<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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


                  For the quarterly period ended March 31, 1999


             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 Identification No.)
of incorporation or organization)


                445 East Florida Avenue, Hemet, California 92543
               (Address of principal executive offices)(Zip Code)


       Registrant's telephone number, including area code: (909) 658-4411

                  Registrant's Internet site: www.hemetfed.com
           Registrant's electronic mail address: corpinfo@hemetfed.com




         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.Yes x No



                      APPLICABLE ONLY TO CORPORATE ISSUERS:

         Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

         There were 6,421,298 shares of the Registrant's common stock, par value
$0.01 per share, outstanding as of May 10, 1999.

<PAGE>   2

HF BANCORP, INC. AND SUBSIDIARY
FORM 10-Q
INDEX


<TABLE>
<CAPTION>
                                                                                                          PAGE
                                                                                                          ----
<S>               <C>                                                                                     <C>
PART I - FINANCIAL INFORMATION

ITEM 1.           FINANCIAL STATEMENTS

                  Consolidated Statements Of Financial Condition As Of
                  March 31, 1999 (unaudited) and June 30, 1998                                            3 - 4

                  Consolidated Statements Of Operations (unaudited) For The
                  Three And Nine Months Ended March 31, 1999 and 1998                                     5 - 6

                  Consolidated Statement Of Changes In Stockholders' Equity (unaudited)
                  For The Nine Months Ended March 31, 1999                                                7

                  Consolidated Statements Of Cash Flows (unaudited) For The
                  Nine Months Ended March 31, 1999 and 1998                                               8 - 9

                  Notes To Consolidated Financial Statements (unaudited)                                  10 - 13


ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                           14 - 40

ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                               40


PART II - OTHER INFORMATION

ITEM 1.                    Legal Proceedings                                                              41

ITEM 2.                    Changes In Securities                                                          41

ITEM 3.                    Defaults Upon Senior Securities                                                41

ITEM 4.                    Submission Of Matters To A Vote Of Security Holders                            41

ITEM 5.                    Other Information                                                              41

ITEM 6.                    Exhibits And Reports On Form 8-K                                               41


         Signature Page                                                                                   42
</TABLE>



                                        2

<PAGE>   3

                         HF BANCORP, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


<TABLE>
<CAPTION>
                                                                                         March 31,            June 30,
                                                                                              1999                1998
                                                                                         ---------            --------
                                                                                        (Unaudited)

                                                                                               (Dollars In Thousands)
<S>                                                                                    <C>                  <C>       
ASSETS

Cash and cash equivalents                                                              $   42,419           $   27,720
Securities available-for-sale, at estimated fair value:
   Investment securities (amortized cost of $141,352 and $98,792 at
         March 31, 1999 and June 30, 1998 respectively)                                   141,571               98,573
   Mortgage-backed securities (amortized cost of $193,633 and $164,400 at
         March 31,1999 and June 30,1998, respectively)                                    192,946              165,004
Securities held-to-maturity, at cost:
   Investment securities (estimated fair value of $9,753 at June 30, 1998)                     --                9,647
   Mortgage-backed securities (estimated fair value of $123,281 at June 30, 1998)              --              123,596
Loans receivable (net of allowance for estimated loan losses of $6,928
   and $6,271 at March 31, 1999 and June 30, 1998, respectively)                          611,616              581,153
Loans held-for-sale                                                                         2,835                3,763
Accrued interest receivable                                                                 5,213                6,038
Investment in capital stock of the Federal Home Loan Bank, at cost                          8,376                8,048
Premises and equipment, net                                                                 6,247                7,145
Real estate acquired through foreclosure, net                                                 825                1,674
Gross intangible assets                                                                    10,353               12,118
Other assets                                                                                  738                1,358
                                                                                       ----------           ----------

Total assets                                                                           $1,023,139           $1,045,837
                                                                                       ==========           ==========
</TABLE>



See Notes to Consolidated Financial Statements



                                        3

<PAGE>   4

                         HF BANCORP, INC. AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED)


<TABLE>
<CAPTION>
                                                                                      March 31,              June 30,
                                                                                           1999                  1998
                                                                                      ---------              --------
                                                                                    (Unaudited)

                                                                                               (Dollars In Thousands)
<S>                                                                                  <C>                   <C>       
LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
   Checking deposits                                                                 $   99,053            $   88,231
   Savings deposits                                                                      73,424                88,008
   Money market deposits                                                                120,967                82,249
   Certificates of deposit                                                              591,965               608,236
                                                                                     ----------            ----------
Total deposits                                                                          885,409               866,724

Advances from the Federal Home Loan Bank                                                 45,000                85,000
Accounts payable and other liabilities                                                    4,410                 7,030
Income taxes                                                                              2,501                 3,305
                                                                                     ----------            ----------

   Total liabilities                                                                    937,320               962,059


Stockholders' equity:
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
   at March 31, 1999 and June 30, 1998; 6,412,073 outstanding at
   March 31, 1999 and 6,369,103 outstanding at June 30, 1998                                 66                    66
Additional paid-in capital                                                               51,874                51,557
Retained earnings, substantially restricted                                              39,822                38,552
Accumulated other comprehensive income                                                     (275)                  226
Deferred stock compensation                                                              (3,639)               (4,159)
Treasury stock, 200,427 shares at March 31, 1999 and 243,397 shares
   at June 30, 1998                                                                      (2,029)               (2,464)
                                                                                     ----------            ----------

   Total stockholders' equity                                                            85,819                83,778
                                                                                     ----------            ----------

Total liabilities and stockholders' equity                                           $1,023,139            $1,045,837
                                                                                     ==========            ==========
</TABLE>




See Notes to Consolidated Financial Statements


                                        4

<PAGE>   5

                         HF BANCORP, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                           FOR THE THREE MONTHS           FOR THE NINE MONTHS
                                                               ENDED MARCH 31,               ENDED MARCH 31,
                                                           --------------------           -------------------
                                                             1999           1998           1999            1998
                                                          -------        -------        -------         -------
                                                                           (Dollars In Thousands)
<S>                                                       <C>            <C>            <C>             <C>    
INTEREST INCOME:
Interest on loans                                         $12,050        $11,409        $35,677         $31,885
Interest on mortgage-backed securities                      2,890          4,697         10,423          14,179
Interest and dividends on investment securities             2,281          2,531          6,725           9,567
                                                          -------        -------        -------         -------

   Total interest income                                   17,221         18,637         52,825          55,631

INTEREST EXPENSE:
Interest on deposit accounts                                9,569         10,037         30,000          30,789
Interest on advances from the Federal Home Loan
   Bank and other borrowings                                  547          1,681          2,854           4,757
Net interest expense of hedging transactions                   27            421            841           1,370
                                                          -------        -------        -------         -------

   Total interest expense                                  10,143         12,139         33,695          36,916

NET INTEREST INCOME BEFORE PROVISION
   FOR ESTIMATED LOAN LOSSES                                7,078          6,498         19,130          18,715

PROVISION FOR ESTIMATED LOAN LOSSES                           400          2,300          1,600           2,700
                                                          -------        -------        -------         -------

NET INTEREST INCOME AFTER PROVISION
   FOR ESTIMATED LOAN LOSSES                                6,678          4,198         17,530          16,015

OTHER INCOME (EXPENSE):
Loan and other fees                                           122             89            345             286
Impairment writedown on securities                             --            (16)            --             (16)
Net gain on sales of securities available-for-sale             --             --            159              62
Net gain on sales of loans held for sale                      134             56            385             127
Income (expense) from real estate operations, net              19           (312)           217            (953)
Amortization of intangible assets                            (588)          (588)        (1,765)         (1,765)
Gain on sale of merchant bankcard portfolio                    --            200             --             200
Branch and deposit related fees                               571            640          1,822           1,711
Other income                                                  289             54            956             144
                                                          -------        -------        -------         -------

   Total other income (expense)                               547            123          2,119            (204)
</TABLE>


See Notes to Consolidated Financial Statements



                                        5

<PAGE>   6

                         HF BANCORP, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                       FOR THE THREE MONTHS          FOR THE NINE MONTHS
                                                            ENDED MARCH 31,              ENDED MARCH 31,
                                                      ---------------------        ---------------------
                                                         1999          1998           1999          1998
                                                      -------       -------        -------       -------
                                                                    (Dollars In Thousands)
<S>                                               <C>           <C>            <C>           <C>        
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and employee benefits                    $     2,965   $     2,604    $     8,994   $     7,214
Occupancy and equipment expense                           968           840          3,027         2,747
FDIC insurance and other assessments                      180           185            542           547
Legal and professional services                           252           195            775           541
Data and item processing service costs                    649           623          1,813         1,673
Marketing expense                                         169           155            613           400
Supplies expense                                           83           118            285           253
Expenses for pending acquisition                          103             0            328             0
Other operating expenses                                  378           392          1,341         1,127
                                                  -----------   -----------    -----------   -----------

     Total general and administrative expenses          5,747         5,112         17,718        14,502

EARNINGS BEFORE INCOME
     TAX EXPENSE                                        1,478          (791)         1,931         1,309

INCOME TAX EXPENSE                                        507          (327)           661           544
                                                  -----------   -----------    -----------   -----------

NET EARNINGS                                      $       971   $      (464)   $     1,270   $       765
                                                  ===========   ===========    ===========   ===========

SHARES APPLICABLE TO BASIC EARNINGS PER SHARE       6,406,395     6,305,292      6,395,802     6,291,108

BASIC EARNINGS PER SHARE                          $      0.15   $     (0.07)   $      0.20   $      0.12
                                                  ===========   ===========    ===========   ===========

SHARES APPLICABLE TO DILUTED EARNINGS PER SHARE     6,535,580     6,305,292      6,514,958     6,488,333

DILUTED EARNINGS PER SHARE                        $      0.15   $     (0.07)   $      0.19   $      0.12
                                                  ===========   ===========    ===========   ===========
</TABLE>



See Notes to Consolidated Financial Statements



                                        6

<PAGE>   7

HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                                                    
                                                              Common stock      Additional                    Deferred              
                                                           -----------------       paid-in    Retained          stock-     Treasury 
                                                           Shares     Amount       capital    earnings    compensation        stock 
                                                           ------     ------       -------    --------    ------------        ----- 
<S>                                                        <C>        <C>       <C>           <C>         <C>              <C>      
Balance at June 30, 1998                                    6,613       $ 66      $ 51,557    $ 38,552        $ (4,159)    $ (2,464)
Amortization of deferred stock compensation                    --         --           320          --             520           -- 
Sale of treasury stock                                         --         --            (3)         --              --          435 
Comprehensive income:
   Net earnings                                                --         --            --       1,270              --           -- 
   Other comprehensive income:
        Change in net unrealized gain on available-
            for-sale securities, net of $350 in taxes          --         --            --          --              --           -- 
     Total other comprehensive income                          --         --            --          --              --           -- 
Total comprehensive income                                                                                                          
                                                            -----       ----      --------    --------        --------     -------- 
Balance at March 31, 1999                                   6,613       $ 66      $ 51,874    $ 39,822        $ (3,639)    $ (2,029)
                                                            =====       ====      ========    ========        ========    ========= 


<CAPTION>
                                                             Accumulated
                                                                   other            Total
                                                           comprehensive    stockholders'
                                                                  income           equity
                                                                  ------           ------
<S>                                                        <C>              <C>     
Balance at June 30, 1998                                           $ 226         $ 83,778
Amortization of deferred stock compensation                           --              840
Sale of treasury stock                                                --              432
Comprehensive income:
   Net earnings                                                       --            1,270
   Other comprehensive income:

        Change in net unrealized gain on available-                                       
            for-sale securities, net of $350 in taxes               (501)
     Total other comprehensive income                                 --             (501)
                                                                                    -----
Total comprehensive income                                                            769
                                                                  ------         --------
Balance at March 31, 1999                                         $ (275)        $ 85,819
                                                                 =======         ========
</TABLE>


See Notes to Consolidated Financial Statements



                                        7

<PAGE>   8

                         HF BANCORP, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                               FOR THE NINE MONTHS
                                                                                                 ENDED MARCH 31, 
                                                                                             ----------------------
                                                                                             1999              1998
                                                                                             ----              ----
                                                                                             (Dollars In Thousands)
<S>                                                                                      <C>               <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings                                                                             $  1,270          $    765

Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Write-down of interest only security                                                           --                16
Origination of loans held-for-sale                                                        (31,382)          (14,940)
Proceeds of sale of loans held-for-sale                                                    32,696            11,423
Provisions for estimated loan and real estate losses                                        1,613             3,639
Depreciation and amortization                                                                 761               934
Amortization of deferred loan fees                                                           (760)             (586)
Amortization (accretion) of premiums (discounts) on loans
   and investment and mortgage-backed securities, net                                       2,035               371
Amortization of intangible assets                                                           1,765             1,765
Federal Home Loan Bank stock dividend                                                        (328)             (285)
Gain on sales of mortgage backed and investment securities available-for-sale                (159)              (62)
Gain on sales of loans held-for-sale                                                         (385)             (127)
Gain on sales of foreclosed real estate, net                                                 (243)             (151)
(Gain) loss on sale of premises and equipment                                                 (30)               21
Decrease in accrued interest receivable                                                       825               811
Decrease in accounts payable and other liabilities                                         (2,621)           (1,615)
Decrease in other assets                                                                      620               736
Other, net                                                                                    820               722
                                                                                         --------          --------

Net cash provided by operating activities                                                   6,497             3,437

CASH FLOWS FROM INVESTING ACTIVITIES:

Net increase in loans receivable                                                          (32,354)         (106,565)
Purchases of mortgage-backed securities available-for-sale                                     --           (80,163)
Principal repayments on mortgage-backed securities held-to-maturity                            --            19,399
Principal repayments on mortgage-backed securities available-for-sale                      64,805            29,006
Purchases of investment securities available-for-sale                                    (128,914)          (62,869)
Principal repayments on investment securities held-to-maturity                                 --               747
Principal repayments on investment securities available-for-sale                           83,495             4,127
Proceeds from sales of mortgage-backed and investment securities available-for-sale        28,157            58,254
Matured / called investment and mortgage backed securities held-to-maturity                    --            16,000
Matured / called investment and mortgage backed securities available-for-sale              11,741            44,033
Proceeds from sales of real estate acquired by foreclosure                                  2,419             5,593
Proceeds from sales of real estate held for investment                                         --               427
Proceeds from sale of premises and equipment                                                1,473                46
Acquisitions of premises and equipment                                                     (1,306)             (263)
                                                                                         --------          --------

Net cash provided by (used in) investing activities                                        29,516           (72,228)
</TABLE>

See Notes to Consolidated Financial Statements


                                       8
<PAGE>   9

                         HF BANCORP, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                    FOR THE NINE MONTHS
                                                                                                        ENDED MARCH 31,
                                                                                                    -------------------
                                                                                                   1999           1998
                                                                                                   ----           ----
                                                                                                 (Dollars In Thousands)
<S>                                                                                              <C>            <C>      
CASH FLOWS FROM FINANCING ACTIVITIES:

Advances received from Federal Home Loan Bank                                                    $ 107,000      $  60,000
Proceeds from other borrowings                                                                          --        213,000
Increase in deposit accounts                                                                        18,686         28,893
Repayment of advances from Federal Home Loan Bank                                                 (147,000)       (10,000)
Repayment of other borrowings                                                                           --       (213,000)
                                                                                                 ---------      ---------

Net cash (used in) provided by financing activities                                                (21,314)        78,893
                                                                                                 ---------      ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                                           14,699         10,102

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                    27,720         18,411
                                                                                                 ---------      ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                       $  42,419      $  28,513
                                                                                                 =========      =========

SUPPLEMENTAL CASH FLOW DISCLOSURES:

Cash paid during the period for:
Interest on deposit accounts and other borrowings                                                $   6,265      $   7,995
                                                                                                 =========      =========
Income taxes paid                                                                                $     350      $      --
                                                                                                 =========      =========

SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES:

Real estate acquired through foreclosure                                                         $   2,084      $   2,678
                                                                                                 =========      =========

Loans to facilitate the sale of real estate acquired through foreclosure                         $      92      $   1,102
                                                                                                 =========      =========

Transfer of mortgage-backed securities held-to-maturity to available-for-sale classification     $ 123,596      $      --
                                                                                                 =========      =========

Transfer of investment securities held-to-maturity to available-for-sale classification          $   9,647      $      --
                                                                                                 =========      =========
</TABLE>



See Notes to Consolidated Financial Statements



                                        9

<PAGE>   10

NOTE 1:  Basis of Presentation

         The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all necessary adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation have been included. The results of operations for the nine month
period ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the entire fiscal year or any other interim period.

        HF Bancorp Inc. ("HFB") is the holding company for Hemet Federal Savings
& Loan ("Bank") and the Bank's subsidiary, First Hemet Corporation ("FHC"). The
Company's headquarters are in Hemet, California. The Company offers a broad
range of financial services to both consumers and small businesses. All
significant intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to prior year's consolidated financial
statements to conform to the current presentation.

        These unaudited consolidated financial statements and the information
under the heading "Item 2. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations" have been prepared with the presumption
that the users of this interim financial information have read, or have access
to, the most recent audited consolidated financial statements and notes thereto
of HF Bancorp, Inc. for the fiscal year ended June 30, 1998 included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998.

        The preparation of the consolidated financial statements of HF Bancorp,
Inc. and subsidiary requires management to make estimates and assumptions that
affect reported amounts. These estimates are based on information available as
of the date of the financial statements. Therefore, actual results could differ
from those estimates.

NOTE 2:  Computation Of Earnings Per Share

        The Company calculates earnings per share ("EPS") in accordance with
Statement Of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share". All of the Company's net income has been available to common
shareholders during the periods covered in this Form 10-Q. Basic and diluted EPS
were calculated based upon the following information:

<TABLE>
<CAPTION>
                                                           PLUS:         PLUS:
                                           EQUALS:      Treasury      Treasury       EQUALS:                   Shares      Shares *
                               LESS:        Shares         Stock         Stock      Shares *                      For           For
                 Average     Average           For       Method:       Method:           For   Quarterly       Fiscal        Fiscal
                   Total      Shares     Quarterly    Shares For    Shares For     Quarterly     Average          YTD           YTD
    Quarter       Shares    Treasury         BASIC         Stock         Stock       DILUTED       Share        BASIC       DILUTED
     Ending       Issued       Stock           EPS       Options        Awards           EPS       Price          EPS           EPS
     ------    ---------    --------     ---------    ----------    ----------     ---------   ---------    ---------     ---------
<S>            <C>           <C>         <C>             <C>            <C>        <C>            <C>       <C>           <C>      
   09/30/97    6,612,500     330,625     6,281,875       148,044        23,922     6,453,841      $14.94    6,281,875     6,453,841
   12/31/97    6,612,500     326,343     6,286,157       184,928        30,785     6,501,870      $16.60    6,284,016     6,477,856
   03/31/98    6,612,500     307,208     6,305,292       179,413        24,583     6,509,288      $17.13    6,291,108     6,488,333
   06/30/98    6,612,500     280,391     6,332,109       148,744        17,672     6,498,525      $16.98    6,301,358     6,490,881
   09/30/98    6,612,500     227,410     6,385,090       103,878        12,697     6,501,665      $16.14    6,385,090     6,501,665
   12/31/98    6,612,500     216,578     6,395,922        98,921        12,785     6,507,628      $15.98    6,390,506     6,504,647
   03/31/99    6,612,500     206,105     6,406,395       117,232        11,953     6,535,580      $17.34    6,395,802     6,514,958
</TABLE>

*Share counts for diluted EPS are applicable only in the event of positive
earnings.



                                       10

<PAGE>   11

NOTE 3: Derivative Financial Instruments

        Effective July 1, 1998, the Company adopted SFAS No. 133 "Accounting For
Derivative Instruments And Hedging Activities". At that date, the Company
maintained $35.0 million (notional amount) in active interest rate exchange
agreements which had previously been designated as "cash flow hedges" within the
meaning defined in the Statement. The $35.0 million was comprised of two
separate swaps, both of which contractually matured in January 1999; and both of
which placed the Company in a "net payment" position based upon the current
market interest rates applicable to the swap agreements. Also at July 1, 1998,
the Company maintained one deferred loss with a remaining book value of $272
thousand associated with a terminated swap previously designated as a "cash flow
hedge". These derivative positions were established many years ago in order to
stabilize the effective cost of short term deposits. Prior to the adoption of
SFAS No. 133, these positions were accounted for on an accrual basis, with the
net periodic amount payable (receivable) debited (credited) to interest expense.

        Due to the historic hedging relationship and accounting treatment for
these derivatives, and per the applicable requirements of SFAS No. 133,
effective July 1, 1998, the active interest rate swaps were marked to fair value
and recorded as liabilities on the Company's balance sheet. A corresponding
adjustment, net of tax effect, was posted to a separate component of
shareholders' equity through Other Comprehensive Income as defined in SFAS No.
130. For the terminated swap, the related deferred loss was reclassified, net of
tax effect, to a separate component of stockholders' equity, through a charge to
Other Comprehensive Income. Also per SFAS No. 133, no restatement was recorded
for periods prior to the adoption of the Statement.

        Also effective July 1, 1998, the Company evaluated the effectiveness of
the cash flow hedges and determined them to be ineffective as defined in SFAS
No. 133. As a result, future changes in the fair values of the active interest
rate swaps due to changes in interest rates were reflected in current earnings,
whereas changes in fair value due to the passage of time were amortized from
Other Comprehensive Income into earnings over the remaining terms of the
interest rate swaps. The amount charged to Other Comprehensive Income associated
with the terminated swap was amortized into income over the remaining life of
the original agreement, which had an expiration date of November 21, 1998.

         Because the two active swaps matured during fiscal 1999 and because the
original amortization period for the deferred loss associated with the
terminated swap concluded in fiscal 1999, the adoption of SFAS No. 133 therefore
presented no net impact upon fiscal 1999 aggregate earnings or shareholders'
equity. Results within each quarter of fiscal 1999, however, were impacted by
the adoption of the Statement.

        In conjunction with the adoption of SFAS No. 133, the Company
reclassified 100% of its securities to "available-for- sale" as defined under
SFAS No. 115. A total of $133.2 million (amortized cost) in mortgage-backed and
investment securities were reclassified from "held-to-maturity" on July 1, 1998.
The Company reclassified these securities in order to provide additional
flexibility in future balance sheet and interest rate risk management, and due
to the clarification of regulatory capital treatment for unrealized gains and
losses accounted for under SFAS No. 115 since the initial adoption of that
Statement.

NOTE 4:  Non-qualified Pension Plans

         During the nine months ended March 31, 1999, the Company commenced cash
distributions of accumulated participant benefits under the non-qualified
Directors Retirement Plan. All but three participants have elected to receive
and have by March 31, 1999 received cash payments in lieu of future monthly
benefits under this plan. The substantial liquidation of this plan will reduce
Company administrative costs in future periods, while also constraining a
potential source of volatility in future general & administrative expenses
stemming from changes in Director fees and / or general market interest rates.
The cash distributions also accelerated the deductibility of these expenses by
the Company, thereby reducing associated deferred tax assets as accounted for
under SFAS No. 109. At March 31, 1999, the Company maintained an accrued
liability of $251 thousand in conjunction with the three participants who
determined not to receive a cash distribution. In addition, the one participant
in the non-qualified Retirement Restoration Plan had received by March 31, 1999
a cash distribution in lieu of future monthly benefits under that plan.


                                       11

<PAGE>   12

NOTE 5:  Stock Plan

         The Company maintains the HF Bancorp, Inc. Stock Based Incentive Plan,
which includes both a stock option and a stock award component. All outstanding
stock options and awards under the plan vest in the event of a change in
control, such as the Company's planned acquisition by Temple-Inland, Inc. The
following tables summarize the status of this plan:

         HF BANCORP, INC. STOCK BASED INCENTIVE PLAN: STOCK OPTION INFORMATION

<TABLE>
<CAPTION>
                                                          Stock                               Stock        Average
                                                        Options              Stock          Options       Exercise
                      Stock           Stock        Cumulatively            Options        Available       Price Of
                    Options         Options            Vested &       Cumulatively       For Future         Vested
Date             Authorized     Outstanding         Outstanding          Exercised           Grants        Options
----             ----------     -----------        ------------       ------------       ----------       --------
<S>              <C>            <C>                 <C>               <C>                <C>              <C>   
06/30/98            811,250         565,960             163,528             87,228          158,062         $10.47
09/30/98            811,250         587,010             165,328            109,428          114,812         $11.10
12/31/98            811,250         580,890             160,008            117,048          113,312         $11.17
03/31/99            811,250         564,980             222,535            130,198          116,072         $11.47
</TABLE>


         Activity during the nine months ended March 31, 1999 included:


<TABLE>
<S>                                    <C>
                 Granted               47,250
                Canceled                5,260
               Exercised               42,970
</TABLE>

         The exercise price of individual vested stock options ranged from a low
of $9.50 per share to a high of $17.50 per share as of March 31, 1999.


         HF BANCORP, INC. STOCK BASED INCENTIVE PLAN:  STOCK AWARD INFORMATION

<TABLE>
<CAPTION>
                                                                         Stock
                                                         Stock          Awards
                          Stock           Stock         Awards       Available
                         Awards          Awards   Cumulatively      For Future
Date                 Authorized     Outstanding         Vested          Grants
----                 ----------     -----------   ------------      ----------
<S>                  <C>            <C>           <C>               <C>   
06/30/98                198,375         102,925         68,257          27,193
09/30/98                198,375          99,565         74,917          23,893
12/31/98                198,375         107,565         74,917          15,893
03/31/99                198,375          84,712         97,770          15,893
</TABLE>


         Activity during the nine months ended March 31, 1999 included:


<TABLE>
<S>                                    <C>
                 Granted               11,300
                Canceled                    0
                  Vested               29,513
</TABLE>



                                       12

<PAGE>   13

NOTE 6: Restructuring Charges

         During the quarter ended June 30, 1998, the Company recorded a $1.06
million charge associated with restructuring the Bank's branch network and
eliminating eight full-time equivalent positions, including a layer of
management. This restructuring charge was recognized in conjunction with a
business restructuring plan meeting the criteria for accrual under the guidance
of EITF 94-3. The types of expenses incorporated in the restructuring charge
included costs for employee severance, lease buyouts, abandoned building
improvements, long lived asset impairment as defined under SFAS No. 121, and
construction work to return several then existing branch sites to "retail shell"
or similar condition. At June 30, 1998, $716 thousand of these charges remained
accrued and were included in Accounts Payable And Other Liabilities on the
Consolidated Statements Of Financial Condition.

         In the three quarters since the charge was announced, the Company has
completed the vast majority of the business restructuring plan. The Rancho
Bernardo, Idyllwild, San Jacinto, and Rancho Mirage branches were relocated to
new facilities. The former Diamond Valley branch was merged into the nearby, and
larger, Hemet West branch. The targeted staff positions (eight full-time
equivalents) were eliminated. As of March 31, 1999, the Company maintained a
remaining accrued restructuring charge balance of $212 thousand. At March 31,
1999, the primary remaining outstanding cost associated with the restructuring
plan was the settlement of a lease termination for one of the former branch
sites. The Bank has been conducting ongoing negotiations with the landlord for
this site, and management anticipates settling the lease termination for no more
than the remaining accrued balance.


NOTE 7:  Commitments And Contingencies

         At March 31, 1999, the Company maintained commitments to sell $934
thousand in residential fixed rate mortgage loans on a servicing released basis,
to originate $12.6 million in various types of loans, and to purchase $640
thousand in loans secured by multifamily real estate. The Company maintained no
commitments to assume borrowings, purchase securities, or sell securities at
March 31, 1999.


NOTE 8: Recent Accounting Pronouncements

         In October 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 134 "Accounting For Mortgage-Backed Securities Retained After
The Securitization Of Mortgage Loans Held For Sale By A Mortgage Banking
Enterprise". The Company realized no impact upon adoption of this Statement on
January 1, 1999, as the Company has not securitized mortgage loans held for sale
during fiscal 1999 and has had no such securities on its balance sheet during
fiscal 1999.


                                       13

<PAGE>   14

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Forward-Looking Statements

         Certain matters discussed in this Form 10-Q Report constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act Of 1995. These forward looking statements relate to, among other
things, the nature and timing of the proposed acquisition by Temple-Inland,
Inc., expectations of the business environment in which the Company operates,
projections of future performance, adequacy of the allowance for estimated loan
losses, trends in credit experience, 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 involve
risks and uncertainties. The Company's actual results, performance, or
achievements may differ materially from those suggested, expressed, or implied
by forward looking statements due to a wide range of factors including, but not
limited to, the extent to which the Company's operations and results are
impacted by its proposed acquisition, customer response to the proposed
acquisition, the general business environment, the California real estate
market, competitive conditions among bank and non-bank financial services
providers, changes in laws or regulations, and other risks detailed in the
Company's reports filed with the Securities and Exchange Commission, including
the Annual Report on Form 10-K for the fiscal year ended June 30, 1998. The
Company does not undertake, and specifically disclaims any obligation, to update
any forward looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.


General

         HF Bancorp, Inc. (referred to herein on an unconsolidated basis as
"HFB" and on a consolidated basis as the "Company") is a savings & loan holding
company incorporated in the State of Delaware whose principal business is to
serve as a holding company for Hemet Federal Savings & Loan Association (the
"Bank") and for other banking or banking related subsidiaries which the Company
may establish or acquire. The Company's common stock is listed on the Nasdaq
National Market ("NASDAQ") under the symbol "HEMT".

         At March 31, 1999, the Company had $1,023.1 million in assets, $611.6
million in net loans receivable, and $885.4 million in 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, electronic mail address CORPINFO@HEMETFED.COM. 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.

         The Company conducts business from eighteen full service branch offices
(including one supermarket branch), one loan production office, and one
centralized loan servicing center. In addition, the Company supports its
customers through 24 hour telephone banking, a transaction capable Internet
site, and ATM access through an array of networks including STAR, CIRRUS, PLUS,
and NOVUS. Through its banking offices, the Bank emphasizes personalized service
focused upon two primary markets: households and small businesses. The Bank
offers a wide complement of lending and depository products. The Bank also
supports its customers by functioning as a federal tax depository, providing
merchant bankcard services, issuing debit cards, and supplying various forms of
electronic funds transfer. In addition, the Bank, through third party
relationships and its First Hemet Corporation ("FHC") subsidiary, makes various
non FDIC insured investment products available to its customers, including
mutual funds and selected insurance related products.



                                       14

<PAGE>   15

Acquisition By Temple-Inland, Inc.

         As previously announced, on November 14, 1998, the Company entered into
an Agreement and Plan of Merger with Temple Inland, Inc., pursuant to which the
Company will be merged with and into Temple-Inland. The merger is subject to
regulatory and shareholder approvals. An application for regulatory approval has
been filed with the Office Of Thrift Supervision and is pending. The Company has
scheduled a special shareholders meeting to consider the proposed acquisition on
June 22, 1999.

         Year 2000 Computer Issue

         The Year 2000 Issue concerns the potential impact of historic computer
software code that only utilizes two digits to represent the calendar year (e.g.
"99" for "1999"). Software so developed could produce inaccurate or
unpredictable results upon January 1, 2000, when current and future dates
present a lower two digit year number than dates in the prior century. The
Company, similar to most financial services providers, is significantly subject
to the potential impact of the Year 2000 Issue due to the extensive presence of
dates in financial information. Potential impacts to the Company may arise from
software, hardware, and equipment both within the Company's direct control and
outside of the Company's ownership, yet with which the Company electronically or
operationally interfaces. Financial institution regulators have intensively
focused upon Year 2000 issues, issuing guidance concerning the responsibilities
of senior management and directors. Year 2000 testing and certification is being
addressed as a key safety and soundness issue in conjunction with regulatory
exams.

         In order to address the Year 2000 Issue, the Company has developed and
implemented a five phase plan divided into the following major components:

         1.  awareness
         2.  assessment
         3.  renovation
         4.  validation
         5.  implementation

         The Company has finished the first three phases of its Year 2000 plan,
and has completed the vast majority of the final two phases. The Company is
currently working internally and with external vendors on completing the final
two phases prior to June 30, 1999. Because the Company outsources its data
processing and item processing operations, a significant component of the Year
2000 plan is to work with external vendors to test and certify their systems as
Year 2000 compliant. Other important segments of the Year 2000 plan are to
identify loan customers whose possible lack of Year 2000 preparedness might
expose the Bank to financial loss, and to highlight any servicers of purchased
loans or securities which might present Year 2000 related operating problems.

         The Board Of Directors has established a Year 2000 subcommittee to
monitor progress with achieving and certifying Year 2000 compliance. In
addition, the Company has utilized an external consulting firm to assist with
its Year 2000 program.

         The Company has no significant internally generated software coding to
correct, as substantially all of the software utilized by the Company is
purchased or licensed from external providers. The Company believes that it has
relatively little exposure to contingencies related to the Year 2000 Issue for
products it has sold due to the nature of its business.



                                       15

<PAGE>   16

The Company has recently conducted the following Year 2000 related activities:

o        Validation testing with the Company's primary data processor has been
         completed. No significant shortcomings arose as a result of the
         testing. Regulatory examinations for the Company's primary data
         processor have been satisfactory. The Company's primary data processor
         has contacted 100% of third-party vendors with which it interfaces. 97%
         of those vendors have responded. The primary data processor has
         scheduled testing with 76% of the third party vendors and has completed
         61% of this testing. Test results to date have been successful. The
         remaining third-party testing is scheduled to be completed by June 30,
         1999.

o        The Company continues to monitor Year 2000 testing and validation
         performed by its primary item processor. This testing and validation
         has not indicated any significant shortcomings. Recent regulatory
         examinations for the Company's primary item processor have been
         satisfactory.

o        The Company has communicated with servicers and trustees for a majority
         of its securities portfolio. These entities (primarily government
         sponsored enterprises such as the Federal National Mortgage
         Association) have provided information in regards to their Year 2000
         readiness. No significant risk to the Company has been identified
         through this process. However, the Company maintains little opportunity
         to independently verify the responses from most servicers, including
         the government sponsored enterprises.

o        Due to the age of much of the hardware and software utilized by the
         Company at the beginning of calendar year 1998, and in conjunction with
         its strategic plan, the Company has installed a new branch computer
         environment. The new PC hardware associated with this upgrade completed
         the Company's certification of all PC, network, and data
         telecommunications hardware throughout the organization as Year 2000
         compliant.

o        Those ATM's requiring new hardware and / or software to achieve Year
         2000 compliance have been upgraded, and all new ATM's acquired have
         been Year 2000 certified. In addition, Year 2000 testing for the third
         party which drives the Company's ATM's has been completed by the Bank's
         primary data processor with no significant issues identified.

o        The Company introduced debit cards and a transaction capable Internet
         site during the quarter ended December 31, 1998. Prior to implementing
         these new services, Year 2000 testing was conducted with no
         shortcomings identified.

o        In conjunction with the Federal Reserve, the Bank is in the process of
         testing of its FedWire wire transfer system for Year 2000 compliance.
         This testing will be completed in May, 1999. All test results to date
         have been favorable, with no lack of Year 2000 compliance indicated.

o        The Company has corresponded with those loan customers whose business
         or cash flow might be interrupted by a lack of Year 2000 compliance in
         some aspect of their operation and who present a credit exposure of at
         least $500 thousand to the Company. No responses received to date have
         highlighted the likelihood of significant financial loss to the
         Company. A risk analysis has been completed for these loan customers
         and no significant Year 2000 exposure to the Company has been
         identified.

o        The Company continues to communicate awareness and readiness to its
         customers through marketing materials in the branches and information
         posted on its web site.

         The Company's Year 2000 compliance plans have been finalized.



                                       16

<PAGE>   17

         The Company has conducted formal communications with all of its
significant suppliers (112 vendors) to determine the extent to which it is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. These formal communications included a request that the vendor complete
a Year 2000 status survey. The Company also requested that third party vendors
represent their products and services to be Year 2000 compliant and that they
have a program to test for that compliance. Each vendor was ranked as High,
Medium, or Low on their impact to the Company in event of a Year 2000 failure.
If the vendor failed to respond to the first inquiry, a second letter was mailed
certified receipt requested.

         Of the one hundred twelve vendors contacted, forty-three were ranked
has having a High impact to the bank in case of a Year 2000 failure. Only one of
the High impact vendors has failed to respond. Twelve vendors were ranked as
having a Medium impact. Only one of the Medium impact vendors has failed to
respond. Fifty-seven were ranked as having a Low impact with only three failing
to respond.

         For each of those vendors that have failed to respond, HF Bancorp has
contingency plans or replacement vendors for these services lined up in case of
Year 2000 failures. Every vendor that has been ranked as having a High or Medium
impact to the Company has a Year 2000 testing script associated with it. Each of
these vendors has been or is in the process of being tested for their Year 2000
compliance. Where the Company can test these vendors, teams have been set up to
execute test scripts once the testing time slots have been made available by the
vendors. Significant successful testing has been completed with several material
third party vendors. In some circumstances, the Company will not be able to
perform actual testing of their systems and will have to rely on proxy testing
for validation. This proxy testing is in progress with successful results coming
in regularly. The Company anticipates that this testing will be completed by
June 30, 1999.

         In the unlikely event that a disruption occurs that materially affects
operations, the Company would implement disaster recovery contingency plans. The
Company has conducted both applications and third party testing during the 1998
calendar year as part of its annual disaster recovery plan testing. In addition,
the Company used a full day system outage by its primary service bureau in
February, 1999 as an opportunity to test its Year 2000 contingency plans. The
Company plans to replicate this testing as well as other scenarios in the second
quarter of calendar 1999. The Company intends to complete substantially all of
its contingency testing no later than June 30, 1999. Year 2000 contingency
planning involves four phases:

         1.       establishing organizational planning guidelines
         2.       completing a business impact analysis
         3.       developing a business resumption contingency plan
         4.       validating the business resumption contingency plan

         The Company's total Year 2000 estimated project cost, which is based
upon currently available information, includes expenses for the review and
testing of third parties, including government entities. However, there can be
no guarantee that the hardware, software, and systems of such third parties will
be without unfavorable Year 2000 issues and therefore not present a material
adverse impact upon the Company. Year 2000 compliance costs incurred during
fiscal 1999 totaled approximately $11 thousand. This figure does not include the
implicit costs associated with the reallocation of internal staff hours to Year
2000 project related efforts. At this time, management currently estimates
additional Year 2000 compliance costs, which are expensed on a current period
basis, at between zero and $25 thousand. This range of costs does not include
normal ongoing costs for computer hardware and software that would be replaced
even without the presence of the Year 2000 Issue in conjunction with the
Company's ongoing programs for updating its delivery and service infrastructure.
At this time, no significant projects have been delayed as a result of the
Company's Year 2000 effort.

         While there can be no guarantee that Year 2000 problems will not occur,
the Company believes its efforts have addressed the risks and that contingency
plans will be in place for the unexpected.



                                       17

<PAGE>   18

Overview Of Business Activity And Results

         Results for the nine months ended March 31, 1999 were significantly
influenced by four primary factors:

1.       A significant decline in the provision for estimated loan losses in the
         nine months ending March 31, 1999 versus the same period the prior
         fiscal year. This reduction stemmed from historically high provisions
         during the third quarter of fiscal 1998, real estate appreciation over
         the past twelve months in the vast majority of the markets in which the
         Company lends, and a continuing favorable trend in most of the
         Company's measures of credit profile during fiscal 1999.

2.       Expenses associated with the implementation of the Company's strategic
         plan of evolving an almost 80 year old savings & loan into a community
         based financial services firm.

3.       The November 14, 1998 signing of a definitive agreement to sell the
         Company to Temple-Inland, Inc., which triggered various events,
         including the liability for significant merger related expenses,
         restrictions on the Company's operations, a modification in the
         Company's strategic plan, and a redirection of various internal
         resources towards facilitating a timely and effective close to the
         transaction.

4.       The historically low level of general market interest rates during the
         fiscal year, combined with a relatively flat Treasury curve,
         particularly during the first six months of fiscal 1999. This
         environment fostered high prepayments on a variety of mortgage related
         assets, which in turn affected net interest income and the composition
         of the Company's balance sheet.

         The confluence of the above factors led to improved financial results
for the three and nine months ended March 31, 1999 compared to like periods
during the prior fiscal year, as progress in net interest income, credit
experience, and fee income more than offset higher operating costs. However,
despite this improvement, the Company's return on assets, return on equity, and
efficiency ratio in fiscal 1999 remained below peer institutions.

         With the signing of the definitive agreement, the Company became liable
to pay its investment banking firm 1.25% of the market value of the
consideration paid to the shareholders of the Company, with such fee segmented
into a series of payments based upon the progress of the sale. Additional costs
were incurred, and will be incurred through the close of the sale, for legal,
accountant, and other services. These additional expenses reduced fiscal 1999
year to date earnings and will continue to impact results through to the close
of the proposed transaction. The definitive agreement includes various operating
restrictions, including limitations on investment security purchases and lending
activity. These restrictions unfavorably affected earnings during the period
following the signing of the definitive agreement. With the announcement of the
Company's sale, certain strategic projects, including a new loan origination
system and the migration to a "proof of deposit" ("POD") branch operations
environment, were placed on hold. Internal resources previously assigned to
these projects were reallocated toward facilitating the legal and operational
(including systems conversion) aspects of timely concluding the transaction with
Temple- Inland, Inc.

         Additional information concerning the above factors and events is
presented in the pages which follow.


                                       18

<PAGE>   19

Changes In Financial Condition From June 30, 1998 to March 31, 1999

         Total assets decreased $22.7 million, or 2.2%, from $1,045.8 million at
June 30, 1998 to $1,023.1 million at March 31, 1999. Total assets rose $1.5
million during the three months ended March 31, 1999, primarily due to a $1.2
million rise in deposits.

         Cash & cash equivalents rose from $27.7 million at June 30, 1998 to
$42.4 million at March 31, 1999. In HF Bancorp Inc.'s Form 10-Q as of December
31, 1998, the Company reported that it had built up a balance of short term
funds in preparation for a planned wholesale loan purchase during the third
quarter of fiscal 1999. Due to limited secondary market supply of the types of
residential loans (Treasury based adjustable rate mortgages, 3/1 and 5/1 hybrid
loans) sought by the Company and the resulting comparatively high pricing,
management decided to instead purchase short term collateralized mortgage
obligations. While the Company purchased $66.0 million (par value) in
collateralized mortgage obligations during the third quarter of fiscal 1999, it
would have acquired an additional $15.0 million if suitable product had been
available. As a result, as of March 31, 1999, the Company carried cash
equivalent balances approximately $15.0 million in excess of those normally
maintained.

         In conjunction with the Company's adoption of SFAS No. 133 (see Note
3), all investment and mortgage-backed securities were designated as
available-for-sale effective July 1, 1998 in order to provide the Company with
enhanced flexibility in balance sheet and interest rate risk management.

         Total securities declined from $396.8 million at June 30, 1998 to
$334.5 million at March 31, 1999 due to amortization, prepayments, sales, and
calls being only partially offset by new purchases. Funds from the reduction in
mortgage-backed security balances were reinvested into the loan portfolio, used
to repay maturing borrowings, and retained in short term cash equivalents, as
described above. The Company experienced historically high prepayment speeds for
mortgage related securities during fiscal 1999 primarily because of the
availability of new fixed rate mortgages with rates below 7.00% and the
historically flat and low shape of the Treasury yield curve throughout most of
the fiscal year.

         Security acquisitions in fiscal 1999 have been concentrated in fixed
rate, private label, AAA rated, low duration collateralized mortgage
obligations, resulting in a significant reduction in the Company's
mortgage-backed security portfolio, as prepayments and sales associated with
mortgage-backed securities were not offset with sufficient new purchases.
Security purchases since the signing of the definitive agreement have been
conducted in accordance with the limitations and terms contained within that
document. During fiscal 1999, the Company has generally avoided purchasing
adjustable rate securities because of concerns over prepayment exposure and
declines in underlying indices, both of which present the potential for impaired
total return. The Company sold $27.9 million in long term, fixed rate mortgage
backed securities in the quarter ended December 31, 1998 to support its interest
rate risk management program and to better diversify the Bank's investment
portfolio. This was the only security sale during the first nine months of
fiscal 1999.

         Net loans receivable increased 5.2% from $581.2 million at June 30,
1998 to $611.6 million at March 31, 1999. Net loans receivable were almost flat
during the most recent three months, as prepayments and sales offset new credit
commitments. The ratio of loans to deposits rose from 67.5% at the end of the
prior fiscal year to 69.4 % at the conclusion of the most recent quarter. The
nominal and relative increases in the loan portfolio have been key objectives of
management in implementing the Company's strategic plan.

         Credit commitments during the first nine months of fiscal 1999 totaled
$206.0 million, down from $226.6 million during the same period during the prior
fiscal year. However, the prior fiscal year total included $107.7 million in
wholesale purchases of residential hybrid loans which are fixed for an extended
initial period (generally three to five years) and then convert to an adjustable
rate mortgage (generally annually adjusting based upon the One Year Treasury
Constant Maturity Index). No such wholesale residential loan purchases occurred
during the first nine months of fiscal 1999. However, the first nine months of
fiscal 1999 included the acquisition of $47.2 million in apartment loans sourced
through a mortgage banker, whereas the first nine months of the prior fiscal
year contained no similar activity.



                                       19

<PAGE>   20

         Expansion in net loans receivable was constrained by prepayments,
particularly on the Company's portfolio of residential adjustable rate loans, as
consumers sought to refinance with interest rates at historically low levels.
The Company originated $66.2 million in multifamily real estate loans during the
nine months ending March 31, 1999, up significantly from the $14.1 million
funded during the first nine months of the prior fiscal year. The Company
increased its emphasis upon apartment loans during fiscal 1999 in order to
diversify its loan portfolio away from its historically high concentration in
lower yielding single family mortgages and in order to improve the efficiency of
origination in conjunction with the larger average loan sizes for apartment
loans. Construction lending expanded from $7.6 million to $13.6 million during
the three months ended March 31, 1999 and from $24.9 million to $35.4 million
during the nine months ended March 31, 1999. The strength of the real estate
markets in many of the communities in which the Company operates combined with
the limited supply of housing built during the recessionary period from the
early to the mid 1990's to create enhanced construction lending opportunities
for the Company.

         Net loans available for sale decreased from $3.8 million at June 30,
1998 to $2.8 million at March 31, 1999. The Company's pipeline of fixed rate,
refinance mortgages began to decline toward the end of the fiscal third quarter
due to a moderating of the refinance boom experienced earlier in the fiscal year
and due to customer and counterparty response to the pending sale of the
Company. Management believes that segments of retail customers and mortgage
brokers are uncomfortable having their mortgage loan(s) in process with a bank
during an acquisition and pending a computer systems conversion, and that this
will continue to impact credit commitments during the remaining period prior to
the close of the proposed acquisition.

         The Company's investment in the capital stock of the Federal Home Loan
Bank ("FHLB") increased from $8.0 million at June 30, 1998 to $8.4 million at
March 31, 1999 due to dividends credited. The Bank has been notified by the FHLB
that its excess capital stock ownership position ($1.1 million) is below the
threshold for mandatory redemption. Management may, however, determine to sell
some or all of its excess FHLB stock consistent with liquidity, profitability,
and tax planning considerations.

         Net premises and equipment declined from $7.1 million at June 30, 1998
to $6.2 million at March 31, 1999 due to the sale of the former sites for the
Bank's Rancho Bernardo and Idyllwild branches, periodic depreciation and
amortization, and a reduction in capital spending activity following the signing
of the definitive agreement.

         The Company's net investment in real estate acquired through
foreclosure decreased from $1.7 million at June 30, 1998 to $825 thousand at
March 31, 1999. The Company sold $2.2 million in foreclosed real estate during
the past nine months, highlighting the relatively rapid turnover experienced in
the Company's inventory of foreclosed properties. This has resulted from a
continued strengthening in real estate values in many of the Company's lending
markets, which in turn has increased buyer interest and supported better sales
prices. At March 31, 1999, the Company's inventory of foreclosed properties was
comprised of one multifamily building and twelve residential properties, four of
which were in escrow for sale at prices exceeding net book value. However, no
assurances can be given regarding whether these escrows will close or concerning
the financial results from such transactions.

         Gross intangible assets declined from $12.1 million at June 30, 1998 to
$10.4 million at March 31, 1999 due to the continued amortization of the
intangible assets generated in conjunction with the North San Diego County
branch purchase from Hawthorne Savings and the Palm Springs Savings Bank
("PSSB") acquisition. Under OTS regulations, intangible assets net of associated
deferred tax liabilities reduce regulatory capital, resulting in lower capital
ratios than would otherwise be the case. At March 31, 1999, the reduction in the
Bank's regulatory capital resulting from intangible assets was $7.8 million.



                                       20

<PAGE>   21

         Total deposits rose 2.2% from $866.7 million at June 30, 1998 to $885.4
million at March 31, 1999. Key trends within the deposit portfolio included:

o        Checking account balances expanded from $88.2 million at June 30, 1998
         to $99.1 million at March 31, 1999. The Company has continued to target
         increases in checking accounts as a source of low cost funds and
         non-interest income, with efforts in fiscal 1999 including the
         introduction of a transaction capable Internet site, the installation
         of additional ATM's, and an alteration in branch staff incentive
         program emphasis.

o        Customers responded positively to the Bank's "Platinum" money market
         deposit account, which provides competitive, highly tiered rates for
         liquid funds. In conjunction with this product, total money market
         deposits increased from $82.2 million at June 30, 1998 to $121.0
         million nine months later. This growth occurred despite repeated
         reductions in pricing in response to the three cuts in the federal
         funds rate implemented by the Federal Reserve during the nine months
         ended March 31, 1999.

o        Savings deposits fell from $88.0 million at June 30, 1998 to $73.4
         million at March 31, 1999, as the Company continued to price its
         passbook based products less aggressively in order to encourage
         customer migration into statement based products. Management believes
         statement based products present the Bank with fewer operational issues
         (and losses), result in faster customer service, and more effectively
         mesh with upcoming advances in technology. The decline in savings
         balances during the most recent quarter also stemmed from a number of
         higher balance customers moving their savings funds into the Platinum
         money market product. In the fourth quarter of fiscal 1999, the Company
         will cease opening new passbook based accounts in preparation for the
         conversion to Guaranty Federal Bank's computer system, which does not
         support passbook based depository products.

o        Certificate of deposit balances fell $16.3 million, or 2.7%, from
         $608.2 million at June 30, 1998 to $592.0 million at March 31, 1999.
         During fiscal 1999, the Company priced its certificates of deposit
         relatively less aggressively than in prior periods to more quickly
         reduce the Bank's cost of funds and due to the Company's high
         liquidity. This pricing strategy, when combined with the aforementioned
         changes in mix and some significant rate rolldowns on maturing longer
         term CD's, led to a 30 basis point decline in the Bank's weighted
         average cost of deposits during the first nine months of fiscal 1999.

         During the nine months ended March 31, 1999, the Bank experienced
relatively favorable results for the four branches relocated and one branch
merged during the fiscal year. Deposit attrition from relocated portfolios was
very moderate. In addition, new account activity has been strong for several of
the relocated branches, particularly at the Palm Desert location (moved into
during January, 1999). The San Jacinto branch, relocated earlier this fiscal
year to the Company's first supermarket facility, has experienced favorable new
account activity for checking and money market accounts, in addition to
significant internal and "foreign" customer utilization of the newly installed
ATM.




                                       21

<PAGE>   22


         Advances from the FHLB-SF declined from $85.0 million at June 30, 1998
to $45.0 million at March 31, 1999. $65.0 million of the June 30 inventory of
advances matured during October, 1998. The Company utilized this opportunity to:

o        redeploy funds from security prepayments and sales to reduce borrowings

o        extend $25.0 million in advances out to between two and three years,
         thereby improving the Company's interest rate risk profile

o        decrease the weighted average nominal cost of advances from 5.24% to
         4.91%

         Total stockholders' equity rose from $83.8 million at June 30, 1998 to
$85.8 million at March 31, 1999. Factors contributing to this increase included:

o        net income generated for the fiscal year to date

o        continued amortization of the Company's deferred stock compensation

o        the exercise of stock options (funded with Treasury stock) during the
         current fiscal year

The above factors more than offset:

o        depreciation in the portfolios of investments designated as
         available-for-sale, with the equity impact of this depreciation
         augmented by the realization of $159 thousand in pre-tax gains on the
         sale of available-for-sale securities during fiscal 1999.

         As a result of the above equity increase and the continued amortization
of intangible assets, the Company's tangible book value per share increased from
$11.71 at June 30, 1998 to $12.16 at March 31, 1999.


Interest Rate Risk Management And Exposure

         In an effort to limit the Company's exposure to interest rate changes,
management monitors and evaluates interest rate risk on a regular basis,
including participation in the OTS Net Portfolio Value Model and associated
regulatory reporting. Management acknowledges that interest rate risk and credit
risk compose the two greatest financial exposures faced by the Company in the
normal course of its business.

         In recent quarters, the Company has maintained a net liability
sensitivity in regards to net portfolio value, also referred to as market value
of portfolio equity. This means that the fair value of the Company's assets is
more volatile than that of its liabilities. This net liability sensitivity
primarily arises from the longer term, higher duration mortgage-backed
securities and whole loans maintained on the Company's balance sheet, for which
the Company's only current match funding sources are demand deposit accounts,
non interest bearing liabilities, a segment of core deposits transaction
accounts, certain borrowings, and capital. A net liability sensitive position
typically translates to improved net portfolio value during periods of falling
general market interest rates. Conversely, this position presents the likelihood
of reductions in net portfolio value during increasing rate environments.
However, in addition to the overall direction of general market interest rates,
changes in relative rates (i.e. the slope of the term structure of interest
rates) also impact net portfolio value and the Company's profitability.



                                       22

<PAGE>   23

         The Company's net liability sensitivity declined during the first nine
months of fiscal 1999 due to multiple factors, including:

o        The sale of $27.9 million in long term, fixed rate Agency
         mortgage-backed securities during the second fiscal quarter.

o        The extension of $25.0 million in maturing FHLB advances to terms of
         between two and three years during the second fiscal quarter.

o        A $35.0 million rise in transaction accounts. Checking accounts (and to
         a lesser degree savings and money market accounts) are generally less
         interest rate sensitive than certificates of deposit and other
         alternative funding sources.

o        An increase in prepayment speeds on higher duration assets maintained
         on the balance sheet. As a result, there are both fewer such remaining
         assets and those which do remain present shorter average lives and thus
         less volatility in value.

o        Associated with the above factor, long term, fixed rate residential
         loans held for portfolio declined from $134.9 million at June 30, 1998
         to $121.5 million at March 31, 1999.

o        An increase in capital. Higher capital levels reduce the percentage
         impact or relative exposure from a given volatility in net portfolio
         value.

o        The call of the final $10.8 million in long term, fixed rate Agency
         debentures owned by the Company on June 30, 1998.

o        The concentration of new security purchases into relatively low
         duration collateralized mortgage obligations with above market coupons
         and limited extension risk, thereby moderating the average duration of
         the Company's assets and providing some measure of total return
         protection in rising interest rate environments.

         The Company's final two active interest rate swaps matured in January,
1999. The amortization period for the Other Comprehensive Income adjustment
stemming from the Company's final terminated interest rate swap concluded in
November, 1998. Consequently, at March 31, 1999, the Company maintained no
derivative positions and recorded no equity adjustment resulting from its July
1, 1998 adoption of SFAS No. 133.

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. HFB's and the Bank's investment portfolios are
structured to provide an ongoing source of cash from scheduled payments and
anticipated prepayments from mortgage related securities, in addition to cash
flows from periodic maturities.

         At March 31, 1999, the Company maintained $42.4 million in cash and
cash equivalents, untapped borrowing capacity of $390.4 million at the FHLB-SF,
and 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. In addition, the Bank has been granted three
federal funds lines of credit from correspondent financial institutions, with an
aggregate borrowing capacity of $20.0 million. However, there can be no
assurance that funds from such lines will be available at all times, or that
such lines will be maintained in future periods.

         The Bank's regulatory liquidity ratio under revised guidelines adopted
on January 1, 1998 has exceeded 15.0% since that date, versus a regulatory
requirement of 4.0%. Liquidity needs for HFB on a stand alone basis are met
through available cash, periodic earnings, cash flows from its investment
portfolio, exercises of vested stock options, and payments associated with its
loan to the ESOP.



                                       23

<PAGE>   24

Regulatory Capital Compliance

         The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required the OTS to implement a system providing for regulatory
sanctions against institutions that are not adequately capitalized. The severity
of these sanctions increases to the extent that an institution's capital
continues to decline. Under FDICIA, the OTS issued the Prompt Corrective Action
("PCA") regulations with established specific capital ratios for five separate
capital categories as set forth below:



<TABLE>
<CAPTION>
                                                 Core Capital To
                                                     Adjusted                 Core Capital To               Total Capital
                                                   Total Assets                Risk-weighted                     To
                                                 (Leverage Ratio)                 Assets                Risk-weighted Assets
                                                 ----------------                 ------                --------------------
<S>                                              <C>                          <C>                       <C>
Well capitalized                                   5% or above                  6% or above                 10% or above
Adequately capitalized                             4% or above                  4% or above                  8% or above
Undercapitalized                                     Under 4%                    Under 4%                     Under 8%
Significantly undercapitalized                       Under 3%                    Under 3%                     Under 6%
Critically undercapitalized                           Ratio of tangible equity to adjusted total assets of 2% or less
</TABLE>


         The following table summarizes the capital ratios required by FDICIA
for an institution to be considered well capitalized and the Bank's regulatory
capital at March 31, 1999 as compared to such ratios.


<TABLE>
<CAPTION>
                                                 Core Capital To           Core Capital To          Total Capital To
                                                    Adjusted                Risk-weighted             Risk-weighted
                                                  Total Assets                 Assets                     Assets
                                               --------------------       -------------------       -------------------
                                               Balance      Percent       Balance     Percent       Balance     Percent
                                               -------      -------       -------     -------       -------     -------
                                                                        (Dollars In Thousands)
<S>                                          <C>            <C>         <C>           <C>          <C>          <C>   
Hemet Federal's regulatory capital           $   67,978      6.74%      $ 67,978       14.97%      $ 73,457      16.17%
Well capitalized requirement                     50,464      5.00         27,253        6.00         45,422      10.00
                                             ----------      ----       --------       -----       --------      -----
Excess                                       $   17,514      1.74%      $ 40,725        8.97%      $ 28,035       6.17%
                                             ==========      ====       ========       =====       ========      =====
                                                                                    
Adjusted assets (1)                          $1,009,289                 $454,220                   $454,220
                                             ==========                 ========                   ========
</TABLE>

 (1) The term "adjusted assets" refers to the term "adjusted total assets" as
defined in 12 C.F.R. section 567.1(a) for purposes of core capital requirements,
and refers to the term "risk-weighted assets" as defined in 12 C.F.R. section
567.1(bb) for purposes of risk-based capital requirements.




                                       24

<PAGE>   25

         The Bank is also subject to OTS capital regulations under the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") and
amendments thereto. These regulations require the Bank to maintain: (a) tangible
capital of at least 1.5% of adjusted total assets (as defined in the
regulations), (b) core capital of at least 4.0% of adjusted total assets (as
defined in the regulations), and (c) total capital of at least 8.0% of
risk-weighted assets (as defined in the regulations).

         The following table summarizes the regulatory capital requirements
under FIRREA for the Bank. As indicated in the table, Hemet Federal's capital
levels at March 31, 1999 exceeded all three of the currently applicable minimum
FIRREA capital requirements.


<TABLE>
<CAPTION>
                                                                     Percent Of
                                                                       Adjusted
                                                       Amount      Total Assets
                                                       ------      ------------
                                                       (Dollars In Thousands)
<S>                                                  <C>                   <C>  
Tangible Capital
Regulatory capital                                   $ 67,978              6.74%
Minimum required                                       15,139              1.50
                                                     --------              ----
Excess                                               $ 52,839              5.24%
                                                     ========              ====


Core Capital
Regulatory capital                                   $ 67,978              6.74%
Minimum required                                       40,372              4.00
                                                     --------              ----
Excess                                               $ 27,606              2.74%
                                                     ========              ====
</TABLE>

<TABLE>
<CAPTION>
                                                                     Percent Of
                                                                  Risk-weighted
                                                       Amount            Assets
                                                       ------            ------
<S>                                                  <C>                 <C>   
Risk-based Capital
Actual capital                                       $ 73,457             16.17%
Minimum required                                       36,338              8.00
                                                     --------             -----
Excess                                               $ 37,119              8.17%
                                                     ========             =====
</TABLE>


         At March 31, 1999, the Bank's regulatory capital levels exceeded the
thresholds required to be classified as a "well capitalized" institution. The
Bank's regulatory capital ratios detailed above do not reflect the additional
capital (and assets) maintained by the holding company. Management believes
that, under current regulations, the Bank will continue to meet its minimum
capital requirements. 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.



                                       25

<PAGE>   26

Credit Profile

         Nonperforming Assets

         The following table sets forth information regarding non accrual loans,
real estate acquired through foreclosure, and repossessed consumer assets.


<TABLE>
<CAPTION>
                                                                           March 31, 1999         June 30, 1998
                                                                           --------------         -------------
                                                                                  (Dollars In Thousands)

<S>                                                                               <C>                   <C>    
Gross non accrual loans before valuation reserves                                 $ 7,107               $ 4,276
Investment in foreclosed real estate before valuation reserves                        916                 1,853
                                                                                  -------               -------
     Total nonperforming assets                                                   $ 8,023               $ 6,129
                                                                                  =======               =======

Non accrual loans to gross loans net of undisbursed loan funds                      1.14%                 0.72%
Nonperforming assets to total assets                                                0.78%                 0.59%
</TABLE>


         The following table presents a profile of gross non accrual loans at
March 31, 1999.


<TABLE>
<CAPTION>
                  Gross Non Accrual Loans                                  March 31, 1999
                                                                           --------------
                                                                   (Dollars In Thousands)

                  <S>                                                       <C>
                  Residential real estate                                       $   4,079
                  Multifamily real estate                                             338
                  Commercial & industrial real estate                                 611
                  Construction                                                         90
                  Land / Lots                                                       1,742
                  Consumer                                                            193
                  Commercial business                                                  54
                                                                                ---------
                       Total                                                    $   7,107
                                                                                =========
</TABLE>


         The increase in non accrual loans during fiscal 1999 primarily resulted
from:

o        the placement of a $975 thousand loan secured by residential lots onto
         non accrual status

o        cash flow deterioration for certain income property loans

o        retaining reinstated loans on non accrual status pending verification
         of collateral values and cash flow adequacy

         Approximately $2.2 million of the non accrual loans at March 31, 1999
were paying according to contractual terms. In addition, a continuing recovery
in real estate markets and the economy in the Company's primary lending areas
has favorably impacted the Company's ability to dispose of foreclosed real
estate, contributing to the reduction in foreclosed real estate balances during
fiscal 1999 year to date.



                                       26

<PAGE>   27

         Criticized And Classified Assets

         The following table presents information concerning the Company's
inventory of criticized ("OAEM") and classified ("substandard" and lower)
assets. The category "OAEM" refers to "Other Assets Especially Mentioned", or
those assets which present indications of potential future credit deterioration.



<TABLE>
<CAPTION>
                                             History of Classified Assets
                                                (Dollars In Thousands)
                                   OAEM           Substandard          Doubtful             Loss             Total
                                   ----           -----------          --------             ----             -----
<S>                               <C>         <C>                      <C>                 <C>              <C>
June 30, 1997                     $9,586            $19,834               --               $2,952           $32,372
September 30, 1997                $8,656            $15,805               --               $3,051           $27,512
December 31, 1997                 $9,572            $12,932               --               $1,843           $24,347
March 31, 1998                   $10,885            $11,701              $55               $2,526           $25,167
June 30, 1998                    $20,477            $14,383               --               $2,718           $37,578
September 30, 1998               $16,698            $16,746               --               $2,010           $35,454
December 31, 1998                $14,813            $17,136               --               $1,654           $33,603
March 31, 1999                    $9,443            $16,956               --               $1,540           $27,939
</TABLE>


         The portfolio of loans acquired in conjunction with the Palm Springs
Savings Bank acquisition, which experienced a disproportionately high charge-off
rate following the acquisition, totaled $79.5 million in gross principal balance
at March 31, 1999. Of this total, $61.9 million was composed of residential
mortgages and $9.7 million was comprised of loans secured by commercial &
industrial real estate.


         Impaired Loans

         At March 31, 1999, the Company maintained total gross impaired loans,
before specific reserves, of $9.7 million, constituting 83 credits. This
compares to total gross impaired loans of $10.7 million at June 30, 1998. This
decrease was caused by the Company's continuing to foreclose upon, and generally
subsequently sell, its existing problem credits secured by real estate, the
reinstatement of previously impaired loans combined with evidence of the
capacity for future financial performance, and a limited inflow of new problem
credits due to the strength of the economy, the rebound in Southern California
real estate markets, and the favorable impact of the Company's credit management
program. A total of $1.4 million in specific reserves were established against
impaired loans at March 31, 1999, down from $2.5 million at June 30, 1998. The
average recorded investments in impaired loans during the three and nine months
ended March 31, 1999 were $9.9 million and $10.2 million, respectively.

         Of the total impaired loans at March 31, 1999, $2.6 million were either
fully current or exhibited only minor delinquency and were therefore maintained
on accrual status. Interest is accrued on impaired loans on a monthly basis
except for those loans that are 90 or more days delinquent or those loans which
are less than 90 days delinquent but where management has identified concerns
regarding the collection of the credit. For the nine months ended March 31,
1999, accrued interest on impaired loans was $18 thousand and interest of $581
thousand was received in cash. If all non accrual loans had been performing in
accordance with their original loan terms, the Company would have recorded
interest income of $569 thousand during the nine months ended March 31, 1999,
instead of interest income actually recognized on cash payments of $401
thousand.



                                       27

<PAGE>   28

         Allowance For Loan Losses

         The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risks inherent in the loan
portfolio. Management reviews the Bank's loan loss allowance on a monthly basis.
In determining levels of risk, management considers a variety of factors,
including asset classifications, economic trends, industry experience and
trends, geographic concentrations, estimated collateral values, management's
assessment of the credit risk inherent in the portfolio, historical loan loss
experience, and the Bank's underwriting policies. The allowance for loan losses
is maintained at an amount management considers adequate to cover losses in
loans receivable which are deemed probable and estimable. While management uses
the best information available to make these estimates, future adjustments to
the allowances may be necessary due to economic, operating, regulatory, and
other conditions that may be beyond the Bank's control. 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.

         The following table presents activity in the Bank's allowances for
estimated loan losses during the nine months ended March 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                                               Nine Months Ended March 31,
                                                                                               ---------------------------
                                                                                             1999                      1998
                                                                                             ----                      ----

                                                                                                  (Dollars In Thousands)
<S>                                                                                       <C>                       <C>    
Allowance for Loan Losses:
Balance at June 30                                                                        $ 6,271                   $ 4,780
    Loan chargeoffs:
          Residential real estate                                                            (362)                     (446)
          Multifamily real estate                                                            (125)                     (197)
          Commercial & industrial real estate                                                (336)                     (313)
          Construction                                                                        ---                       ---
          Land / Lots                                                                         (12)                     (288)
          Consumer                                                                            (41)                     (160)
          Commercial business                                                                (117)                      (90)
                                                                                          -------                   -------
    Total chargeoffs                                                                         (993)                   (1,494)
     Loan recoveries:
          Residential real estate                                                              50                       ---
                                                                                          -------                   -------
    Total recoveries                                                                           50                       ---
    Provision for estimated loan losses                                                     1,600                     2,700
                                                                                          -------                   -------
Balance at March 31                                                                       $ 6,928                   $ 5,986
                                                                                          =======                   =======
Ratio of net charge-offs during the period to average gross loans
     net of loans in process outstanding during the period                                   0.20%                     0.36%


                                                                                   March 31, 1999                  June 30, 1998
                                                                                   --------------                  -------------
Allowance for estimated loan losses as a percent of
     nonperforming loans                                                                    97.49%                   146.64%
Allowance for estimated loan losses as a percent of
     gross loans receivable net of loans in process                                          1.11%                     1.06%
</TABLE>




                                       28

<PAGE>   29

         Loan charge-offs during fiscal 1999 included $336 thousand for a loan
secured by a retail strip center and $125 thousand for a loan secured by an
apartment complex, both of which were located in Hemet. The ratio of allowance
for estimated loan losses to non accrual loans decreased from 146.64% at June
30, 1998 to 97.49% at March 31, 1999 due to the $2.8 million rise in non accrual
loans during the period. However, specific reserves for loans declined from $2.5
million at June 30, 1998 to $1.4 million at March 31, 1999, in part because of
improved financial performance, property values, and / or updated cash flow
information for certain loans secured by income properties. The ratio of
allowance for estimated losses to gross loans receivable net of loans in process
rose slightly from 1.06% at June 30, 1998 to 1.11% at March 31, 1999, with the
increase concentrated in the quarter ending March 31, 1999, when the Company
recorded net recoveries combined with a $400 thousand provision for estimated
loan losses. At March 31, 1999, 60.8% of the Bank's gross loan portfolio was
comprised of residential real estate loans. Multifamily loans constituted the
next largest segment, at 17.3% of the gross loan portfolio. In addition, 96.3%
of the gross loan portfolio at March 31, 1999 was composed of loans secured by
real estate of various types.

         The following presents activity in the Bank's allowances for estimated
real estate losses during the nine months ended March 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                                                Nine Months Ended March 31,
                                                                                                ---------------------------
                                                                                             1999                      1998
                                                                                             ----                      ----
                                                                                                (Dollars In Thousands)
<S>                                                                                       <C>                       <C>    
Valuation Allowances: Real Estate Acquired Through Foreclosure
Balance at June 30                                                                        $   179                   $ 1,020
   Net chargeoffs                                                                            (101)                   (1,313)
   Provision to increase valuation allowances                                                  13                       939
                                                                                          -------                   -------
Balance at March 31                                                                       $    91                   $   646

Valuation Allowances: Real Estate-Development
Balance at June 30                                                                        $     0                   $   577
   Net chargeoffs                                                                               0                      (577)
   Provision to increase valuation allowances                                                   0                         0
                                                                                          -------                   -------
Balance at March 31                                                                       $     0                   $     0

Total Valuation Allowances For Real Estate                                                $    91                   $   646
                                                                                          =======                   =======
</TABLE>

         The Company exited the real estate development business during the
first half of fiscal 1998, after the final two development projects were sold.

         The Company's inventory of foreclosed properties (thirteen at March 31,
1999) and repossessed consumer assets is summarized as follows:

       Real Estate Acquired By Foreclosure and Repossessed Consumer Assets
                                 March 31, 1999

<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               $   778       $      91      $    687         83.3%
Multifamily More Than 4 Units             138               0           138         16.7%
Commercial / Industrial                     0               0             0          0.0%
Land / Developed Lots                       0               0             0          0.0%
Repossessed Consumer Assets                 0               0             0          0.0%
                                      -------       ---------      --------        -----
     Total                            $   916       $      91      $    825        100.0%
                                      =======       =========      ========        =====
</TABLE>

         Upon acquisition, the Bank accounts for real estate owned through
foreclosure at fair market value less estimated costs to sell. Management
believes that adequate valuation reserves have been established based upon
current market conditions.



                                       29

<PAGE>   30

Comparison Of Operating Results For The Three Months And Nine Months Ended March
31, 1999 and March 31, 1998

General

         For the fiscal 1999 third quarter ended March 31, 1999, the Company
reported net income of $971 thousand, equivalent to $0.15 basic and diluted
earnings per share. This compares to a loss of $464 thousand, or $0.07 basic and
diluted loss per share, during the same period during the prior fiscal year. For
the nine months ended March 31, 1999, the Company generated net income of $1.27
million, equivalent to $0.20 basic and $0.19 diluted earnings per share. This
compares to earnings of $765 thousand, or $0.12 basic and diluted earnings per
share during the first nine months of the prior fiscal year.

         Primary factors which led to these changes in earnings included:

1.       The various impacts, particularly during the first six months of fiscal
         1999, stemming from the historically low and flat shape of the Treasury
         yield curve.

2.       The November, 1998 conclusion of the amortization period for the
         Company's final terminated interest rate swap and the maturity of the
         Bank's remaining active interest rate swap agreements during January,
         1999.

3.       Significantly lower provisions for estimated loan losses fiscal 1999
         year to date versus the first nine months of fiscal 1998. During the
         third quarter of fiscal 1998, the Company recorded substantial credit
         related costs in conjunction with the completion of an extensive review
         of the Bank's credit portfolio, which included input stemming from a
         periodic examination by the Office Of Thrift Supervision, the Bank's
         primary federal regulator.

4.       Fiscal 1999 acquisition related operating costs of $328 thousand,
         including attorney, investment banker, and accountant fees.

5.       Fiscal 1999 general & administrative expenses running above prior year
         levels due to a combination of business initiatives and particular
         events.

         The above factors are discussed in more detail in the sections which
follow.


Net Interest Income

         Net interest income increased $580 thousand (8.9%) from $6.50 million
during the quarter ended March 31, 1998 to $7.08 million during the most recent
three months. Reduced net interest expense on hedging transactions accounted for
$394 thousand, or 67.9%, of the improvement in net interest income. The figures
for net hedging expense reported by the Company reflect the adoption of SFAS No.
133 as of July 1, 1998. An increase in net interest earning assets also
significantly contributed to the expansion in net interest income.

         Net interest income for the nine months ended March 31, 1999 totaled
$19.13 million, up $415 thousand (2.2%) from $18.72 million during the same
period the prior fiscal year, as net interest expense on hedging transactions
declined $529 thousand and average net interest earning assets increased by
22.5%.



                                       30

<PAGE>   31

         Net interest income during fiscal 1999 has been constrained by the
unfavorable impacts stemming from the historically low and flat shape of the
Treasury yield curve. As a result of this interest rate environment, the Company
experienced accelerated prepayments, particularly on its portfolios of
adjustable rate mortgage related assets and higher coupon collateralized
mortgage obligations, many of which are owned at a premium to par value, as
customers took advantage of historically low fixed interest rates to refinance.
In addition, the flatness of the yield curve in fiscal 1999 reduced the spread
derived from the Company's net liability sensitive position, pressuring net
interest income, and discouraged borrowers from selecting the adjustable rate
loans that the Company utilizes to build its balance sheet.

         The Company's average spread on total assets increased from 2.41%
during the third quarter of fiscal 1998 to 2.77% during the most recent three
months. The Company's average spread on total assets during the first nine
months of the current fiscal year was 2.42%, up from 2.35% for the similar
period the prior fiscal year. During the first nine months of fiscal 1999, the
Company achieved a 30 basis point decrease in the weighted average cost of
deposits, a 33 basis point fall in the weighted average cost of borrowings,
greater ratios of loans to deposits and average interest earning assets to
average interest bearing liabilities, and a reduced loan portfolio concentration
in lower yielding residential mortgages. In addition, during the first nine
months of fiscal 1998, the Company maintained certain short term investment
positions which increased nominal net interest income, but also constrained the
average spread on total assets. The fiscal 1999 accomplishments were, however,
somewhat offset by the aforementioned impacts from the general interest rate
environment and by the imposition of balance sheet composition restrictions
commencing in mid-November with the signing of the definitive agreement to sell
the Company.

         The following tables present certain information relating to net
interest income for the three and nine months ended March 31, 1999 and 1998. The
average rates and costs are derived by dividing annualized interest income or
expense by the average balance of assets or liabilities, respectively, for the
periods shown.



                                       31

<PAGE>   32


<TABLE>
<CAPTION>
                                                 Three Months Ended March 31, 1999      Three Months Ended March 31, 1998
                                               -------------------------------------    -----------------------------------
(Dollars In Thousands)                             Average                   Average      Average                   Average
                                                   Balance     Interest         Rate      Balance     Interest         Rate
                                                   -------     --------         ----      -------     --------         ----
ASSETS:
  Interest Earning Assets:
<S>                                             <C>            <C>            <C>       <C>            <C>           <C>  
    Real Estate Loans, Net (1)                     591,380       11,444        7.74%      574,975       11,008        7.66%
    Non Real Estate Loans, Net (1)                  24,563          606        9.87%       17,544          401        9.14%
    Mortgage-backed Securities (2)                 198,168        2,890        5.83%      293,699        4,697        6.40%
    CMO's (3)                                       96,474        1,397        5.79%       45,396          743        6.55%
    FHLB Stock                                       8,247          107        5.19%        6,395           85        5.31%
    Other Interest Earning Assets (4)               60,820          777        5.11%       85,773        1,703        7.94%
                                               -----------     --------        -----  -----------      -------        -----
  Total Interest Earning Assets                    979,652       17,221        7.03%    1,023,782       18,637        7.28%
  Non Interest Earning Assets                       43,991                                 53,967
                                               -----------                            -----------
TOTAL ASSETS                                     1,023,643                              1,077,749

LIABILITIES & SHAREHOLDERS' EQUITY:
  Interest Bearing Liabilities:
    Deposits                                       833,222        9,569        4.59%      822,728       10,037        4.88%
    Net Hedging Expense (5)                                          27                                    421
    Borrowings (6)                                  45,000          547        4.86%      115,000        1,681        5.85%
                                               -----------     --------        -----      -------        -----        -----
  Total Interest Bearing Liabilities               878,222       10,143        4.62%      937,728       12,139        5.18%
  Non Interest Bearing Liabilities                  60,118                                 55,841
                                               -----------                            -----------
Total Liabilities                                  938,340                                993,569
Shareholders' Equity                                85,303                                 84,180
                                               -----------                            -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY         1,023,643                              1,077,749

Net Interest Income                                               7,078                                  6,498
Interest Rate Spread (7)                                                       2.41%                                  2.10%
Net Interest Earning Assets                        101,430                                 86,054
Net Interest Margin (8)                                                        2.89%                                  2.54%
Net Interest Income / Average Total Assets                                     2.77%                                  2.41%
Int. Earning Assets / Int. Bearing Liabilities                               111.55%                                109.18%
</TABLE>

------------------------------------------
Average balances in the above table were calculated using average daily balances
for fiscal 1999 and month end balances for fiscal 1998.

1) In computing the average balance of loans, non-accrual loans and loans
   held-for-sale have been included.

2) Includes both mortgage-backed securities available-for-sale and
   held-to-maturity.

3) Includes both collateralized mortgage obligations available-for-sale and
   held-to-maturity.

4) Includes federal funds sold, interest earning deposit accounts, securities
   purchased under agreement to resell, and US Government and Agency
   obligations.

5) Represents the net expense of interest rate swaps, both active and
   terminated.

6) Includes advances from the FHLB, securities sold under agreements to
   repurchase, and federal funds purchased.

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 annualized net interest income divided by average
   interest earning assets.



                                       32

<PAGE>   33

<TABLE>
<CAPTION>
                                                  Nine Months Ended March 31, 1999        Nine Months Ended March 31, 1998
                                               -------------------------------------   -----------------------------------
(Dollars In Thousands)                             Average                   Average      Average                  Average
                                                   Balance     Interest         Rate      Balance     Interest        Rate
                                                ----------     --------      -------   ----------     --------      ------
<S>                                             <C>            <C>            <C>       <C>            <C>           <C>  
ASSETS:
  Interest Earning Assets:
    Real Estate Loans, Net (1)                     585,848       34,118        7.76%      528,096       30,727        7.76%
    Non Real Estate Loans, Net (1)                  23,666        1,559        8.78%       16,317        1,158        9.46%
    Mortgage-backed Securities (2)                 237,472       10,423        5.85%      292,165       14,179        6.47%
    CMO's (3)                                      103,188        4,306        5.56%       36,935        1,743        6.29%
    FHLB Stock                                       8,130          328        5.38%        6,304          286        6.04%
    Other Interest Earning Assets (4)               49,021        2,091        5.69%      129,497        7,538        7.76%
                                                ----------       ------        -----   ----------      -------        ----
  Total Interest Earning Assets                  1,007,325       52,825        6.99%    1,009,314       55,631        7.35%
  Non Interest Earning Assets                       46,116                                 54,392
                                                ----------                             ----------
TOTAL ASSETS                                     1,053,441                              1,063,706

LIABILITIES & SHAREHOLDERS' EQUITY:
  Interest Bearing Liabilities:
    Deposits                                       836,522       30,000        4.78%      821,804       30,789        5.00%
    Net Hedging Expense (5)                                         841                                  1,370
    Borrowings (6)                                  72,812        2,854        5.23%      107,500        4,757        5.90%
                                                ----------      -------        -----      -------      -------        ----
  Total Interest Bearing Liabilities               909,334       33,695        4.94%      929,304       36,916        5.30%
  Non Interest Bearing Liabilities                  59,396                                 51,305
                                                ----------                             ----------
Total Liabilities                                  968,730                                980,609
Shareholders' Equity                                84,711                                 83,097
                                                ----------                             ----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY         1,053,441                              1,063,706

Net Interest Income                                              19,130                                 18,715
Interest Rate Spread (7)                                                       2.05%                                  2.05%
Net Interest Earning Assets                         97,991                                 80,010
Net Interest Margin (8)                                                        2.53%                                  2.47%
Net Interest Income / Average Total Assets                                     2.42%                                  2.35%
Int. Earning Assets / Int. Bearing Liabilities                               110.78%                                108.61%
</TABLE>

------------------------------------------
Average balances in the above table were calculated using average daily balances
for fiscal 1999 and month end balances for fiscal 1998.

1) In computing the average balance of loans, non-accrual loans and loans
   held-for-sale have been included.

2) Includes both mortgage-backed securities available-for-sale and
   held-to-maturity.

3) Includes both collateralized mortgage obligations available-for-sale and
   held-to-maturity.

4) Includes federal funds sold, interest earning deposit accounts, securities
   purchased under agreement to resell, and US Government and Agency
   obligations.

5) Represents the net expense of interest rate swaps, both active and
   terminated.

6) Includes advances from the FHLB, securities sold under agreements to
   repurchase, and federal funds purchased.

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 annualized net interest income divided by average
   interest earning assets.


                                       33

<PAGE>   34

Rate / Volume Analysis

         The following tables utilize the figures from the preceding tables to
present a comparison of interest income and interest expense resulting from
changes in volumes and the rates on average interest earning assets and average
interest bearing liabilities for the periods indicated. Changes in interest
income or interest expense attributable to volume changes are calculated by
multiplying the change in volume by the prior period average interest rate. The
changes in interest income or interest expense attributable to changes in rate
are calculated by multiplying the change in interest rate by the prior period
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 volume by the change in rate.


<TABLE>
<CAPTION>
                                                                        Three Months Ended March 31, 1999
                                                                                 Compared To
                                                                        Three Months Ended March 31, 1998
                                                       ------------------------------------------------------------------
(Dollars In Thousands)                                                       Increase (Decrease) Due To:
                                                       ------------------------------------------------------------------
                                                         Volume               Rate        Volume / Rate               Net
                                                         ------               ----        -------------               ---
<S>                                                    <C>                <C>                  <C>               <C>     
INTEREST INCOME:
     Real Estate Loans, Net                            $    314           $    119             $      3          $    436
     Non Real Estate Loans, Net                             160                 32                   13               205
     Mortgage-backed Securities                          (1,528)              (414)                 135            (1,807)
     CMO's                                                  836                (86)                 (96)              654
     FHLB Stock                                              25                 (2)                  (1)               22
     Other Interest Earning Assets                         (495)              (608)                 177              (926)
                                                       --------           --------             --------          --------
TOTAL INTEREST INCOME                                      (688)              (959)                 231            (1,416)

INTEREST EXPENSE:
     Deposit Accounts                                       128               (588)                  (8)             (468)
     Net Hedging Expense                                      0               (394)                   0              (394)
     Borrowings                                          (1,023)              (284)                 173            (1,134)
                                                       --------           --------             --------          --------
TOTAL INTEREST EXPENSE                                     (895)            (1,266)                 165            (1,996)

NET CHANGE IN NET INTEREST INCOME                      $    207           $    307             $     66          $    580
                                                       ========           ========             ========          ========
</TABLE>



<TABLE>
<CAPTION>
                                                                       Nine Months Ended March 31, 1999
                                                                                  Compared To
                                                                       Nine Months Ended March 31, 1998
                                                       ------------------------------------------------------------------
(Dollars In Thousands)                                                       Increase (Decrease) Due To:
                                                       ------------------------------------------------------------------
                                                         Volume               Rate        Volume / Rate               Net
                                                         ------               ----        -------------               ---
<S>                                                    <C>                <C>                  <C>               <C>     
INTEREST INCOME:
     Real Estate Loans, Net                            $  3,360           $     28             $      3          $  3,391
     Non Real Estate Loans, Net                             522                (84)                 (37)              401
     Mortgage-backed Securities                          (2,654)            (1,356)                 254            (3,756)
     CMO's                                                3,126               (201)                (362)            2,563
     FHLB Stock                                              83                (32)                  (9)               42
     Other Interest Earning Assets                       (4,684)            (2,015)               1,252            (5,447)
                                                       --------           --------              -------          --------
TOTAL INTEREST INCOME                                      (247)            (3,660)               1,101            (2,806)

INTEREST EXPENSE:
     Deposit Accounts                                       551             (1,316)                 (24)             (789)
     Net Hedging Expense                                      0               (529)                   0              (529)
     Borrowings                                          (1,535)              (543)                 175            (1,903)
                                                       --------           --------              -------          --------
TOTAL INTEREST EXPENSE                                     (984)            (2,388)                 151            (3,221)

NET CHANGE IN NET INTEREST INCOME                      $    737           $ (1,272)            $    950          $    415
                                                       ========           ========             ========          ========
</TABLE>




                                       34

<PAGE>   35

Interest Income

         Interest income declined from $18.6 million and $55.6 million in the
three and nine months ended March 31, 1998 to $17.2 million and $52.8 million in
the three and nine months ended March 31, 1999, respectively, as a shift in
asset mix toward loans and away from securities was insufficient to offset the
impacts of a generally lower interest rate environment, increased premium
amortization on assets owned with a basis exceeding par, and smaller average
balance sheets. The following table highlights the change in general interest
rate environment between the first nine months of fiscal 1998 and fiscal 1999:


<TABLE>
<CAPTION>
Treasury    Bond Equivalent Yield On    Bond Equivalent Yield On    Bond Equivalent Yield On    Bond Equivalent Yield On
            ------------------------    ------------------------    ------------------------    ------------------------
Security        6/30/97      6/30/98        9/30/97      9/30/98        12/31/97    12/31/98         3/31/98     3/31/99
--------        -------      -------        -------      -------        --------    --------         -------     -------
<S>             <C>          <C>            <C>          <C>            <C>         <C>              <C>         <C>
3 month           5.17%        5.09%          5.09%        4.36%           5.34%       4.46%           5.13%       4.47%
6 month           5.25%        5.23%          5.27%        4.47%           5.44%       4.54%           5.25%       4.52%
1 year            5.65%        5.37%          5.44%        4.39%           5.47%       4.52%           5.38%       4.71%
2 year            6.06%        5.48%          5.78%        4.27%           5.64%       4.53%           5.56%       4.98%
5 year            6.37%        5.47%          5.99%        4.22%           5.71%       4.54%           5.61%       5.10%
10 year           6.49%        5.45%          6.11%        4.41%           5.74%       4.65%           5.65%       5.23%
30 year           6.78%        5.63%          6.40%        4.97%           5.92%       5.09%           5.93%       5.62%
</TABLE>

In addition, the 11th District Cost Of Funds Index declined from 4.92% for March
1998 to 4.52% for March 1999.

         Interest income on loans rose 5.6% from $11.4 million during the three
months ended March 31, 1998 to $12.1 million during the quarter ending March 31,
1999. For the nine months ended March 31, 1999, interest income on loans rose
11.9% versus the same period during the prior fiscal year. These increases were
primarily generated by an expansion in the Company's loan portfolio and by a
gradual shift in loan mix towards a lower concentration in residential
mortgages. At March 31, 1999, 60.8% of the Company's gross loan portfolio was
comprised of residential mortgages, down from 74.9% one year earlier. Over the
same time period, loans secured by multifamily real estate expanded from 6.2% to
17.3% of gross loans. The rise in interest income on loans would have been
greater if not for the year to year decline in the various indices underlying
the Company's adjustable rate loans. At March 31, 1999, 48.5% of the Company's
gross loans repriced based upon various Treasury indices.

         Interest income on mortgage backed securities declined from $4.7
million and $14.2 million for the three months and nine months, respectively,
ended March 31, 1998 to $2.9 million and $10.4 million during the like periods
in fiscal 1999. These reductions stemmed from both reduced average volumes and
lower average effective rates. The lower average effective rates resulted from
declines in indices underlying the Company's adjustable rate mortgage backed
securities and by a significant rise in prepayments on adjustable rate
mortgage-backed securities owned at a premium to par value. The accelerated
payoff of these securities caused a similarly accelerated amortization of the
purchase premiums, depressing yield. The Company experienced this constrained
yield despite concentrating its adjustable rate mortgage backed securities in
seasoned GNMA ARMs, which historically and recently have exhibited relatively
less prepayment volatility than conventional adjustable rate mortgage backed
securities.

         Interest income on collateralized mortgage obligations ("CMO's")
increased from $743 thousand and $1.7 million for the three and nine months,
respectively, ended March 31, 1998 to $1.4 million and $4.3 million during the
same periods in fiscal 1999. These increases were due to significantly expanded
volume. Over the past year, the Company has focused a majority of its security
purchases into low duration, fixed rate, AAA rated, private label CMO's due to
concerns over total return volatility for adjustable rate securities and because
of management's plan to build a stream of cash flows off of the securities
portfolio in order to provide liquidity for potential future increases in credit
commitments. The relatively short term of the new CMO purchases therefore
constrained the yield versus what could have been acquired for longer average
lives.



                                       35

<PAGE>   36

         Interest income on other earning assets fell significantly in fiscal
1999 when compared to the prior fiscal year due to reductions in both average
rate and average volume. These reductions largely stemmed from the Company's
eliminating its portfolio of long term, fixed rate, callable Agency debentures
in conjunction with its interest rate risk management program. In addition,
restrictions contained in the definitive agreement governing the Company's sale
restrict the profile of investments which the Company may purchase. These
restrictions constrained interest income during the period following the signing
of the document.

Interest Expense

         Interest expense on deposits declined from $10.0 million and $30.8
million during the three and nine months ended March 31, 1998, respectively, to
$9.6 million and $30.0 million during the like periods in fiscal 1999.
Reductions in average rate were more than sufficient to offset the effect of
increases in the average balances of interest bearing deposits. The Company has
continued to pursue a series of initiatives to reduce its average cost of funds,
including:

o        a sales and incentive emphasis upon transaction accounts in general and
         checking accounts in particular

o        the introduction of new transaction products aimed at reducing the
         funding concentration in certificates of deposit

o        the development of new certificate products that default to a roll over
         into less costly products upon maturity

o        the conduct of relationship based pricing, where higher CD rates are
         coordinated with lower cost transaction accounts

o        working to attract deposits with factors other than rate, including ATM
         access, a transaction capable Internet site, companion loan products
         for income property and small business customers, and improved facility
         locations and hours of operation

In addition, deposit rates among the Company's competition were lower in fiscal
1999 versus one year earlier due to the decline in general market interest
rates, thereby facilitating the Company's reducing its deposit price points.

         Interest expense on borrowings fell from $1.7 million and $4.8 million
during the three and nine months ended March 31, 1998 to $547 thousand and $2.9
million for the same periods in fiscal 1999. These reductions were because of
both smaller average volumes and lower average rates. $65.0 million of the
Company's FHLB advances at June 30, 1998 matured in November, 1998, providing
the Company with the opportunity to reduce its debt level and acquire new FHLB
advances at rates below the maturing advances. In addition, during fiscal 1998,
the Company utilized short term borrowings to fund short term investments to a
much greater extent than occurred in fiscal 1999.

         Net interest expense of hedging transactions declined from $421
thousand and $1.4 million during the three and nine months ended March 31, 1998
to $27 thousand and $841 thousand during the same periods in fiscal 1999.
Figures for net hedging expense reflect the Company's adoption of SFAS No. 133
effective July 1, 1998. The reduction in net hedging expense from the fiscal
1998 periods to the fiscal 1999 periods was generated by the maturity of
interest rate swap contracts and the conclusion of the amortization periods for
deferred losses associated with terminated interest rate swaps. As of January
31, 1999, all of the Company's interest rate swap positions matured.



                                       36

<PAGE>   37

Provision For Estimated Loan Losses

         Provision for estimated loan losses totaled $400 thousand and $1.6
million in the three and nine months, respectively, ended March 31, 1999. These
figures compare to $2.3 million and $2.7 million during the three and nine
months, respectively, ended March 31, 1998. The substantial provision for
estimated loan losses posted in the third quarter of fiscal 1998 followed an
extensive review of the Bank's credit portfolio in conjunction with a periodic
examination by the Office Of Thrift Supervision, the Bank's primary federal
regulator. This review identified the need to increase provisions for estimated
loan losses as a result of the following factors:

o        the appropriateness of expanded general reserves in conjunction with a
         significantly increased loan portfolio and in light of peer financial
         institution credit experience and reserve levels

o        higher charge-off experience in the quarters preceding March 31, 1998,
         with such charge-offs disproportionately stemming from the portfolio of
         loans acquired through the Palm Springs Savings Bank purchase

o        deterioration in individual credits, primarily secured by income
         property and land, leading to the need for greater specific reserves

         During fiscal 1999, the Company's need to provide for future potential
credit losses has been moderated by the following factors:

o        Real estate valuation trends in most of the market areas served by the
         Company have remained strong, with improvement in collateral values
         providing reduced risk of loss to the Bank.

o        Specific reserves declined from $2.5 million at June 30, 1998 to $1.4
         million at March 31, 1999, thereby freeing more of the Company's
         aggregate allowance for loan losses to address unidentified potential
         future losses in the loan portfolio.

o        Total criticized plus classified assets declined by $9.6 million during
         the nine months ended March 31, 1999.

o        The Company's ratio of total allowances for estimated loan losses to
         gross loans receivable net of loans in process has expanded from 1.06%
         at June 30, 1998 to 1.11% at March 31, 1999.

o        The Company's net charge-off experience has improved significantly in
         fiscal 1999. Net charge-offs during the first nine months of fiscal
         1999 were $943 thousand, down 36.9% from the same period the prior
         fiscal year.

o        The Company has continued to conduct the enhanced and expanded credit
         management process implemented in the latter half of fiscal 1998,
         whereby all non-homogeneous credits are reviewed at least annually and
         which includes an increased credit monitoring and reporting operation,
         augmented by third party review.


                                       37

<PAGE>   38

Other Income & Expense

         Other income & expense for the three months ended March 31, 1999 was
$547 thousand in income, up significantly from $123 thousand in income during
the same period the prior fiscal year. For the nine months ended March 31, 1999,
other income & expense totaled $2.1 million in income, comparing favorably to
$204 thousand in expense during the same period in fiscal 1998.  Key factors
supporting these improved financial results included:

o        Branch & deposit related fee income for the quarter ended March 31,
         1999 was $571 thousand, down $69 thousand from the $640 thousand
         generated for the like period during the prior fiscal year. This
         reduction was caused by $140 thousand in less merchant bankcard gross
         income in the most recent quarter following the sale of that portfolio
         in March, 1998. Excluding this effect, branch & deposit related fees in
         the three months ending March 31, 1999 improved 14.2% versus the
         similar quarter during the prior fiscal year. For the nine months ended
         March 31, 1999, branch & deposit related fee income totaled $1.8
         million, up 6.5% from $1.7 million during the same period the prior
         fiscal year despite the sale of the merchant bankcard portfolio. This
         rise resulted from an expanded roster of fee based services, the
         imposition of new fees, the continued expansion in the number of
         transaction accounts, enhanced control over fee waivers, and the
         implementation of revised fee and service charge schedules. In
         addition, during the quarter ended December 31, 1998, the Company
         introduced debit card services to its customers, which constitute a new
         source of non interest income to the Bank while providing convenience
         for customers making purchases at a wide array of retailers. Moreover,
         two branch sites received their first ATM's during fiscal 1999, thereby
         creating an additional source of fee income from "foreign"
         (non-customer) transactions while also enhancing convenience for the
         Bank's customers.

o        Results from real estate operations improved from losses of $312
         thousand and $953 thousand for the three and nine months ended March
         31, 1998 to income of $19 thousand and $217 thousand during the like
         periods in fiscal 1999. During fiscal 1999, the Company carried a
         comparatively small inventory of foreclosed properties, thereby
         moderating operating costs. In addition, due to the continuing price
         appreciation in many of the real estate markets in which the Company
         operates, a pre-tax gain of $243 thousand on the sale of foreclosed
         real estate was recorded during the first nine months of fiscal 1999.

o        Net gains on loans held for sale rose to $134 thousand and $385
         thousand for the three and nine months ended March 31, 1999 from $56
         thousand and $127 thousand for the same periods during the prior fiscal
         year, as the Company has continued expanding its mortgage banking
         program and has benefitted from the strength of the mortgage loan
         refinance market in fiscal 1999, fueled by the continued availability
         of residential loans with fixed rates below 7.00%.

o        Other income expanded significantly from $54 thousand and $144 thousand
         during the three and nine months ended March 31, 1998 to $289 thousand
         and $956 thousand during the like periods in fiscal 1999 due to
         improved results from the Company's new alternative investment
         (non-FDIC insured) sales program, the operation of that program on a
         gross (versus net) basis in the current fiscal year, and because of
         $145 thousand in aggregate gains on the sale of two former branch
         sites. During the first nine months of fiscal 1999, the Company
         recorded revenue of $801 thousand from sales of alternative investment
         products, up from $111 thousand during the like period the prior fiscal
         year.

o        Net gains on available-for-sale securities increased from $62 thousand
         for the nine months ended March 31, 1998 to $159 thousand during fiscal
         1999. During the second quarter of fiscal 1999, $27.9 million in long
         term, fixed rate Agency mortgage backed securities were sold in support
         of the Company's interest rate risk management program. This sale also
         better diversified the Company's investment portfolio, as the Bank had
         previously maintained a concentration in 6.50% coupon, traditional
         pass-through, mortgage backed securities.



                                       38

<PAGE>   39

General & Administrative Expenses

         General & administrative expense rose 12.4% from $5.11 million during
the three months ended March 31, 1998 to $5.75 million during the most recent
quarter. For the first nine months of fiscal 1999, general & administrative
expenses totaled $17.72 million, up $3.22 million (22.2%) from the same period
the prior fiscal year. Factors contributing to the rise in operating costs
included:

o        The first nine months of fiscal 1998 included a $533 thousand
         non-recurring reduction in salaries & employee benefits expense
         associated with a restructuring of the Company's loan to the employee
         stock ownership plan ("ESOP").

o        $505 thousand in expenses (primarily personnel related) were realized
         in fiscal 1999 for the establishment of a commercial lending unit and a
         stand alone loan production office in Orange County.

o        $328 thousand in acquisition related costs were incurred during fiscal
         1999 ($103 thousand in the most recent quarter).

o        The conversion of the Company's alternative investment (non-FDIC
         insured) product sales program to a gross (versus net) basis as part of
         that program's redesign lead to the recognition of $312 thousand in
         employee sales commission (compensation) expense during fiscal 1999.

o        Training costs were $127 thousand higher in the nine months ended March
         31, 1999 versus the same period the prior fiscal year, as the Company
         conducted increased training in support of sales effectiveness,
         customer service, and the multiple new technologies introduced
         throughout the Company in conjunction with its strategic plan.

o        The Company introduced a 401(k) benefits plan during fiscal 1999.
         Administrative and benefits expenses associated with this plan totaled
         $87 thousand during the nine months ended March 31, 1999.

o        $91 thousand in employment related litigation settlement costs were
         incurred during the nine months ended March 31, 1999, including $41
         thousand during the most recent quarter. There were no comparable
         expenses during the respective prior year periods.

o        In fiscal 1999, the Company "co-sourced" its internal audit function to
         an outside party presenting enhanced resources and procedures, but also
         higher periodic expenses.

o        Credit review expenses were higher during fiscal 1999 compared to the
         prior year in conjunction with an expanded credit management function,
         which included the recurring use of external credit review specialists
         during the current fiscal year.

o        Various expenses associated with the implementation of the Company's
         strategic plan of converting to a community based financial services
         firm were realized during fiscal 1999, including costs for a planned
         new loan origination system, opening four new sites for relocated
         branches, multiple technology and telecommunications initiatives, the
         introduction of debit cards, and the rollout of Internet banking.



                                       39

<PAGE>   40

         During fiscal 1999, the Company implemented a frame relay WAN
connecting all of the Company's sites, a new teller system, and a new branch
platform (new accounts) system. Over 10,000 debit cards were issued to current
customers at a cost of $35 thousand. In addition, the Bank switched to a new
transaction capable Internet site operating under 128 bit SSL security
technology. This significant technology program was designed to provide a
foundation for future gains in operating efficiency, improvements in customer
service, and the delivery of a broader range of financial products and services.
This program also furnished the Company with a broad base of technology
certified as Year 2000 compliant by its manufacturer and / or independent third
parties.

         As a result of the above increases in general & administrative
expenses, the ratio of general & administrative expenses to average assets
increased from 1.82% during the nine months March 31, 1998 to 2.24% during the
most recent nine months. Due to the increased revenue streams from a number of
the aforementioned initiatives, however, the Company's efficiency ratio rose
less dramatically, increasing from 81.12% for the first nine months of fiscal
1998 to 84.51% during the nine months ended March 31, 1999. For the three months
ended March 31, 1999, the Company's efficiency ratio was 77.09%, comparing
favorably to 79.94% for the same period the prior fiscal year due to increases
in various sources of revenue and improved performance from real estate
operations.

         The Company's operating costs during the remaining period before its
proposed acquisition by Temple-Inland, Inc. will most likely be inflated by
significant merger related expenses, including additional fees for investment
banker, attorney, and independent accountant services. At the same time,
revenues may be impaired due to customer and counterparty uncertainty regarding
the potential impacts of the acquisition, likely leading to continued efficiency
ratios above those of peer institutions. Management intends to communicate the
benefits arising from the acquisition. However, no assurance can be provided
concerning the nature and efficacy of such efforts.

Income Taxes

         The Company recorded income tax expense of $507 thousand for the three
months ending March 31, 1999, versus an income tax benefit of $327 thousand for
the quarter ended March 31, 1998, as the Company recorded pre-tax income during
the most recent quarter as compared to a pre-tax loss for the same period one
year earlier. Income tax expense increased from $544 thousand during the nine
months ended March 31, 1998 to $661 thousand for fiscal 1999, as the impact of
greater nominal pre-tax income more than offset the effect of a reduction in the
Company's effective book tax rate. The reduction in the effective book tax rate
stems from the fiscal 1999 recapture of valuation allowances established in
prior years for deferred tax assets associated with California State franchise
taxes.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         For a current discussion of the nature of market risk exposures, see
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Interest Rate Risk Management And Exposure". Readers should also
refer to the qualitative and quantitative disclosures (consisting primarily of
interest rate risk) in the Company's Form 10-K for the fiscal year ending June
30, 1998. There has been no significant change in these disclosures since the
filing of that document.


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<PAGE>   41

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

         The Company is not involved in any material pending legal proceedings
         other than routine legal proceedings occurring in the ordinary course
         of business. Such other routine legal proceedings in the aggregate are
         believed by management to be immaterial to the Company's financial
         condition or results of operations.

Item 2. Changes in Securities

         None.

Item 3. Defaults Upon Senior Securities

         Not applicable.

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

         None.

Item 5.  Other Information

         None.

Item 6.  Exhibits and Reports on Form 8-K

         A.  Exhibits

                  (27) Financial Data Schedule

         B.  Reports on Form 8-K

                  The Company filed no reports on Form 8-K during the quarter
ended March 31, 1999.




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<PAGE>   42

                                   SIGNATURES



                           Pursuant to the requirements of The Securities
                           Exchange Act Of 1934, the registrant has duly caused
                           this report to be signed on its behalf by the
                           undersigned thereunto duly authorized.



                                                        HF BANCORP INC.
                                                         (Registrant)



Date:  May 14, 1999                       By:      /s/ Richard S. Cupp
                                                   --------------------------
                                                   Richard S. Cupp
                                                   President
                                                   Chief Executive Officer




Date:  May 14, 1999                       By:      /s/ Mark R. Andino
                                                   --------------------------
                                                   Mark R. Andino
                                                   Senior Vice President
                                                   Chief Financial Officer




                                       42