                                                  15         9        2
                                                                                        ----      ----     ----

                                                                                        $ 70      $ 61     $ 66
                                                                                        ====      ====     ====

</TABLE>

        The  following  table  sets forth the  funded  status of the  Directors'
        Retirement Plan:

<TABLE>
<CAPTION>



                                                                                                 JUNE 30,
                                                                                   -----------------------------------
                                                                                      1997       1996        1995
                                                                                              (IN THOUSANDS)

           <S>                                                                       <C>        <C>        <C> 
           Accumulated benefit obligation -     
             Vested                                                                  $ (594)    $ (602)    $ (659)
                                                                                     -------     -------    -------

                                                                                     $ (594)    $ (602)     $ (659)
                                                                                     =======    ======      ====== 

           Projected benefit obligation for service to June 30                       $ (642)    $ (638)     $ (659)
           Unrecognized net gain                                                        (18)       (37)        (23)
           Unrecognized net obligation at July 1, 1986
             being recognized over 15 years
                                                                                         62         78          93
                                                                                     ------     ------      ------

           Pension liability cost recognized in consolidated
             statements of financial condition                                       $ (598)    $ (597)     $ (589)
                                                                                     ======     ======      ====== 
</TABLE>


        The weighted  average  discount rate used in  determining  the actuarial
        present value of the projected benefit obligation was 7.5% in 1997, 1996
        and 1995.

                                                           113

<PAGE> 114

HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------

        RETIREMENT RESTORATION PLAN - The Bank has implemented a nonqualified
        retirement plan to provide any qualifying executive with additional
        retirement benefits. The Company has determined to terminate the
        Retirement Restoration Plan. As a result of the termination, an
        additional $9,000 in expense was recorded as of June 30, 1997.
        Termination of the Retirement Restoration Plan is expected in fiscal
        year ended June 30, 1998. The benefits provided under such Plan will
        make up the benefits lost to the participant due to application of
        limitations on compensation and maximum benefits applicable to the
        Bank's tax-qualified, defined-benefit plan. Benefits will be provided
        under the Retirement Restoration Plan at the same time and in the same
        form as the benefits will be provided under the Bank's tax-qualified,
        defined-benefit plan.

        Net pension cost for the  Retirement  Restoration  Plan  consists of the
        following:

<TABLE>
<CAPTION>

                                                                                                         JUNE 30,
                                                                                                 ------------------------
                                                                                                     1997        1996
                                                                                                      (IN THOUSANDS)

           <S>                                                                                        <C>         <C>
           Immediate recognition of initial liability                                                 $ -         $87
           Interest cost on projected benefit obligations                                               7
           Adjustment to recognize the effect of curtailment                                            7
                                                                                                      ---         ---

                                                                                                      $14         $87
                                                                                                      ===         ===
</TABLE>


        The  following  table  sets forth the  funded  status of the  Retirement
        Restoration Plan:
<TABLE>
<CAPTION>

                                                                                                        JUNE 30,
                                                                                                ------------------------
                                                                                                    1997        1996
                                                                                                    (IN THOUSANDS)



           <S>                                                                                   <C>         <C>    
           Accumulated benefit obligation -
             Vested                                                                              $  (101)    $  (87)
                                                                                                 -------     ------

                                                                                                 $  (101)    $  (87)
                                                                                                 =======     ======

           Projected benefit obligation for service to June 30                                   $  (101)    $  (87)
                                                                                                --------     ------

           Pension liability cost recognized in consolidated
             statement of financial condition                                                    $  (101)    $ (87)
                                                                                                 =======     =====

</TABLE>



                                                        114

<PAGE> 115


HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        The weighted average discount rate used in determining the actuarial
        present value of the projected benefit obligation was 7.5% in 1997 and
        1996.

        STOCK BENEFIT PLANS - The Company maintains the amended and restated HF
        Bancorp, Inc. Stock-Based Incentive Plan (the Plan), which amends the HF
        Bancorp, Inc. 1995 Master Stock Option Plan and the 1995 Hemet Federal
        Savings & Loan Association 1995 Master Stock Compensation Plan, which
        were both adopted on January 11, 1996.

        The Company applies Accounting Principles Board (APB) Opinion No. 25 and
        related interpretations in accounting for the Plan. Under APB No. 25,
        compensation cost for stock options is measured as the excess, if any,
        of the fair market value of the Company's stock at the date of grant
        over the amount the director or employee must pay to acquire the stock.
        Because the Plan provides for the issuance of options at a price of no
        less than the fair market value at the date of grant, no compensation
        cost has been recognized for the stock option components of the Plan.

        Had compensation costs for the stock option components of the Plan been
        determined based upon the fair value at the date of grant consistent
        with SFAS No. 123, Accounting For Stock Based Compensation, the
        Company's net (loss) income and (loss) earnings per share would have
        been (increased) reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>


                                                                                                YEAR ENDED JUNE 30,
                                                                                        ---------------------------------
                                                                                             1997             1996
                                                                                                 (IN THOUSANDS,
                                                                                             EXCEPT PER SHARE DATA)

                                                                             

           <S>                                                                            <C>             <C>  
           Net (loss) income:
             As reported                                                                  $   (2,516)     $    1,947
             Pro forma
                                                                                              (2,790)          1,831

           Primary (loss) earnings per common share:
             As reported                                                                  $    (0.44)     $     0.33
             Pro forma                                                                    $    (0.48)     $     0.31

           Shares utilized in EPS calculations                                             5,755,859       5,953,823

</TABLE>


        STOCK OPTION COMPONENT OF THE PLAN - Pursuant to the terms of the Plan,
        661,250 shares of HF Bancorp, Inc. common stock are reserved for
        issuance under the stock option components of the Plan. Of these 661,250
        shares, 547,550 are reserved for grant as Incentive Stock Options and
        113,700 shares are reserved for grant as Nonstatutory Stock Options. To
        the extent that options are granted under the Plan, the shares
        underlying such options are unavailable for any other use including
        future grants under the Plan, except that options which terminate,
        expire, or are forfeited without having been exercised may be recycled
        into new grants.


                                                                     115

<PAGE> 116

HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------



        NONSTATUTORY STOCK OPTIONS - Nonstatutory Stock Options may be granted
        to employees and outside directors. The exercise price of each
        Nonstatutory Stock Option is determined by the Board of Directors; and
        may not be less than the fair market value of HF Bancorp, Inc. common
        stock on the date of grant. The term of each Nonstatutory Stock Option
        shall be determined by the Board of Directors, but in no case shall such
        term exceed 10 years from the date of grant. Nonstatutory Stock Options
        vest and are exercisable as determined by the Board of Directors.
        However, all Nonstatutory Options granted will be immediately vested and
        exercisable in the event the optionee terminates his employment due to
        death, disability, or a change in control of Hemet Federal Savings &
        Loan or HF Bancorp, Inc. In the event optionee's employment is
        terminated for cause, all optionee rights under the optionee's
        Nonstatutory Options expire immediately. In the event optionee
        terminates his employment due to reasons other than death, disability, a
        change in control, and termination for cause, optionee's Nonstatutory
        Stock Options shall be exercisable only to the extent that such options
        were exercisable at the date of termination, and for a period of three
        months following termination except in the case of retirement, which
        provides for an exercise period of twelve months following termination.

        The Nonstatutory Stock Options do not provide for the granting of stock
        appreciation rights; however, all options were granted in tandem with
        limited stock appreciation rights exercisable in the event of a change
        in control of Hemet Federal Savings & Loan or HF Bancorp, Inc., as
        defined by the Plan.

        INCENTIVE STOCK OPTIONS - Incentive Stock Options may be granted to
        employees. The exercise price of each Incentive Stock Option is
        determined by the Board of Directors, but may not be less than the fair
        market value of HF Bancorp, Inc. common stock on the date of grant. The
        term of each Incentive Stock Option shall be determined by the Board of
        Directors, but in no case shall such term exceed 10 years from the date
        of grant. Incentive Stock Options vest and are exercisable as determined
        by the Board of Directors. The Board of Directors may select various
        conditions or performance goals which must be satisfied prior to the
        Incentive Stock Options' becoming exercisable. Incentive Stock Options
        are designed to comply with Section 422 of the Internal Revenue Code
        (IRC). However, any Incentive Stock Options failing to qualify under the
        IRC are converted to Nonstatutory Stock Options.

        All Incentive Stock Options granted will be immediately vested and
        exercisable in the event the optionee terminates his employment due to
        death, disability, or a change in control of Hemet Federal Savings &
        Loan or HF Bancorp, Inc. In the event the optionee's employment is
        terminated for cause, all optionee rights under the optionee's Incentive
        Stock Options expire immediately. In the event the optionee terminates
        his employment due to reasons other than death, disability, a change in
        control, and termination for cause, optionee's Incentive Stock Options
        shall be exercisable only to the extent that such options were
        exercisable at the date of termination, and for a period of three months
        following termination except in the case of retirement, which provides
        for an exercise period of twelve months following termination (although,
        in the event of retirement, exercising after three months will result in
        a loss of incentive stock option treatment under the IRC). The Incentive
        Stock Options do not provide for the granting of stock appreciation
        rights; however, all options were granted in tandem with limited stock
        appreciation rights exercisable in the event of a change in control of
        Hemet Federal Savings & Loan or HF Bancorp, Inc., as defined by the
        Plan.


                                         116 

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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------



        The Stock  Option  components  of the Plan as of June 30, 1997 and 1996,
        and changes during the years then ended, consist of the following:

<TABLE>
<CAPTION>


                                                                                     JUNE 30,
                                                             ----------------------------------------------------------
                                                                  1997                          1996
                                                             ----------------------------  ----------------------------
                                                                              WEIGHTED                      WEIGHTED
                                                                              AVERAGE                       AVERAGE
                                                                              EXERCISE                      EXERCISE
                                                               SHARES          PRICE           SHARES        PRICE
<S>                                                           <C>            <C>              <C>          <C>  
           Options outstanding at the
             beginning of the fiscal year                     595,340        $ 10.04             -         $    -


                Granted                                        44,000          10.06          595,340        10.04
                Canceled                                      116,155           9.97
                Exercised

           Options outstanding at
             fiscal year end                                   523,185         10.06          595,340        10.04

           Options exercisable at
             fiscal year end                                   109,183         10.04

           Weighted average remaining
           Contractual life of options
             outstanding at fiscal year end                   8.5 years                      9.5 years

           Weighted average information
             for options granted during the
             fiscal year:

           Fair value                                            $4.37                          $4.05

           Assumptions utilized in the
             Black-Scholes option-pricing
             model:
             Dividend yield                                       0.00 %                         0.00 %
             Expected stock price volatility                     18.30 %                        18.30 %
             Risk-free interest rate                              6.52 %                         5.65 %
             Expected option lives                              8 years                        8 years
</TABLE>


        Options to purchase  138,065 and 65,910 shares were available for future
        grants as of June 30, 1997 and June 30, 1996, respectively.


                                                         117

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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        At the July 24, 1997 Board of Directors meeting, 99,000 options for the
        purchase of shares were issued at the then-current market price of HF
        Bancorp, Inc. common stock ($14.34), leaving 39,065 shares available for
        future option grants.

        STOCK AWARD COMPONENT OF THE PLAN - The Company established the stock
        award component of the Plan as a method of providing directors,
        officers, and employees with a proprietary interest in the Company in a
        manner designed to encourage such persons to remain with the Company and
        to improve the performance of the Company. The Company contributed
        $1,983,750 from available liquid assets on February 28, 1996 to purchase
        198,375 shares in the open market at an average cost of $10.00 per
        share. This contribution represents deferred compensation which is
        initially recorded as a reduction in stockholders' equity and then is
        ratably charged to compensation expense over the vesting period of the
        actual stock awards.

        The Plan provides for two types of stock awards: time-based grants and
        performance-based grants. Outside directors of the Company receive
        time-based grants, which vest on a straight-line basis over the
        applicable period, as determined by the Board of Directors. Employees
        are eligible for both time-based grants and performance-based grants.
        Vesting of performance-based grants is dependent upon achievement of the
        criteria established by the Board of Directors for each stock award.

        All stock awards granted will be immediately vested and exercisable in
        the event the award recipient terminates his employment due to death,
        disability, or a change in control of Hemet Federal Savings & Loan or HF
        Bancorp, Inc. In the event the award recipient terminates his employment
        due to any reason other than death, disability, or a change in control,
        all unvested stock awards become null and void.

        During the fiscal years ended June 30, 1997 and 1996, the Company
        recorded $354,000 and $198,000, respectively, in compensation expense
        related to the stock award component of the Plan. During the fiscal year
        ended June 30, 1995, no compensation expense was recorded related to the
        Plan.


        A summary of the status of the stock award component of the Plan as
        of June 30, 1997 and 1996, and changes during the years ended on
        those dates, is presented below:
<TABLE>
<CAPTION>

                                                                                                    JUNE 30,
                                                                                          ------------------------------
                                                                                               1997           1996

           <S>                                                                                <C>            <C> 
           Stock awards outstanding at the beginning of the fiscal year                       195,075           -

             Granted                                                                                         195,075
             Canceled                                                                          35,894
             Vested                                                                            37,954

           Stock awards outstanding at the end of the fiscal year                             121,227        195,075

           Available for future awards at the end of the fiscal year                           39,194          3,300

</TABLE>




                                                                 118


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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------

        At the July 24, 1997 Board of Directors meeting, 33,300 shares were
        granted, leaving 5,894 shares available for future stock awards.

14.     COMMITMENTS AND CONTINGENCIES

        The Company is a party to financial instruments with off-balance sheet
        risk in the normal course of business, in order to meet the financing
        needs of its customers. These financial instruments represent
        commitments to fund loans. Commitments are issued following the
        Company's evaluation of each applicant's creditworthiness on a
        case-by-case basis. At June 30, 1997, the Company had outstanding loan
        funding commitments of $10,129,000, substantially all of which were
        adjustable rate commitments. Commitments to fund loans are agreements to
        lend to a customer as long as there is no violation of any condition
        established in the contract. Commitments generally have fixed expiration
        dates or other termination clauses and may require payment of a fee.
        Also, external market forces impact the probability of commitments being
        exercised; therefore, total commitments outstanding do not necessarily
        represent future cash requirements.

        As of June 30, 1997, minimum future operating lease commitments of the
        Company for real and personal property are as follows:

<TABLE>
<CAPTION>


           <S>                                                   <C>  
           First year                                            $     897,000
           Second year                                                 740,000
           Third year                                                  584,000
           Fourth year                                                 520,000
           Fifth year                                                  513,000
           Thereafter                                                2,987,000
                                                                  ------------

                                                                  $  6,241,000
                                                                  ============

</TABLE>

        Included in general and administrative expenses are rents and other
        leasehold expenses which approximated $928,000, $520,000 and, $468,000
        for the years ended June 30, 1997, 1996 and 1995, respectively.

        The Company is involved in litigation concerning various transactions
        entered into during the normal course of business. Management does not
        believe that settlement of such litigation will have a material effect
        on the Company's financial position or results of operations.

        The Company has negotiated employment agreements with its chief
        executive and operating officers. The employment agreements provide for
        the payment of severance benefits upon termination.


                                        119


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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------

15.     INTEREST RATE RISK MANAGEMENT - OFF-BALANCE SHEET ACTIVITIES

        From 1987 to 1993, the Company entered into various interest rate
        exchange agreements in order to reduce the interest rate risk associated
        with long-term fixed-rate mortgages and short-term liabilities. These
        agreements were designated as hedges of short-term liabilities,
        specifically deposit accounts with no specified maturity date or with
        maturity dates of less than one year which were expected to be renewed
        or replaced with other deposits upon their maturity.

        The Company pays a fixed rate and earns a variable rate, three-month
        LIBOR on interest rate swap agreements with notional amounts of
        $35,000,000 as of June 30, 1997 and 1996, and $110,000,000 as of June
        30, 1995. The agreements are due to mature on various dates through
        1999. At June 30, 1997, 1996 and 1995, the weighted average
        fixed-payment rate and variable-payment received rate were 8.72% and
        5.85%, 8.72% and 5.49% and 9.17% and 6.15%, respectively.

        At June 30, 1997, outstanding notional amounts and maturity dates of
        interest rate exchange agreements are summarized as follows:

<TABLE>
<CAPTION>
                                                                                       NOTIONAL
                                                                                        AMOUNT
           INTEREST RATE SWAPS                                                      (IN THOUSANDS)

          <S>                                                                       <C>     
           Maturity date:
             January 6, 1999                                                         $ 20,000
             January 30, 1999                                                          15,000
                                                                                     --------

                                                                                     $ 35,000
                                                                                    =========
</TABLE>

        Net interest expense  (income)  recorded by the Company on interest rate
        swap, cap and floor agreements is summarized as follows:
<TABLE>
<CAPTION>

                                                                                          YEAR ENDED JUNE 30,
                                                                                ----------------------------------------
                                                                                    1997         1996         1995
                                                                                            (IN THOUSANDS)

           <S>                                                                     <C>         <C>        <C>   
           Interest rate swaps                                                     $1,061      $1,217     $4,452
           Interest rate caps                                                                                106
           Interest rate floors, net of amortization                                                         (32)
           Amortization of deferred loss on swap termination                        1,811       1,975
                                                                                   ------      ------     ------

                                                                                   $2,872      $3,192     $4,526
                                                                                   ======      ======     ======


</TABLE>



                                                      120


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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        There are certain risks associated with swaps, floors and caps,
        including the risk that the counterparty may default and that there may
        not be an exact correlation between the indices on which the
        interest-rate swap agreements are based and the terms of the hedged
        liabilities. In order to offset these risks, the Company generally
        enters into interest-rate swap, floor and cap agreements only with
        nationally recognized securities firms and monitors the credit status of
        counterparties, the level of collateral for such swaps and caps, and the
        correlation between the hedged liabilities and indices utilized. There
        is no assurance that, in the event interest rates change, the swaps,
        floors and caps will move on the same basis or in the same amounts as
        its cost of funds.

        On July 10, 1995, the Company terminated four interest-rate swap
        agreements with an aggregate outstanding notional amount of $60,000,000.
        At June 30, 1995, the weighted average fixed-payment rate and
        variable-payment received rate were 9.53% and 6.11%, respectively. The
        Company paid a termination fee of $4,856,000 which has been deferred and
        is being amortized over the remaining terms of the respective swap
        agreements.


16.     FAIR VALUE OF FINANCIAL INSTRUMENTS

        The following disclosures of the estimated fair value of financial
        instruments is made in accordance with the requirements of SFAS No. 107,
        Disclosures about Fair Value of Financial Instruments. The estimated
        fair value amounts have been determined by the Company, using available
        market information and appropriate valuation methodologies. However,
        considerable judgment is necessarily required to interpret market data
        to develop the estimates of fair value. Accordingly, the estimates
        presented herein are not necessarily indicative of the amounts the
        Company could realize in a current market exchange.











                                      121
<PAGE> 122


HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------



        The use of different market assumptions and/or estimation methodologies
        may have a material effect on the estimated fair value amounts.

<TABLE>
<CAPTION>      
                    
                                                                                                   JUNE 30, 1997
                                                                                          --------------------------------
                                                                                              CARRYING        ESTIMATED
                                                                                               AMOUNT        FAIR VALUE
                                                                                                   (IN THOUSANDS)

           <S>                                                                                <C>             <C>      
           ASSETS:
           Cash and cash equivalents                                                          $  18,411       $  18,411
           Investment securities available-for-sale                                             144,997         144,997
           Mortgage-backed securities available-for-sale                                        109,463         109,463
           Investment securities held-to-maturity                                                26,794          26,557
           Mortgage-backed securities held-to-maturity                                          151,369         148,907
           Loans receivable                                                                     484,334         487,902
           Loans held-for-sale                                                                      335             348
           Federal Home Loan Bank stock                                                           6,224           6,224

           LIABILITIES:
           Term deposit accounts                                                              $ 615,522       $ 615,922
           Other deposit accounts                                                               224,133         224,133
           Advances from the Federal Home Loan Bank                                              50,000          49,271

           OFF-BALANCE SHEET UNREALIZED GAINS (LOSSES):
           Commitments                                                                                        $       3
           Interest-rate swap agreements                                                                        (1,473)

</TABLE>


<TABLE>
<CAPTION>
                                                                                                    JUNE 30, 1996
                                                                                          --------------------------------
                                                                                              CARRYING        ESTIMATED
                                                                                               AMOUNT        FAIR VALUE
                                                                                                    (IN THOUSANDS)

          
           <S>                                                                               <C>             <C>   
           ASSETS:
           Cash and cash equivalents                                                         $  100,633      $  100,633
           Investment securities available-for-sale                                             173,171         173,171
           Mortgage-backed securities available-for-sale                                        100,259         100,259
           Investment securities held-to-maturity                                                34,666          33,842
           Mortgage-backed securities held-to-maturity                                          159,262         152,521
           Loans receivable                                                                     225,161         229,195
           Federal Home Loan Bank stock                                                           4,436           4,436


</TABLE>




                                                             122


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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                                   JUNE 30, 1996
                                                                                         --------------------------------
                                                                                              CARRYING        ESTIMATED
                                                                                               AMOUNT        FAIR VALUE
                                                                                                   (IN THOUSANDS)

          <S>                                                                                 <C>             <C>  
           LIABILITIES:
           Term deposit accounts                                                              $ 528,840       $ 530,453
           Other deposit accounts                                                               140,885         140,885
           Advances from the Federal Home Loan Bank                                              70,000          68,066

           OFF-BALANCE SHEET UNREALIZED GAINS (LOSSES):
           Commitments                                                                                        $       9
           Interest-rate swap agreements                                                                         (2,063)

</TABLE>


        The estimated fair values of investment  securities and  mortgage-backed
        securities are based on quoted market prices or dealer quotes. If quoted
        market  prices are not  available,  estimated  fair  values are based on
        quoted market prices of comparable instruments.

        The fair value of loans receivable is estimated by discounting the
        future cash flows using the current rates at which similar loans would
        be made to borrowers with similar credit ratings and for the same
        remaining maturities. The fair value of nonperforming loans with a
        principal balance of approximately $5,217,000 and $1,301,000 at June 30,
        1997 and 1996, respectively, was not estimated because it is not
        practicable to reasonably assess the credit adjustment that would be
        applied in the marketplace for such loans. These nonperforming loans
        have a weighted average interest rate of 8.32% and 8.84% as of June 30,
        1997 and 1996, respectively, and are due at various dates through 2025.

        The estimated fair value of Federal Home Loan Bank stock is based on its
        redemption value.

        The fair value of term deposit accounts is estimated using the rates
        currently offered for deposits of similar remaining maturities. The
        estimated fair value of other deposit accounts is the amount payable on
        demand at June 30, 1997 and 1996.

        Rates currently available to the Company for debt with similar terms and
        remaining maturities are used to estimate the fair value of advances
        from the Federal Home Loan Bank.

        The fair value of commitments is estimated using the fees currently
        charged to enter into similar agreements, taking into account the
        remaining terms of the agreements and the present creditworthiness of
        the counterparties. For fixed-rate loan commitments, the estimated fair
        value also considers the difference between current levels of interest
        rates and the committed rates.


                                          123


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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        The fair value of interest-rate swap agreements is the estimated amount
        that the Company would receive or pay to terminate the interest-rate
        swap agreements at the reporting date, taking into account current
        interest rates and the current creditworthiness of the swap
        counterparties.

        The fair value of accrued interest receivable and accrued interest
        payable is estimated at book value.

        The fair value estimates presented herein are based on pertinent
        information available to management as of June 30, 1997 and 1996.
        Although management is not aware of any factors that would significantly
        affect the estimated fair value amounts, such amounts have not been
        comprehensively re-evaluated for purposes of these consolidated
        financial statements since that date, and therefore, current estimates
        of fair value may differ significantly from the amounts presented
        herein.


17.     BUSINESS ACQUISITIONS

        In September 1996, the Company acquired Palm Springs Savings Bank ("Palm
        Springs") for approximately $16,300,000. The Company acquired all
        outstanding shares of common stock of Palm Springs, including total
        deposits of $164,687,000 as well as other items for four branches in the
        Coachella Valley communities. The acquisition was accounted for under
        the purchase accounting method. In conjunction with the acquisition, the
        Company recorded a core deposit intangible of $9,808,000. The intangible
        balance is included in intangible assets on the consolidated statement
        of financial condition. Amortization is calculated on a straight-line
        basis, over seven years, with total amortization of $1,030,000 recorded
        for the year ended June 30, 1997.

        The following unaudited pro forma financial information presents the
        combined results of operations as if the acquisition had taken place on
        July 1, 1995, after giving effect to purchase accounting adjustments.

                    






                                        124

<PAGE> 125


HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        The  weighted  average  number  of  shares  used in the  calculation
        of earnings per share was 5,755,859 (1997) and 5,953,823 (1996).
<TABLE>
<CAPTION>

                                                                                                 (IN THOUSANDS)

           <S>                                                                               <C>            <C>      
           Interest income on loans and investments                                          $  69,870      $  65,477  (1)
           Interest expense                                                                     45,822         42,225
                                                                                             ---------      ---------

           Net interest income before provision for estimated
             loan losses                                                                        24,048         23,252
           Provision for estimated loan losses                                                   2,245          1,774
                                                                                             ---------      ---------
           Net interest income after provision for estimated
             loan losses                                                                        21,803         21,478
           Other operating income                                                                   97            450  (2)
           General and administrative expenses                                                  30,328         18,414
                                                                                             ---------      ---------

           (Loss) earnings before income tax (benefit) expense                                  (8,428)         3,514
           Income tax (benefit) expense                                                         (3,304)         1,316
                                                                                             ---------      ---------
                                     
           Net (loss) earnings                                                               $  (5,124)     $   2,198
                                                                                             =========      =========
           (Loss) earnings per share                                                         $   (0.89)     $    0.37
                                                                                             =========      =========


        (1) Includes the estimated effect of amortization of loan premium.

        (2) Includes the estimated effect of amortization of intangible assets.

</TABLE>


        The results of operations since the date of the acquisition is included
        in the accompanying consolidated statement of operations.

        During June 1996, the Company acquired deposit accounts totaling
        approximately $185,189,000 and certain other assets of three branches in
        San Diego County. A premium of approximately $6,642,000 was paid, all of
        which was allocated to core deposit intangible to be amortized, on a
        straight-line basis, over seven years. The balance is included in
        intangible assets in the accompanying consolidated statements of
        financial condition. Amortization of $949,000 was recorded for the year
        ended June 30, 1997 and no amortization was recorded for the year ended
        June 30, 1996.


                                                     125


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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------



        Intangible assets are summarized as follows:

<TABLE>
<CAPTION>

                                                                                                YEAR ENDED JUNE 30,
                                                                                            ----------------------------
                                                                                                1997          1996
                                                                                                  (IN THOUSANDS)

           <S>                                                                                <C>         <C> 
           Hawthorne Savings Bank:
             Intangible asset                                                                 $ 6,642     $ 6,642
             Less accumulated amortization                                                       (949)
                                                                                              -------      ------
                                                                                                            
                                                                                                5,693       6,642

           Palm Springs Savings Bank:
             Intangible asset                                                                   9,808
             Less accumulated amortization                                                     (1,030)
                                                                                              -------      ------

                                                                                                8,778
                                                                                              -------      ------

                                                                                              $14,471     $ 6,642
                                                                                              =======      ======
</TABLE>




                                                         126


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HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


18.     PARENT COMPANY FINANCIAL INFORMATION

        The following presents the unconsolidated financial statements of the
        parent company only, HF Bancorp, Inc. (Note 1).

          HF BANCORP, INC. (PARENT COMPANY ONLY)

          STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                                                                        JUNE 30,
                                                                                             ----------------------------
                                                                                                  1997          1996
                                                                                                    (IN THOUSANDS)


           <S>                                                                                  <C>           <C>  
           ASSETS:
           Cash and cash equivalents                                                            $    92       $ 4,313
           Securities available-for-sale, at estimated fair value:
             Investment securities (amortized cost of $2,999 at June 30, 1997)                    2,988
             Mortgage-backed securities (amortized cost of $4,056 and $15,025
               at June 30, 1997 and 1996, respectively)                                           4,045        14,608
           Accrued interest receivable                                                               25            93
           Investment in subsidiary                                                              70,753        58,406
           Receivables from subsidiary                                                            3,100         3,483
           Other assets                                                                               4
           Income taxes                                                                              24           168
                                                                                                -------       -------

                Total assets                                                                    $81,031       $81,071
                                                                                                =======       =======

           TOTAL LIABILITIES                                                                    $     4       $     -

           TOTAL STOCKHOLDERS' EQUITY                                                            81,027        81,071
                                                                                                -------       -------

           TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                           $81,031       $81,071
                                                                                                =======       =======

</TABLE>



                                                         127


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


          HF BANCORP, INC. (PARENT COMPANY ONLY)

          STATEMENTS OF OPERATIONS

                                                                                         YEAR ENDED JUNE 30,
                                                                               ----------------------------------------
                                                                                   1997          1996         1995
                                                                                           (IN THOUSANDS)

           <S>                                                                 <C>            <C>            <C> 
           INTEREST INCOME:
           Interest on loans                                                   $   283        $   317        $    -
           Interest on mortgage-backed securities                                  484            946
           Interest - Other                                                        358            468
                                                                               -------        -------        -------

             Total interest income                                               1,125          1,731
                                                                               -------        -------        -------
         
           OTHER EXPENSE -
             Loss on sale of investment securities available-for-sale                7
                                                                               -------        -------        -------

           GENERAL AND ADMINISTRATIVE EXPENSES:
           Legal and professional services                                         119             76
           Salaries and employee benefits                                           55             55
           Other                                                                   333            320
                                                                               -------        -------        -------  

             Total general and administrative expenses                             507            451
                                                                               -------        -------        -------

           EQUITY IN NET (LOSS) EARNINGS OF
             SUBSIDIARY                                                         (2,862)         1,224           (693)
                                                                               -------        -------        ------- 

           (LOSS) EARNINGS BEFORE INCOME TAX EXPENSE                            (2,251)         2,504           (693)

           INCOME TAX EXPENSE                                                      265            557
                                                                               -------        -------        ------- 

           NET (LOSS) EARNINGS                                                 $(2,516)       $ 1,947        $  (693)
                                                                               =======        =======        =======

</TABLE>



                                                         128


<PAGE> 129

HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


          HF BANCORP, INC. (PARENT COMPANY ONLY)

          SUMMARY STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                            YEAR ENDED JUNE 30,
                                                                               --------------------------------------------
                                                                                    1997           1996            1995
                                                                                              (IN THOUSANDS)

           <S>                                                                     <C>           <C>            <C>
           CASH FLOWS FROM OPERATING ACTIVITIES:         
           Net (loss) earnings                                                     $(2,516)      $ 1,947        $   (693)
           Adjustments to reconcile net (loss) earnings to cash
            provided by operating activities:
           Amortization (accretion) of premiums (discounts) on
             investments and mortgage-backed securities                                  2           (12)
           Loss on sale of mortgage-backed securities                                    7
           Decrease (increase) in accrued interest receivable                           68           (93)
           Decrease (increase) in receivables from subsidiary                           13          (150)
           Increase in liabilities                                                       4
           Increase in other assets                                                     (4)
           (Increase) decrease in income tax asset                                     (19)            4
           Equity in net loss (earnings) of subsidiary                               2,892        (1,224)            693
                                                                                  --------       -------        --------

               Net cash provided by operating activities                               447           472

           CASH FLOWS FROM INVESTING ACTIVITIES:
           Purchases of investment securities available-for-sale                    (2,999)
           Purchases of mortgage-backed securities available-
             for-sale                                                               (4,384)      (16,153)
           Principal repayments on mortgage-backed securities
             available-for-sale                                                        621         1,140
           Proceeds from sales of mortgage-backed securities
             available-for-sale                                                     14,724
           Capital contribution to subsidiary                                      (13,000)                      (25,535)
           Loan to subsidiary                                                                                     (3,703)
           Paydown of loan to subsidiary                                               370           370
                                                                                  --------       -------        --------

               Net cash used in investing activities                                (4,668)      (14,643)        (29,238)

           CASH FLOWS FROM FINANCING ACTIVITIES:
           Purchases of treasury stock
                                                                                                 (3,348)                       
           Net proceeds from issuance of common stock                                                             51,070
                                                                                  -------      --------         --------

               Net cash (used in) provided by financing activities                               (3,348)          51,070
                                                                                  -------      --------         --------
                                                                                    

</TABLE>

                                                           129


<PAGE> 130


HF BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>

          HF BANCORP, INC. (PARENT COMPANY ONLY)

          SUMMARY STATEMENTS OF CASH FLOWS (CONTINUED)

                                                                                       YEAR ENDED JUNE 30,
                                                                           ---------------------------------------------
                                                                               1997           1996            1995
                                                                                          (IN THOUSANDS)

           <S>                                                              <C>            <C>             <C>    
           NET (DECREASE) INCREASE IN CASH AND
             CASH EQUIVALENTS                                               $ (4,221)      $ (17,519)      $21,832

           CASH AND CASH EQUIVALENTS,
             beginning of year                                                 4,313          21,832
                                                                            --------       ---------       -------

           CASH AND CASH EQUIVALENTS, end of year                           $     92       $   4,313       $21,832
                                                                            ========       =========       =======
                                                                            
</TABLE>


19.     QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

        The following is a summary of quarterly results:
<TABLE>
<CAPTION>

                                                                 FIRST         SECOND         THIRD         FOURTH
           (IN THOUSANDS, EXCEPT PER SHARE DATA)                QUARTER        QUARTER       QUARTER        QUARTER

          <S>                                                  <C>           <C>            <C>           <C> 
           1997:
             Interest income                                   $ 14,399      $ 17,894       $ 17,084      $ 17,145
             Interest expense                                     9,833        11,680         11,335        11,236
             Provision for estimated loan losses                    179            29            101            75
             Net (loss) earnings                                 (2,339)          702            357        (1,236)
             (Loss) earnings per share                            (0.41)          .12            .06         (0.21)
                                                                                      
           1996:
             Interest income                                   $ 11,117      $ 12,473       $ 13,213      $ 13,552
             Interest expense                                     7,606         8,415          8,952         9,086
             Provision for estimated loan losses                    145            58            419           432
             Net earnings                                           214           544            799           390
             Earnings per share                                     .03           .09            .13           .07

</TABLE>




                                                                 130

 

<PAGE> 131



ITEM 9.   CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING AND
          FINANCIAL  DISCLOSURES

       None.
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The  information  relating  to  Directors  and  Executive  Officers of the
Registrant  is  incorporated  herein  by  reference  to the  Registrant's  Proxy
Statement for the Annual Meeting of Stockholders to be held on October 28, 1997,
on pages 6 through 8.  Information  concerning  executive  officers  who are not
directors  is contained  in Part I of this report  pursuant to paragraph  (b) of
Item 401 of Regulation S-K in reliance on Instruction G.

ITEM 11.  EXECUTIVE COMPENSATION

      The information relating to executive  compensation is incorporated herein
by reference  to the  Registrant's  Proxy  Statement  for the Annual  Meeting of
Stockholders  to be held on October 28, 1997,  on pages 11 through 19 (excluding
the Report of the  Compensation  Committee  on pages 11 through 13 and the Stock
Performance Graph on page 14).

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The  information  relating to  security  ownership  of certain  beneficial
owners and management is  incorporated  herein by reference to the  Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on October 28,
1997, on page 4 and 6 through 8.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information relating to certain relationships and related transactions
is incorporated  herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on October 28, 1997, on page 19.




                                      131

<PAGE> 132



                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K

      (a)  1.  Financial Statements

               These  documents  are  listed   in   the  Index  to  Consolidated
               Financial  Statements  under Item 8.

           2.  Financial Statement Schedules

               Financial  Statement Schedules have been omitted because they are
               not  applicable  or  the  required  information  is shown  in the
               Consolidated Financial  Statements or Notes  thereto.

      (b)  Reports on Form 8-K Filed During the Quarter Ended June 30, 1997

           None

      (c)  Exhibits Required  by Securities  and Exchange  Commission Regulation
           S-K



                                      132

<PAGE> 133



Exhibit Number
--------------

  3.1   Amended Certificate of Incorporation of HF Bancorp, Inc.*

  3.2   Bylaws of HF Bancorp, Inc.*

  4.0   Stock Certificate of HF Bancorp, Inc.*

  10.1  Form of Employment Agreement entered into between the Association and
        Mr. Cupp

  10.2  Form of Employment Agreement entered into between the Company and Mr.
        Cupp

  10.3  Form of Employment Agreement entered into between the Association and
        Mr. Agnes

  10.4  Form of Employment Agreement entered into between the Company and Mr.
        Agnes

  10.5  Hemet  Federal Savings  and  Loan  Association Employee Stock Ownership
        Plan and Trust*

  10.6  Hemet Federal Savings and Loan Association Retirement Restoration Plan**

  10.7  Hemet  Federal Savings and Loan Association Directors Deferred Fee Stock
        Unit Plan**

  10.8  Hemet  Federal Savings  and Loan Association Management Deferred Compen-
        sation Plan**

  10.9  HF Bancorp, Inc. 1995 Master Stock Option Plan***

  21    Subsidiaries of  HF  Bancorp,  Inc.  See "Part  II  - Item 7- Subsidiary
        Activities," which  information is incorporated herein by reference

  27    Financial Data Schedule


--------------------------
*    Incorporated  herein by reference  into this  document from the Exhibits to
     Form S-1 Registration Statement and any amendments thereto, filed March 14,
     1994, Registration No. 33-90286.

**   Incorporated herein  by reference  into  this  document  from the Form 10-K
     for  the fiscal  year  ended  June 30, 1995 filed  with  the  Commission on
     September 27, 1995, file No. 0-27522.

***  Incorporated  herein   by  reference  from  the  Proxy  Statement  for  the
     Annual  Meeting of Stockholders  for the  1997 fiscal  year filed  with the
     Commission  on  September 25, 1997.



                                      133

<PAGE> 134



                                    SIGNATURE


      Pursuant to the requirements of Section 13 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 Bancorp, Inc.


                                      By: /s/ Richard S. Cupp
                                          ------------------------------
                                          Richard S. Cupp
Dated:  September 25,1997                 President and Chief Executive Officer
        -----------------


      Pursuant to the  requirements  of the Securities and Exchange Act of 1934,
this report has been signed by the following  persons in the  capacities  and on
the dates indicated.

      Name                              Title                      Date
      ----                              -----                      ----

/s/ Richard S. Cupp            President and Chief            September 25, 1997
----------------------------   Executive Officer
Richard S. Cupp                (principal executive officer)
                               

/s/ Gerald A. Agnes            Executive Vice President       September 25, 1997
------------------------------
Gerald A. Agnes


/s/ Mark R. Andino             Vice President and Treasurer   September 25, 1997
------------------------------ (principal financial and 
Mark R. Andino                 accounting officer)  
                               

/s/ J. Robert Eichinger        Chairman of the Board          September 25, 1997
------------------------------
J. Robert Eichinger 


/s/ Norman M. Coulson          Director                       September 25, 1997
------------------------------
Norman M. Coulson


/s/ Dr. Robert K. Jabs         Director                       September 25, 1997
------------------------------
Dr. Robert K. Jabs


/s/ George P. Rutland          Director                       September 25, 1997
------------------------------
George P. Rutland


/s/ Patricia A. "Corky" Larson  Director                      September 25, 1997
------------------------------
Patricia A. "Corky" Larson


/s/ Harold L. Fuller            Director                      September 25, 1997
-------------------------------
Harold L. Fuller


/s/ Leonard E. Searl            Director                      September 25, 1997
-------------------------------
Leonard E. Searl



<PAGE> 135



CORPORATE INFORMATION

HF BANCORP, INC.
DIRECTORS

J. Robert Eichinger, Chairman

Norman M. Coulson

Richard S. Cupp

Harold L. Fuller

Dr. Robert K. Jabs

Patricia A. "Corky" Larson

George P. Rutland

Leonard E. Searl


HF BANCORP, INC.
EXECUTIVE OFFICERS

Richard S. Cupp, President and Chief Executive Officer
Gerald A. Agnes, Executive Vice President
Mark R. Andino, Vice President, Treasurer
Janet E. Riley, Corporate Secretary

HEMET FEDERAL SAVINGS AND LOAN ASSOCIATION OFFICERS

Richard S. Cupp, President and Chief Executive Officer
Gerald A. Agnes, Executive Vice President, Chief Operating Officer
Mark R. Andino, Sr. Vice President, Chief Financial Officer
Leticia J. Arciniega, Sr. Vice President, Information Services
Robert J. Armstrong, Sr. Vice President, Chief Loan Officer
Jack A. Sanden, Sr. Vice President, Real Estate Services
William K. Tierney, Sr. Vice President, Administrative Services
Pamala S. Trotter, Sr. Vice President, Human Resources

BRANCH DIRECTORY

445 E. Florida Avenue, Hemet, California
3600 Tyler St., Riverside, California
28031 Bradley Road, Sun City, California
1479 S. San Jacinto Avenue, San Jacinto, California
5395 Canyon Crest Drive, Riverside, California
1111 S. State Street, Hemet, California
3013 W. Florida Avenue, Hemet, California
41815 E. Florida Avenue, Hemet, California
5242 Arlington Avenue, Riverside, California
31740 Railroad Canyon Road, Canyon Lake, California
54245 North Circle Drive, Idyllwild, California
40461  Murrieta Hot Springs Road,  Murrieta,  California
961 S. Santa Fe, Vista, California  
815 Mission  Ave.,  Oceanside,  California  
15703  Bernardo  Heights Parkway, San Diego,  California 
420 S Palm Canyon Dr., Palm Springs,  California
66565 Pierson Blvd, Desert Hot Springs,  California 
68327 Highway 111, Cathedral City, California 
39800 Bob Hope Dr., Rancho Mirage, California

Stock Listing Information

The stock of HF Bancorp,  Inc. is traded  over-the-counter  on the Nasdaq  Stock
Market  under the symbol  "HEMT".  Daily  quotations  are included in the Nasdaq
Stock  Market  stock  tables  published  in leading  dailies and other  business
publications.

STOCK PRICE INFORMATION

Shares of common stock were made available to qualified subscribers at $8.00 per
share during  the initial  public  offering  on June 30,  1995.  The table below
shows the  reported  high and low  closing prices of the common stock during the
periods  indicated in fiscal 1997.  The closing price of a common share on  June
30, 1997 was $14 3/8.

Quarter Ended
-------------
                         High             Low
                         ----             ---
September 30,1996        $10             $9 1/4
December 31, 1996        $11 3/8         $9 3/4
March 31, 1997           $14             $11
June 30, 1997            $14 3/4         $12 1/4






STOCK TRANSFER AGENT

American Securities Transfer & Trust, Lakewood, Colorado

INVESTOR RELATIONS

Stockholder  and  general  inquiries  regarding  HF  Bancorp,   Inc.  should  be
directed to:

Richard S. Cupp
HF Bancorp, Inc.
P.O. Box 12006
Hemet, Ca 92546
1-800-540-4363 ext 2101

LEGAL COUNSEL

Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016

AUDITOR

Deloitte & Touche LLP
1000 Wilshire Blvd
Los Angeles, California 90017