<PAGE> 1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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


                  For the quarterly period ended March 31, 1997


             Securities and Exchange Commission File Number 0-25722



                                HF BANCORP, INC.

             (Exact name of registrant as specified in its charter)

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


                 445 E. Florida Avenue, Hemet, California 92543
                    (Address of principal executive offices)


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






      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 6,281,875 shares of the Registrant's  common stock  outstanding
as of May 9, 1997.




<PAGE> 2


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

PART I - FINANCIAL INFORMATION                                        PAGE
         ---------------------                                        ----

ITEM 1.           FINANCIAL STATEMENTS

         Consolidated Statements of Financial Condition as of
         March 31, 1997, (unaudited) and June 30, 1996                3-4

         Consolidated Statements of Operations (unaudited) for the
         Three and Nine Months ended March 31, 1997, and 1996         5-6

         Changes in Stockholders' Equity (unaudited)                   7

         Consolidated Statements of Cash Flows (unaudited) for the
         Nine Months ended March 31, 1997 and 1996                    8-10

         Notes to Consolidated Financial Statements (unaudited)       11-19


ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  ---------------------------------------
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS       20-41
                  ---------------------------------------------

PART II - OTHER INFORMATION
          -----------------

Item 1.           Legal Proceedings                                     42

Item 2.           Changes in Securities                                 42

Item 3.           Defaults Upon Senior Securities                       42

Item 4.           Submission of Matters to a Vote of Security Holders   42

Item 5.           Other Information                                     42

Item 6.           Exhibits and Reports on Form 8-K                      42

            Signature Page                                              43




                                         2

<PAGE> 3

<TABLE>
<CAPTION>

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



                                                                                     Mar. 31                  June 30,
                                                                                        1997                      1996
                                                                                        ----                      ----
                                                                                 (Unaudited)

                                                                                      (Dollars in thousands)
<S>                                                                               <C>                        <C>    
ASSETS
Cash and cash equivalents                                                         $  32,150                  $100,633
Investment securities held to maturity (estimated fair value of $26,384
 and $ 33,842 at March 31, 1997 and June 30, 1996, respectively)                     26,934                    34,666
Investment securities available for sale (amortized cost of $164,412
 and $ 177,487 at March 31, 1997 and June 30, 1996, respectively)                   160,346                   173,171
Loans held for sale                                                                     156                        --
Loans receivable (net of allowance for estimated loan losses of $5,185
 and $3,068 at March 31, 1997 and June 30, 1996, respectively)                      468,081                   225,161
Mortgage-backed securities held to maturity (estimated fair value of $153,112
 and $152,521 at March 31, 1997 and June 30, 1996, respectively)                    157,306                   159,262
Mortgage-backed securities available for sale (amortized cost of $88,756
 and $99,888 at March 31, 1997 and June 30, 1996, respectively)                      89,242                   100,259
Accrued interest receivable                                                           7,130                     6,260
Investment in capital stock of the Federal Home Loan Bank, at cost                    6,139                     4,436
Premises and equipment, net                                                           8,620                     6,578
Real estate owned, net of valuation allowances
 Acquired through foreclosure                                                         4,716                     1,079
 Acquired for sale or investment                                                        418                       996
Other assets                                                                         23,217                    14,415
                                                                                 ----------                ----------

Total assets                                                                       $984,455                  $826,916
                                                                                   ========                  ======== 
</TABLE>


                                                   3

<PAGE> 4

<TABLE>
<CAPTION>

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


                                                                                         Mar 31          June 30,
                                                                                           1997              1996
                                                                                           ----              ----   

                                                                                   (Unaudited)

                                                                (Dollars in thousands except per share amounts)
<S>                                                                                 <C>                 <C>    
LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
Deposit accounts                                                                     $ 840,477          $ 669,725
Advances from the Federal Home Loan Bank                                                50,000             70,000
Accounts payable and other liabilities                                                   6,591              5,278
Income taxes                                                                             6,550                842
                                                                                  ------------       ------------

     Total liabilities                                                                 903,618            745,845


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
  and 6,281,875 outstanding at March 31, 1997 and June 30, 1996                             66                 66
Additional paid-in capital                                                              51,277             51,113
Retained earnings, substantially restricted                                             39,677             40,957
Net unrealized loss on securities available for sale, net of taxes                      (2,101)            (2,309)
Deferred stock compensation                                                             (4,734)            (5,408)
Treasury stock, 330,625 shares                                                          (3,348)            (3,348)
                                                                                 --------------        -----------

     Total stockholders' equity                                                         80,837             81,071
                                                                                 --------------        -----------

Total liabilities and stockholders' equity                                            $984,455            $826,916
                                                                                      ========            ========



Nominal book value per share                                                            $12.87              $12.91
Tangible book value per share                                                           $11.05              $11.85
Average market price per share on the final day of the period                           $12.83              $ 9.97


Shares utilized in above book value calculations                                     6,281,875           6,281,875

</TABLE>





See notes to consolidated financial statements



                                        4

<PAGE> 5

<TABLE>
<CAPTION>

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

                                                                      FOR THE THREE MONTHS         FOR THE NINE MONTHS
                                                                      ENDED MARCH 31,              ENDED MARCH 31,
                                                                      --------------------         -------------------
                                                                      1997            1996         1997           1996
                                                                      ----            ----         ----           ----

                                                                                    (Dollars in thousands)

<S>                                                                 <C>             <C>          <C>           <C>
INTEREST INCOME:
Interest on loans                                                   $9,016          $4,497       $23,104       $12,943
Interest on mortgage-backed securities                               3,795           4,763        12,807        14,518
Interest and dividends on investment securities                      4,273           3,953        13,466         9,343
                                                                   -------        --------     ---------      --------

     Total interest income                                          17,084          13,213        49,377        36,804

INTEREST EXPENSE:
Interest on deposit accounts                                         9,894           5,929        28,021        17,706
Interest on advances from the Federal Home Loan
 Bank and other borrowings                                             679           2,263         2,510         4,864
Net interest expense of hedging transactions                           762             760         2,318         2,403
                                                                  --------       ---------      --------      --------

     Total interest expense                                         11,335           8,952        32,849        24,973
                                                                  --------       ---------      --------      --------

NET INTEREST INCOME BEFORE PROVISION
 FOR ESTIMATED LOAN LOSSES                                           5,749           4,261        16,528        11,831

PROVISION FOR ESTIMATED LOAN LOSSES                                    101             419           309           622
                                                                 ---------       ---------      --------     ---------

NET INTEREST INCOME AFTER PROVISION
 FOR ESTIMATED LOAN LOSSES                                           5,648           3,842        16,219        11,209

OTHER INCOME (EXPENSE):
Loan and other fees                                                    105              47           253           140
Loss from real estate operations, net                                  (54)            (75)         (241)         (343)
Gain on sale of mortgage-backed and investment
   securities available for sale                                        --              --         1,030            --
Gain on sale of loans held for sale                                     10              --            20            --
Savings fees                                                           400             151           982           465
Other income                                                            66             420           217           491
Amortization of intangible assets                                     (579)             --        (1,391)           --
                                                                -----------      ---------     ----------      --------

     Total other income (expense)                                      (52)            543           870           753

</TABLE>








See notes to consolidated financial statements




                                        5

<PAGE> 6

<TABLE>
<CAPTION>

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


                                                              FOR THE THREE MONTHS       FOR THE NINE MONTHS
                                                              ENDED MARCH 31,            ENDED MARCH 31,
                                                              --------------------       ------------------- 
                                                              1997            1996       1997           1996     
                                                              ----            ----       ----           ----
          
                                                             (Dollars in thousands except earnings per share)

<S>                                                         <C>             <C>        <C>            <C>   
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and employee benefits                              $2,376          $1,577     $7,028         $4,999
Occupancy and equipment expense                                938             510      2,474          1,501
FDIC insurance and other assessments                           185             308      1,009          1,002
SAIF special assessment                                          0               0      4,759              0
Legal and professional services                                161             120        569            357
Data processing service costs                                  428             209      1,182            604
Marketing                                                      165             118        472            288
Savings expense                                                234              58        476            182
Other                                                          406             390      1,188            633
                                                          --------        --------    -------        -------

     Total general and administrative expenses               4,893           3,290     19,157          9,566

EARNINGS(LOSS) BEFORE INCOME TAXES
EXPENSE (BENEFIT)                                              703           1,095     (2,068)         2,396

INCOME TAX EXPENSE (BENEFIT)                                   346             296       (788)           839
                                                           -------         -------    -------        -------

NET EARNINGS (LOSS)                                        $   357        $    799    $(1,280)     $   1,557
                                                          ========        ========   ========        =======

Net earnings (loss) per share                               $ 0.06          $ 0.13     ($0.22)         $0.25

Weighted average common shares outstanding               5,888,629       6,127,832  5,786,046      6,155,393


</TABLE>

See notes to consolidated financial statements



                                         6
   






                                              

<PAGE> 7










<TABLE>
<CAPTION>


                                                                 HF BANCORP, INC.             
                                              CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                                        Nine Months Ended March 31, 1997
                                                                  (Unaudited)



                              Common  Additional    Retained  Unrealized  Deferred stock  Treasury       Total
                               stock     paid-in    earnings     loss on  compensation       stock
                                         capital              securities
                                                               available
                                                                for sale
                            ---------------------------------------------------------------------------------

                                                   (In Thousands)
<S>                              <C>     <C>         <C>        <C>           <C>         <C>          <C>    
Balance at June 30, 1996         $66     $51,113     $40,957    ($2,309)      ($5,408)    ($3,348)     $81,071

Net loss for the nine months
ended March 31, 1997              --          --      (1,280)        --            --          --       (1,280)

Change in net unrealized loss
on securities available for sale,
net of taxes                      --          --          --        208            --          --          208

Change in deferred stock
compensation                      --         164          --         --           674          --          838


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

Balance at March 31, 1997        $66     $51,277     $39,677    ($2,101)      ($4,734)    ($3,348)     $80,837
                            =====================================================================================

</TABLE>


See notes to consolidated financial statements




                                               7

<PAGE> 8

<TABLE>
<CAPTION>

                         HF BANCORP, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                                                                                 FOR THE NINE MONTHS
                                                                                                 ENDED MARCH 31
                                                                                                 -------------------
                                                                                                 1997           1996
                                                                                                 ----           ----

                                                                                               (Dollars in thousands)

<S>                                                                                            <C>            <C>   
CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings (loss)                                                                            (1,280)        $1,557

Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating activities:

Origination of loans held for sale                                                             (1,451)            --
Proceeds from sale of loans held for sale                                                       1,315             --
Provisions for estimated loan and real estate losses                                              422            865
Direct write-offs from real estate operations                                                      53            121
Depreciation and amortization                                                                     900            577
Amortization of deferred loan fees                                                               (539)          (283)
Amortization (accretion) of premiums (discounts) on loans
 and investment and mortgage-backed securities, net                                               210             82
Amortization of intangible assets                                                               1,391             --
Federal Home Loan Bank stock dividend                                                            (294)          (210)
Gain on sales of loans held for sale                                                              (20)            --
Loss (gain) on sales of real estate, net                                                         (112)          (233)
Gain on sale of mortgage-backed and investment securities, available for sale                  (1,030)            --
Gain on sale of premises and equipment                                                            (30)            --
Increase in accrued interest receivable                                                          (870)        (2,708)
Increase (decrease) in accounts payable and other liabilities                                     777        (24,617)
Decrease (increase) in other assets                                                               662         (1,758)
Other, net                                                                                        978         (1,240)
                                                                                            ---------       --------

Net cash provided by (used in) operating activities                                             1,082        (27,847)

</TABLE>


                                        8

<PAGE> 9


<TABLE>
<CAPTION>


                         HF BANCORP, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                   (UNAUDITED)
                                                                                                 FOR THE NINE MONTHS
                                                                                                 ENDED MARCH 31
                                                                                                 -------------------
                                                                                                 1997           1996
                                                                                                 ----           ----

                                                                                                (Dollars in thousands)
<S>                                                                                            <C>           <C>  
CASH FLOWS FROM INVESTING ACTIVITIES:

Net increase in loans receivable                                                              (83,557)       (18,898)
Purchases of mortgage-backed securities held to maturity                                      (15,039)            --
Purchases of mortgage-backed securities available for sale                                    (51,652)       (21,272)
Principal repayments on mortgage-backed securities held to maturity                            14,496         18,138
Principal repayments on mortgage-backed securities available for sale                           8,826         10,122
Purchases of investment securities held to maturity                                                --        (90,804)
Purchases of investment securities available for sale                                         (37,968)      (122,000)
Principal repayments on investment securities held to maturity                                    502            378
Principal repayments on investment securities available for sale                                4,191          5,198
Proceeds from sales of mortgage-backed and investment securities available for sale            71,381             --
Matured / called investment and mortgage backed securities held to maturity                     9,352         16,000
Matured / called investment securities available for sale                                      36,428         50,000
Proceeds from sales of real estate owned                                                        3,794          2,233
Additions to real estate owned                                                                     62           (123)
Proceeds from sale of premises and equipment                                                        6              8
Additions to premises and equipment                                                            (1,749)          (309)
Cash payment for acquisition, net of cash received                                            (14,707)            --
Purchase of FHLB stock                                                                             --         (1,618)
                                                                                         ------------    -----------
Net cash provided by (used in) investing activities                                           (55,634)      (152,947)

</TABLE>


                                        9

<PAGE> 10

<TABLE>
<CAPTION>

                         HF BANCORP, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                   (UNAUDITED)
                                                                                                 FOR THE NINE MONTHS
                                                                                                 ENDED MARCH 31
                                                                                                 -------------------
                                                                                                 1997           1996
                                                                                                 ----           ----

                                                                                              (Dollars in thousands)
<S>                                                                                         <C>             <C> 
CASH FLOWS FROM FINANCING ACTIVITIES:

Advances (repaid to) received from FHLB                                                     $ (20,000)      $ 50,000
Proceeds from other borrowings                                                                     --         49,438
(Decrease) increase in certificate accounts                                                   (11,061)        13,909
Net increase (decrease) in NOW, passbook, money market investment and
 non-interest-bearing accounts                                                                 17,130            518
                                                                                            ---------    -----------

Net cash (used in) provided by financing activities                                           (13,931)       113,865
                                                                                            ---------    -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                          (68,483)       (66,929)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                              100,633         88,642
                                                                                            ---------     ----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                     32,150       $ 21,713
                                                                                            =========       ========

SUPPLEMENTAL CASH FLOW DISCLOSURES-

Cash paid during the period for:
Interest on deposit accounts and other borrowings                                           $   5,665      $   5,819
                                                                                            =========      =========

Income taxes paid                                                                                  --            718
                                                                                            =========      =========

SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES:

Real estate acquired through foreclosure                                                     $  3,764      $   2,109

Loans to facilitate sale of real estate through foreclosure                                  $    896      $     447

Purchase of Palm Springs Savings Bank:
Fair value of assets purchased, excluding cash                                              $ 184,321             --
Fair value of liabilities assumed                                                             169,614             --
                                                                                             --------      

     Cash payment for acquisition, net of cash received                                     $  14,707             --
                                                                                            =========      

Transfer of investment securities held to maturity
 to available for sale classification                                                                       $ 59,022

Transfer of mortgage backed securities held to maturity to
 available for sale classification                                                                          $ 24,321

Transfer of interest only security held to maturity to
 available for sale classification per SFAS 125                                                   250             --


See notes to consolidated financial statements


</TABLE>

                                       10

<PAGE> 11


HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997

(UNAUDITED)


1. Company Description and Basis of Presentation
   ---------------------------------------------

      HF Bancorp, Inc. is a savings and loan holding company incorporated in the
State of Delaware  that was  organized  for the purpose of acquiring  all of the
capital stock of Hemet Federal Savings and Loan  Association  (the  Association)
upon its conversion from a federally  chartered mutual savings  association to a
federally  chartered  stock savings  association.  On June 30, 1995, HF Bancorp,
Inc.  completed  its  sale of  6,612,500  shares  of its  common  stock  through
subscription and community offerings to the Association's  depositors,  Board of
Directors,  management,  employees and the public and used  approximately 50% of
the net  proceeds  from such sales to purchase all of the  Association's  common
stock issued in the Association's  conversion to stock form. Net proceeds of the
initial  offering  were $51.1 million and $25.5 million was used for purchase of
the Association's  common stock. Such business  combination was accounted for at
historical cost in a manner similar to a pooling of interests.

      On  September  27,  1996,  Hemet  Federal  Savings  and  Loan  Association
consummated  the  acquisition of Palm Springs Saving Bank ("PSSB") by purchasing
their 1,131,446 shares of common stock for $16.3 million.  The purchase included
acquiring a net loan portfolio of $160.7  million with an average  weighted rate
of 8.47% and savings account deposits of $164.7 million with an average weighted
rate of 4.09%.

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



                                       11

<PAGE> 12


HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997

(UNAUDITED)

      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").  Headquartered  in  Hemet,  California,  the
Association  conducts  business  from its main office and three  branch  offices
located in Hemet, California,  three branches in Riverside,  California and from
its other twelve branch offices  located in Sun City, San Jacinto,  Canyon Lake,
Idyllwild, Murrieta, Vista, Oceanside, Rancho Bernardo, Palm Springs, Desert Hot
Springs,  Cathedral City and Rancho Mirage, California. Its deposits are insured
up to the  applicable  limits  under  the  Savings  Association  Insurance  Fund
("SAIF") of the FDIC. The  Association is also a member of the Federal Home Loan
Bank of San Francisco ("FHLB").

      The Association is primarily  engaged in the business of attracting  funds
in the form of deposits  and  supplementing  such  deposits  with FHLB and other
borrowings,  and investing such funds in loans secured by real estate, primarily
one-to-four  family  residential  mortgage  loans,  and in consumer and business
loans. The Association  has, in recent years,  invested in  mortgage-backed  and
related securities,  including collateralized mortgage obligations.  To a lesser
extent, the Association invests in multi-family mortgage loans,  commercial real
estate  loans,  construction  loans,  acquisition,  development  and land loans,
consumer  loans,  and business  loans.  The  Association's  revenues are derived
principally from interest on its mortgage loans, consumer loans, business loans,
mortgage-backed   securities   portfolio  and  interest  and  dividends  on  its
investment securities.  The Association's primary sources of funds are deposits,
principal   and  interest   payments  on  loans,   investment   securities   and
mortgage-backed securities, FHLB advances, and other borrowings.

      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, 1997, are not necessarily  indicative of the results that
may be expected for the entire fiscal year.

      These  consolidated  financial  statements and the  information  under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of  Operations"  should be read in  conjunction  with the  audited  consolidated
financial  statements  and notes thereto of HF Bancorp,  Inc. for the year ended
June 30,  1996  included  in the  Company's  Annual  Report on Form 10-K for the
fiscal year ended June 30, 1996.



                                       12

<PAGE> 13


HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997

(UNAUDITED)

Private Securities Litigation Reform Act Safe Harbor Statement
--------------------------------------------------------------

      In addition to historical  information,  this document may include certain
forward  looking  statements  based  on  current  management  expectations.  The
Company's   actual  results  could  differ   materially  from  those  management
expectations.  Factors  that could  cause  future  results to vary from  current
management  expectations  include,  but are not  limited  to,  general  economic
conditions,  legislative and regulatory changes, monetary and fiscal policies of
the  federal  government,  changes in tax  policies,  rates and  regulations  of
federal,  state and local tax  authorities,  changes in interest rates,  deposit
flows,  the cost of  funds,  demand  for loan  products,  demand  for  financial
services, competition,  changes in the quality or composition of the Bank's loan
and  investment  portfolios,  changes  in  accounting  principles,  policies  or
guidelines,  and other economic,  competitive,  governmental  and  technological
factors  affecting the Company's  operations,  markets,  products,  services and
prices.  Further  description of the risks and uncertainties to the business are
included in detail in Item 1, "Business" of the Company's 1996 Form 10-K.


2.    Earnings Per Share
      ------------------

      Earnings  per share  ("EPS") for the three and nine months ended March 31,
1997 are based on weighted  average  common  shares  outstanding  calculated  as
follows:
<TABLE>
<CAPTION>

                                                                           3 Months       9 Months
                                                                           Ended          Ended
                                                                           3/31/97        3/31/97
                                                                           -------        -------
     <S>                                                                   <C>            <C>      
     Total shares issued                                                   6,612,500      6,612,500

     Less:
        Weighted average unallocated shares under the ESOP Plan              351,945        366,390
        Reduction in shares for the Stock Compensation Plan                  146,380        178,067
        Shares of treasury stock                                             330,625        330,625

     Plus:
          Increase in shares for the Stock Option Plan                       105,079         48,628

     Weighted average shares outstanding for EPS calculations              5,888,629      5,786,046

</TABLE>





                                       13

<PAGE> 14


HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997

(UNAUDITED)

3.    Termination of Swap Agreements
      ------------------------------

      On  July  10,  1995,  the  Company  terminated  four  interest  rate  swap
agreements with an aggregate outstanding notional amount of $60,000,000. At June
30, 1995, the weighted  average fixed payment rate and variable payment received
rate were 9.53% and 6.11%,  respectively.  The Company paid a termination fee of
$4,856,000 which has been deferred for book purposes and is being amortized over
the remaining  original terms of the respective  swap  agreements.  The expected
future annual amortization is as follows: $1,811,000,  $798,000 and $272,000 for
the fiscal years ended June 30, 1997,  1998 and 1999  respectively.  As of March
31, 1997 the remaining deferred amount was $1,369,000.

4.    Loans Receivable
      ----------------

      The Association adopted Statement of Financial Accounting Standards (SFAS)
No. 114,  "Accounting by Creditors for Impairment of a Loan" as amended by SFAS
No. 118,  "Accounting by Creditors for Impairment of a Loan - Income Recognition
and  Disclosures",  as of July 1, 1995. These statements  generally  require all
creditors to account for impaired  loans,  except those loans that are accounted
for at fair value or at the lower of cost or fair value, at the present value of
the expected future cash flows discounted at the loan's effective  interest rate
or, as a practical expedient,  at the loan's observable market price or the fair
value  of the  collateral  if the loan is  collateral  dependent.  SFAS No.  114
indicates that a creditor should evaluate the collectability of both contractual
interest and contractual principal when assessing the need for loss recognition.

      The Association applies the provisions of SFAS No. 114 to all loans in its
portfolio.  As a majority of the Association's  loans are collateral  dependent,
most  impaired  loans  are  accounted  for  based  upon the fair  value of their
collateral.  In  applying  the  provisions  of SFAS  No.  114,  the  Association
considers a loan to be impaired when it is probable that the Association will be
unable to collect all contractual  principal and interest in accordance with the
terms of the loan agreement.  However,  in determining  when a loan is impaired,
management also considers the loan documentation,  current loan to value ratios,
and the borrowers'  current financial  position.  The Association  considers all
loans  delinquent  90 days or more  and all  loans  that  have a  specific  loss
allowance applied to adjust the loan to fair value as impaired.

      As of March 31, 1997, the  Association  had impaired loans totalling $11.1
million which have related  specific  reserves of $1.6 million;  there were $5.6
million of impaired  loans as of March 31,  1997 for which no specific  reserves
had been recorded.  Impaired  loans at June 30, 1996 totalled $8.9 million.  The
average recorded investment in impaired loans during the nine months ended March
31,  1997 was $16.3  million.  The  accrual of  interest  on  impaired  loans is
discontinued when, in management's  opinion,  the borrower may be unable to meet
payments as they become due. When interest accrual is  discontinued,  all unpaid
accrued  interest  is  reversed  from  interest   income.   


                                       14

<PAGE> 15


HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997

(UNAUDITED)

Interest  income  is subsequently  recognized  to the  extent  of full  cash  
payments  received  and accepted. As of March 31, 1997  accrued  interest on 
impaired  loans was $83,000 and interest of $577,000  was  received in cash for 
the nine months  then  ended.  Interest  not recognized  due to  non-accrual  
status was  $219,000  for the nine months ended March 31, 1997,  compared to 
$97,000 for the nine months  period ended March 31, 1996.  Of the $11.1  million
of  impaired  loans  which have  specific  reserves established in the amount of
$1.6 million,  45.4%,  or $5.0 million are current.  Of the $5.6  million of 
impaired  loans for which no specific  reserves had been recorded as of 
March 31, 1997, 33.3% or $1.9 million are current.

5.    Change In Accounting Principles
      -------------------------------

      SFAS 128
      --------
      In February 1997, the Financial Accounting Standards Board issued SFAS No.
128,  "Earnings  Per  Share"  ("SFAS  128")  which is  effective  for  financial
statements  issued for periods  ending after  December 15, 1997. It replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share. It also requires the  presentation of diluted  earnings per share for
entities with complex capital structures.  Diluted earnings per share takes into
account the potential dilution that could occur if securities or other contracts
to issue common stock, such as options,  were exercised or converted into common
stock. The Company does not believe that SFAS 128 will have a material impact on
its financial statements.

      SFAS 125/127
      ------------
      In June 1996,  the Financial  Accounting  Standards  Board issued SFAS No.
125,   "Accounting   for  Transfers  and  Servicing  of  Financial   Assets  and
Extinguishments  of  Liabilities",  which  was  amended  by SFAS No.  127.  This
statement  provides   accounting  and  reporting  standards  for  transfers  and
servicing  of  financial  assets and  extinguishments  of  liabilities  based on
consistent  application  of a  financial-components  approach  that  focuses  on
control.  It  distinguishes  transfers of  financial  assets that are sales from
transfers that are secured borrowings. Under the financial-components  approach,
after a transfer of financial  assets,  an entity  recognizes  all financial and
servicing  assets it controls and  liabilities it has incurred and  derecognizes
financial   assets  it  no  longer  controls  and  liabilities  that  have  been
extinguished.  The  financial-components  approach  focuses  on the  assets  and
liabilities that exist after the transfer.  Many of these assets and liabilities
are  components of financial  assets that existed  prior to the  transfer.  If a
transfer does not meet the criteria for a sale, the transfer is accounted for as
a secured  borrowing with pledge of  collateral.  The statement is effective for
transfers and servicing of financial assets and  extinguishments  of liabilities
occurring after December 31, 1996. Retroactive  application of this statement is
not  permitted.  The adoption of SFAS No. 125 did not have a material  impact on
the results of operations or financial condition of the Company.




                                       15

<PAGE> 16


HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997

(UNAUDITED)

      SFAS 123
      --------
      In October 1995, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standards (SFAS) No. 123,  "Accounting for Stock-Based
Compensation,"  which became  effective for the Company  beginning July 1, 1996.
SFAS  No.  123  requires  expanded   disclosures  of  stock-based   compensation
arrangements  with employees and encourages (but does not require)  compensation
cost to be measured  based on the fair value of the equity  instrument  awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes  compensation  cost  based  on the  intrinsic  value  of  the  equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to its
stock based compensation  awards to employees and will disclose the required pro
forma effect on net income and earnings per share.

      SFAS 121
      --------
      During 1995, the FASB issued SFAS No. 121,  "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived  Assets to be Disposed Of". The Company
adopted this  statement  beginning  July 1, 1996 with no material  impact on the
financial condition or results of operations of the Company.



                                       16

<PAGE> 17


HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997

(UNAUDITED)

6.    Stock Plans
      -----------

      The Company established for eligible employees an Employee Stock Ownership
Plan and Trust  ("ESOP")  which  became  effective  upon the  conversion  of the
Association from a mutual to a stock  association (the  "Conversion").  The ESOP
subscribed  for 7% of the  shares  of  common  stock  issued  in the  Conversion
pursuant to the  subscription  rights  granted  under the ESOP plan. On June 30,
1995,  the  ESOP  borrowed  $3,703,000  from  the  Company  in order to fund the
purchase of common stock.  The loan to the ESOP will be repaid  principally from
the  Company's  contributions  to the ESOP  over a period  of ten  years and the
collateral for the loan is the common stock  purchased by the ESOP. The interest
rate for the ESOP loan is 9%. As of March 31, 1997 a total of 104,069  shares of
common  stock had been  allocated to  individual  employee  accounts,  leaving a
remainder of 358,806 shares to be allocated over the remaining life of the ESOP.

      At the Company's  Annual Meeting of  Shareholders on January 11, 1996, the
shareholders approved the HF Bancorp, Inc. 1995 Master Stock Option Plan ("Stock
Option Plan") and the Hemet Federal  Savings and Loan  Association  Master Stock
Compensation Plan (the "Stock  Compensation  Plan")  (collectively the "Plans").
These Plans became effective as of the date of approval.  The Stock Compensation
Plan was  authorized  to  acquire  198,375  shares of  common  stock in the open
market.  The Association  contributed  funds to the Stock  Compensation  Plan to
enable the Stock  Compensation  Plan trustees to acquire the necessary shares of
the common stock. On February 28, 1996, the Association  acquired 198,375 shares
in the open  market at a price of $10.00  per  share.  Stock  shares are held in
trust.  The amount  contributed to the Stock  Compensation  Plan is amortized to
compensation expense as the Association's  employees and directors become vested
in the shares.

      The  Stock  Compensation  Plan  provides  for two  general  types of share
grants: time based grants and performance based grants. Outside directors of the
Company receive time based grants,  which become vested on a straight line basis
over the  applicable  grant period,  typically  five years.  A maximum of 34,700
shares are available for grant to outside  directors  under the Plan.  Employees
are eligible for both time based grants and performance  based grants,  of which
two  categories  are  provided  for in the  Plan:  performance  grants  and high
performance  grants.  Vesting of performance  based grants is dependent upon the
financial results of the Company.

     As of March 31, 1997,  a total of 37,294  shares have been vested under the
Stock  Compensation  Plan.  An  additional  21,563  non-vested  shares have been
allocated to outside  directors  under time based  grants.  Also as of March 31,
1997,  100,324  non-vested  shares  have  been  allocated  to  employees  in key
management positions in order to provide them with a proprietary interest in the
Company in a manner  designed to  encourage  such  employees  to remain with the
Company. Of these 100,324 shares, 75% were allocated under time based grants and
25% were allocated under performance based grants. 39,194 shares remained in the
trust on an

                                       17

<PAGE> 18


HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997

(UNAUDITED)

unallocated basis at March 31, 1997.

      The Stock Option Plan  provides  for the grant of up to 661,250  shares of
Common Stock to employees in key management positions and outside directors; and
similar to the Stock Compensation Plan, it is intended to provide key management
and  directors  with a  proprietary  interest in the Company  and  therefore  an
incentive to remain with the Company. As of March 31, 1997, options representing
a total of  528,853  shares  had been  granted  and were  outstanding.  Of these
528,853  options,  issued at share prices ranging from $9.50 to $11.05,  112,851
options at a weighted average share price of $10.05 were vested and none had yet
been exercised.

7.     Recent Developments
       -------------------

Potential Federal Legislation
-----------------------------
      The U.S.  Congress is  currently  discussing  a broad  range of  potential
legislation  which could impact the financial  services  industry in general and
the Company in particular. Key topics under discussion include:

o     the potential merger of the BIF and SAIF FDIC deposit insurance funds,

o     the possible reform of financial institution charters (including the 
      potential elimination of the federal thrift charter),

o     potential requirements for the cancellation of lender mortgage insurance 
      under certain circumstances,

o     financial services modernization, including a possible relaxation of laws 
      separating commercial banking and commerce,

o     potential modifications to the Federal Home Loan Bank system,  including a
      possible  relaxation of the current mandatory  membership  requirement for
      thrift institutions,

o     a possible  reduction in the net operating loss ("NOL")  carryback  period
      from three years to one year,  which  could  present  negative  regulatory
      capital implications to the financial services industry,

o     possible federal controls on the amount and disclosure of ATM fees,

o     legislation  addressing  the  allowable  financial  relationships  between
      financial  institutions and mortgage brokers (generally referred to as the
      "yield / spread" topic),


                                       18

                                  

<PAGE> 19


HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997

(UNAUDITED)

Deposit Insurance Funds Act of 1996
------------------------------------

      On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions,  including the Association,  to
recapitalize  the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995,  payable  November 27, 1996.  The special  assessment was recognized as an
expense  in the  third  calendar  quarter  of 1996  and is tax  deductible.  The
Association  took a  pre-tax  charge  of $4.8  million  as a result  of the FDIC
special assessment during the fiscal quarter ended September 30, 1996.

      As a result of the Deposit  Insurance  Funds Act of 1996, the FDIC lowered
SAIF general  assessments to 0 to 27 basis points  effective  January 1, 1997; a
range comparable to that of BIF members.  However, SAIF members will be assessed
at a rate of 6.5 basis points for FICO payments.  The Association's  invoice for
FDIC deposit  insurance for the quarter  ending March 31, 1997 was assessed at a
rate of 6.5 basis points (FICO related) on SAIF assessable deposits.  Management
cannot  predict the level of FDIC insurance  assessments  on an on-going  basis,
whether the savings association  charter will be eliminated,  or whether the BIF
and SAIF will eventually be merged.




                                       19

<PAGE> 20



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

        General
        -------

              The Company is  headquartered in Hemet,  California and conducts  
        business from nineteen branch offices and one centralized loan servicing
        center, located as follows:

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

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

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

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



                                       20

<PAGE> 21



      On September 27, 1996, the association consummated the acquisition of PSSB
by purchasing  their  1,131,446  shares of common stock for $16.3  million.  The
purchase  included  acquiring a net loan  portfolio  of $160.7  million  with an
average  weighted rate of 8.47% and savings  account  deposits of $164.7 million
with an average weighted rate of 4.09%.

      The Company is primarily  engaged in the business of  attracting  funds in
the form of  deposits  and  supplementing  such  deposits  with  FHLB and  other
borrowings,  and investing such funds in loans secured by real estate, primarily
one to four family  residential  mortgage  loans,  and in consumer  and business
loans The Company had in past recent years,  when loan demand was not as high as
presently exists,  made investments in U.S. agency backed investment  securities
and mortgage-backed and related securities,  including  collateralized  mortgage
obligations ("CMOs") that generally are either guaranteed by a Federal agency, a
government  sponsored  entity,  or are private  issuer  securities  that have an
investment  grade of AAA.  The current  direction is to serve the loan demand in
the Company's expanded market areas that have grown with the branch acquisitions
in northern  San Diego County from  Hawthorne  Savings,  F.S.B.  and through the
acquisition of PSSB that serves the Coachella  Valley  communities.  To a lesser
extent,  the Company  invests in multi-family  mortgage  loans,  commercial real
estate  loans,  construction  loans,  acquisition,  development  and land loans,
commercial business loans and consumer loans.

      The Company's  revenues are derived  principally from interest on its loan
and  mortgage-backed  securities  portfolios  and interest and  dividends on its
investment  securities.  The  Company's  primary  sources of funds are deposits;
principal  and  interest   payments  on  investment   securities,   loans,   and
mortgage-backed  securities;  FHLB  advances;  and  other  borrowings.   Through
subsidiaries,  the Company also engages in residential  real estate  development
and  receives  commissions  from  the  sale of  mortgage  life  insurance,  fire
insurance, annuities, mutual funds and derives income from trustee services.

Changes In Financial Condition From June 30, 1996 to March 31, 1997
-------------------------------------------------------------------

      Total  assets of the Company  increased  $157.6  million,  or 19.1%,  from
$826.9 million at June 30, 1996 to $984.5  million at March 31, 1997,  primarily
as a result  of the  acquisition  of PSSB.  Net  loans  receivable  rose  $243.1
million,  or 108.0%,  from $225.2  million at June 30, 1996 to $468.2 million at
March 31, 1997. The  significant  increase in loans  outstanding was a strategic
objective  identified  by management  to more  effectively  employ the Company's
capital and liquidity while also improving core earnings.  The increase in loans
outstanding  over the nine  months  ended  March 31,  1997  resulted  from three
primary factors:

     1.    $160.7 million in net loans receivable from the PSSB acquisition

     2.    The purchase of $48.6 million face value residential loans in the 
           secondary market

     3.    Increased loan production through the Company's retail and wholesale 
           loan origination networks.



                                       21

<PAGE> 22



      Investment  securities  declined  from $207.8  million at June 30, 1996 to
$187.3 million at March 31, 1997, as funds from sales, maturities,  and calls of
these  assets were  primarily  redirected  into  increased  lending.  During the
quarter  ended  December  31,  1996,  the Company  sold $15.6  million in shares
associated with a mutual fund  concentrated in shorter duration  mortgage backed
securities.  At March 31, 1997, the Company  maintained no investments in mutual
funds.

      Mortgage  backed  securities  fell from $259.5 million at June 30, 1996 to
$246.5  million  at March  31,  1997,  representing  a  decline  of  5.0%.  This
reduction,  however,  was the net result of two significant sets of transactions
aimed at reducing the  Company's  sensitivity  to  increases  in general  market
interest rates:

     1.    During the quarter ended December 31, 1996, the Company sold $34.0 
           million of long term, fixed rate, U.S. Agency mortgage backed  
           securities that had been accounted for as "available for sale".
     
     2.    During the quarter  ended March 31,  1997,  the  Company  purchased  
           $36.4 million  par value  GNMA ARM  mortgage  backed  securities  
           which  reprice annually at a spread over the One Year Treasury 
           Constant Maturities Index.

      Funds from  amortization  and prepayments  associated with mortgage backed
securities were largely redeployed into the whole loan portfolio.

      The  Company's  investment  in the capital  stock of the Federal Home Loan
Bank  increased  from $4.4 million at June 30, 1996 to $6.1 million at March 31,
1997, due to the acquisition of $1.4 million in stock  previously  owned by PSSB
and because of stock dividends credited in the amount of $0.3 million.

      The total investment in foreclosed real estate, net of valuation reserves,
rose  from $1.1  million  at June 30,  1996 to $4.7  million  at March 31,  1997
primarily due to an inflow of foreclosed  properties and loans that would become
foreclosures from PSSB. Management  anticipated this increase as a result of its
due diligence  process in conjunction  with the  acquisition,  requiring PSSB to
record  additional loan and real estate loss  provisions  totalling $2.2 million
prior to the consummation of the acquisition. During the quarter ended March 31,
1997,  the Company  realized a pre tax gain of $53,000 on the sale of foreclosed
real estate.

      Other  assets  increased  from  $14.4  million  at June 30,  1996 to $23.2
million at March 31, 1997 primarily due to the core deposit intangible  recorded
in conjunction  with the  acquisition of PSSB (see  "Acquisition Of Palm Springs
Savings Bank").



                                       22

<PAGE> 23



      Deposits  increased 25.5%, or $170.8 million,  from $669.7 million at June
30,  1996 to  $840.5  million  at  March  31,  1997  primarily  due to the  PSSB
acquisition  that  added  $164.7  million  in  deposits.   As  detailed  in  the
Consolidated  Statement  Of Cash  Flows,  the mix of the  Company's  deposits is
gradually  shifting away from a high  concentration  in  certificates of deposit
toward a profile  presenting  a greater  proportion  of savings and  transaction
accounts;  consistent  with the Company's  enhanced focus on community  banking.
During the nine months  ended March 31,  1997,  the  Company has  experienced  a
divergence  in deposit flows in the various  markets in which it competes;  with
deposits  increasing in those  markets  impacted by  competitor  relocations  or
mergers,  and with deposits falling in those markets subject to aggressive price
competition from new entrants or regional  institutions with significant funding
requirements.

      Total  equity  decreased  from  $81.1  million  at June 30,  1996 to $80.8
million at March 31, 1997, as a result of several offsetting factors:

      1.    The $1.3 million net loss for the nine months ended March 31, 1997 
            (which includes a $2.8 million after tax impact for the one time 
            SAIF recapitalization assessment),

      2.    An $838,000 reduction in the aggregate contra equity effect of the 
            Company's deferred compensation programs, as additional shares 
            became vested during the nine month period,

      3.    A $208,000 improvement in the net unrealized loss position, net of 
            taxes, on securities available for sale.

      During the quarter ended March 31, 1997, however,  the net unrealized loss
associated  with the Company's  securities  available for sale increased by $1.2
million due to two factors:

      A.    Increases in general market interest rates, as reflected in the 
            Federal Reserve Board's raising its target rate for overnight 
            federal funds from 5.25% to 5.50% during the final week of March, 
            1997,

      B.    A rise in the volume of  securities  available  for sale from $219.0
            million to $249.6  million,  as all recent  security  purchases have
            been designated as available for sale.



                                       23

<PAGE> 24



Managing Interest Rate Risk And Hedging Activities
--------------------------------------------------

      In an effort to limit the  Company's  exposure to interest  rate  changes,
management  monitors  and  evaluates  interest  rate risk on an  ongoing  basis,
through both an internal  simulation and modeling process and via  participation
with  the  Office  of  Thrift   Supervision   Market  Value  Model.   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,  meaning that, in aggregate, the Company's liabilities reprice more
quickly  and by a  greater  magnitude  than do its  assets.  This net  liability
sensitivity  primarily  arises from the longer term,  higher  duration  mortgage
backed and  investment  securities  and whole loans  maintained on the Company's
balance sheet,  for which the Company's only current matched funding sources are
demand deposit  accounts,  non interest bearing  liabilities,  a segment of core
deposit transaction accounts,  certain borrowings and capital. The net liability
sensitivity  translates  to improved  profitability  and higher  economic  value
during  decreasing  interest rate  environments,  and  vice-versa for periods of
increases in general market interest rates.

      During the nine  months  ended  March 31,  1997,  the  Company has taken a
number of steps to moderate its exposure to interest rate risk:

      1.    The  sale of $34.0 million in fixed rate securities and the 
            purchase of $36.4  million in  adjustable  rate  securities  
            described  under "Changes In Financial Condition";

      2.    The secondary  market purchase of $22.8 million in residential loans
            that reprice annually based upon a margin over the One Year Treasury
            Constant Maturities Index;

      3.    The secondary  market purchase of $25.8 million in residential loans
            structured  as three/one  adjustable  rate loans whereby the rate is
            fixed for the first three years of the loan's life and then  reverts
            to a one year  adjustable that reprices based upon a margin over the
            One Year Treasury Constant Maturities Index;

      4.    The  adoption  of  a loan  origination  program which encourages the
            generation of adjustable rate mortgages through favorable pricing to
            the customer combined with incentives to the Company's sales force;

      5.    The  introduction  of  three  Prime Rate based home  equity  line 
            of credit  products  which have been marketed  throughout the 
            Company's branch  network,  resulting  in $4.3  million in credit  
            commitments outstanding at March 31, 1997; and

      6.    The development and marketing of additional core deposit transaction
            products,  which are  typically  less  sensitive  to  interest  rate
            changes than certificates of deposit.



                                       24

<PAGE> 25



      Management  believes that,  although investment in adjustable rate assets,
some of which present initial discount,  or teaser, rates, may reduce short term
earnings  below amounts  obtainable  through  investment in fixed rate or higher
duration  assets,  an  asset  portfolio   containing  a  greater  percentage  of
adjustable rate product reduces the Company's  exposure to adverse interest rate
fluctuations and enhances longer term  profitability and economic value. This is
consistent with the overall investment policy of the Company,  which is designed
to manage its  aggregate  interest  rate  sensitivity,  to  generate a favorable
return without  incurring  undue interest rate risk, to supplement the Company's
lending activities, and to provide and maintain liquidity. However, there can be
no assurance that any substantial  quantity of adjustable rate loans meeting the
Company's underwriting standards will be available in the future.

      The Company has also utilized a variety of financial instruments to manage
its  interest  rate risk,  including  off  balance  sheet  transactions  such as
interest  rate  agreements  including  swaps,  caps,  and  floors.  The  Company
originally   entered  into  its  existing   off  balance   sheet   positions  to
synthetically  adjust the duration of the Company's  liabilities to more closely
match that of its assets.  On July 10, 1995,  the  Association  terminated  four
interest rate swap contracts with an aggregate  notional  amount of $60 million,
invoking a termination fee of $4.9 million which,  for accounting  purposes,  is
being amortized to interest expense over the individual remaining contract lives
of each swap.



                                       25

<PAGE> 26



      During the nine months ended March 31,  1997,  the  Association  amortized
$1.5  million of the deferred  loss to interest  expense,  and charged  interest
expense for $0.8 million related to current existing interest rate swaps with an
aggregate  notional  amount of $35 million.  During the quarter  ended March 31,
1997, the end of the amortization period for one of the terminated interest rate
swaps was realized,  with the amortization of an additional  terminated interest
rate swap  concluding in the Company's  fourth  fiscal  quarter  ending June 30,
1997.  The  conclusion  of  these  amortization   periods  will  result  in  the
Association's  reporting a reduction in interest  expense and effective  cost of
funding,  all  else  held  constant.   Additional   information  concerning  the
Association's current and terminated interest rate swap positions is provided in
the following table:

<TABLE>
<CAPTION>
          
      Summary Of Interest Rate Swaps
      ------------------------------

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

                                    Rate             Basis          Rate           Basis
            Notional   Maturity     Association      Association    Association    Association    Swap
            Amount         Date     Receives         Receives       Pays           Pays           Resets
            --------       ----     --------         --------       ----           ----           ------
<S>     <C>            <C>          <C>              <C>            <C>            <C>            <C>
        $20,000,000    01/06/99     3 month LIBOR    Actual/360     9.800% Fixed   360/360        quarterly
        $15,000,000    01/30/99     3 month LIBOR    Actual/360     7.274% Fixed   360/360        quarterly

Total   $35,000,000
</TABLE>


<TABLE>
<CAPTION>

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


                                         Original     3/31/97            Loss           Daily
           Notional     Termination      Deferred    Deferred    Amortization            Loss
             Amount            Date          Loss        Loss      Completion    Amortization
           --------     -----------      --------    --------    ------------    ------------
<S>     <C>                <C>         <C>         <C>               <C>               <C> 
        $10,000,000        07/10/95      $557,730          $0        03/27/97            $890
        $20,000,000        07/10/95    $1,338,145     $60,732        04/30/97          $2,024
        $10,000,000        07/10/95      $631,816    $173,567        11/25/97            $726
        $20,000,000        07/10/95    $2,328,601  $1,134,978        11/21/98          $1,892

Total   $60,000,000                    $4,856,292  $1,369,277                          $5,532

</TABLE>



                                       26

<PAGE> 27





Acquisitions
------------

      The following  tables provide  information  concerning the  acquisition of
three branches from Hawthorne  Savings,  FSB and the acquisition of Palm Springs
Savings  Bank.  Each of these  transactions  generated  intangible  assets which
reduce  regulatory  capital and which are being  amortized  against  income,  as
detailed below.

Acquisition of Three Hawthorne Savings Branches
-----------------------------------------------

Transaction Date                                           06/21/96
Deposits Acquired                                        $185,189,446
Initial Core Deposit Intangible Created                   $6,642,079
Book Amortization Method / Term                  Straight Line / Seven Years
Tax Return Amortization Method / Term            Straight Line / Fifteen Years
Monthly Pre-Tax Charge To Book Income                      $79,072
Monthly Book Amortization Reported As               Non Operating Expense
Core Deposit Intangible Balance As Of 3/31/97             $5,930,427
Reduction In Regulatory Capital As Of 3/31/97             $5,930,427
Reduction In Tangible Book Value As Of 3/31/97            $5,930,427





                                       27

<PAGE> 28

<TABLE>
<CAPTION>

Acquisition of Palm Springs Savings Bank ("PSSB")
-------------------------------------------------
 Transaction Date                                                               09/27/96
 Nature of Transaction                                                   Non Taxable Acquisition
 Accounting Methodology Employed                                           Purchase Accounting
<S>                                                      <C>                 <C>    

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

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

<TABLE>
<CAPTION>
                                                           
<S>                                                       <C>
Book Amortization Method / Term
     Loan Premium                                         Effective Yield/Life Of Loans Acquired
     Core Deposit Intangible                                    Straight Line/Seven Years

Tax Return Amortization Method / Term
     Loan Premium                                         Not Tax Deductible Due To Non Taxable
                                                          Acquisition
     Core Deposit Intangible                              Not Tax Deductible Due To Non Taxable
                                                          Acquisition
Monthly Pre-Tax Charge To Book Income
     Loan Premium                                         variable based upon loan amortization
     Core Deposit Intangible: Gross / Net                            $112,446 / $65,999

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

<TABLE>
<CAPTION>
                                                          Nominal       Deferred
Balances As Of 03/31/97                                   Assets        Tax Liabilities   Net
                                                          -------       ---------------   ---   
<S>                                                       <C>           <C>               <C>
     Loan Premium                                         $  2,303,450  $   951,467       $1,351,983
     Core Deposit Intangible                              $  8,770,799  $ 3,622,884       $5,147,915
                                                          ------------  -----------       ----------
          Total                                           $ 11,074,249  $ 4,574,351       $6,499,898

Reduction In Regulatory Capital As Of 3/31/97
     Loan Premium                                         None
     Core Deposit Intangible, Net                         $5,147,915

Reduction In Tangible Book Value As Of 3/31/97
     Loan Premium                                         None
     Core Deposit Intangible, Net                         $5,147,915

</TABLE>








                                       28

<PAGE> 29


Acquisition of Palm Springs Savings Bank ("PSSB")
-------------------------------------------------

Subsequent Adjustment
---------------------
Adjustment Date                                        03/01/97
Nature of Adjustment                     Recognition of Additional Core Deposit
                                       Intangible Resulting From Trigger of PSSB
                                           Officer 24 Month Salary Continuation
                                                       Agreement
Additional Core Deposit Intangible Created             $362,804
Book Amortization Method / Term                  Straight Line / 79 months
Tax Return Amortization Method / Term            Straight Line / 24 months
Monthly Pre-Tax Charge To Book Income                     $4,592
Monthly Book Amortization Reported As               Non Operating Expense
Core Deposit Intangible Balance As Of 3/31/97            $358,212
Reduction In Regulatory Capital As Of 3/31/97            $358,212
Reduction In Tangible Book Value As Of 3/31/97           $358,212



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



                                     29

<PAGE> 30





Liquidity and Capital Resources
-------------------------------

      The  Company's  primary  sources  of funds  are  deposits,  principal  and
interest payments on loans, mortgage-backed and investment securities,  retained
earnings and FHLB advances and other borrowings.  While maturities and scheduled
amortization  of loans  are  predictable  sources  of funds,  deposit  flows and
prepayments  from  mortgage  related  assets are greatly  influenced  by general
interest  rates,  economic  conditions,  and  competition.  The  Association has
continued to maintain the required minimum levels of liquid assets as defined by
OTS regulations.  This requirement,  which may be varied at the direction of the
OTS  depending  upon  economic  conditions  and deposit  flows,  is based upon a
percentage  of  deposits  and  short-term  borrowings.  The  required  ratio  is
currently  5%. The  Association's  liquidity  ratio was 9.2% at March 31,  1997,
compared to 12.0 % at June 30, 1996. It is the Association's  intent to maintain
liquidity  in  a  5-6%  range  to  take  advantage  of  higher  interest  income
opportunities from mortgage,  commercial, and consumer related investments.  The
ratio at June 30, 1996  appeared high because the  Association  was still in the
process of deploying  funds on a more permanent  basis that were acquired in the
purchase of three branch  offices from Hawthorne  Savings,  FSB on June 21, 1996
that provided cash in the amount of $177.9 million.  The ratio at March 31, 1997
was above management's longer term average target due to the operational need to
build excess  liquidity at the end of March in preparation  to fund  anticipated
customer  deposit  withdrawals  for the payment of  property  tax and income tax
liabilities in early April.

      The Company's  cash flows are comprised of three primary  classifications:
cash  flows  from  operating  activities,  investing  activities  and  financing
activities.   See  Statements  of  Cash  Flows  in  the  Consolidated  Financial
Statements  included herein.  The Company's  primary sources of funds during the
nine months ended March 31, 1997 were its excess  liquidity at the  beginning of
the period,  principal  repayments on loans and  mortgage-backed  and investment
securities,  calls of  investment  securities,  and  proceeds  from the sales of
available for sale mortgage-backed and investment securities.


      The Company has other sources of liquidity if a need for additional  funds
arises; including FHLB advances and various other types of wholesale borrowings.
At March 31, 1997,  the  Association  had $50.0 million in advances  outstanding
from the FHLB; a decline of $20.0  million from the amount  outstanding  at June
30,  1996.  This decline  resulted  from the January  1997  prepayment,  without
penalty,  of a $20.0  million  FHLB advance  bearing an interest  rate of 5.78%,
which was in excess of the marginal  earnings  rate  available for the Company's
excess  liquidity  during the quarter  ended March 31, 1997.  The Company had no
other  debt  outstanding  at March  31,  1997.  The  Association  has  available
significant  unpledged collateral in the form of mortgage loans, mortgage backed
and related  securities,  and U.S. Government Agency Notes and Bonds that may be
used as collateral in securing financing for cash needs.



                                     30

<PAGE> 31





      The Association  must maintain  capital  standards as set forth by federal
regulations.  As of March 31, 1997, these  requirements are: 1) tangible capital
of 1.5 % of adjusted assets;  2) core capital of 4% of adjusted  assets;  and 3)
risk-based  capital of 8.0 % of  risk-weighted  assets.  At March 31, 1997,  the
Association exceeded all minimum regulatory capital requirements as shown in the
table below:

<TABLE>
<CAPTION>
                                                          PERCENT OF
                                                            ADJUSTED 
                                         AMOUNT         TOTAL ASSETS
                                         ------         ------------
                                      (DOLLARS IN THOUSANDS)

Tangible Capital
----------------

<S>                                      <C>               <C>  
Actual capital                           $57,259            5.94%

Minimum required                          14,466            1.50
                                          ------            ----

Excess                                   $42,793            4.44%
                                         =======            =====

Core Capital
------------

Actual capital                           $57,259            5.94%

Minimum required                          38,575            4.00
                                          ------            ----

Excess                                   $18,684            1.94%
                                         =======            =====


                                                     PERCENT OF RISK -
                                         AMOUNT      WEIGHTED ASSETS 
                                         ------      ---------------

Risk-based Capital
------------------

Actual capital                           $60,811           15.72%

Minimum required                          30,944            8.00
                                         -------            ----

Excess                                   $29,867            7.72%
                                         =======            =====

</TABLE>



                                            31

<PAGE> 32



      OTS regulations  contain "prompt corrective action" provisions under which
insured depository institutions are to be classified into one of five categories
based  primarily  upon  capital  adequacy.   The  categories  range  from  "well
capitalized" to "critically  under  capitalized."  OTS guidelines define a "well
capitalized" institution as one which maintains:

      C.    A total risk-based capital ratio of 10% or greater,
      D.    A Tier 1 risk-based capital ratio of 6%
      E.    A core capital ratio of 5% or greater, and
      F.    Is not subject to any written capital order or directive to meet and
            maintain a specific capital level of any capital measure.

      The Association's Tier 1 risk based capital ratio as of March 31, 1997 was
14.80%.  At March 31, 1997, the Association's  regulatory  capital levels exceed
the thresholds  required to be classified as a "well  capitalized"  institution.
The  Association's  capital ratios  detailed above do not reflect the additional
capital (and assets) maintained by the holding company.

      On January  10,  1997,  the Office Of Thrift  Supervision  ("OTS")  issued
Thrift Bulletin #69: "Revised Rating System;  Disclosure Of Component  Ratings".
This Bulletin  presented the adoption by the OTS of an updated Uniform Financial
Institutions Rating System ("FIRS").  The revised rating system is effective for
all  examinations  that begin after January 31, 1997. The OTS will also commence
disclosing individual component ratings for safety and soundness examinations to
thrift management and directors at the same time. The FIRS has historically been
referred to as the CAMEL rating system,  which produced a composite rating of an
institution's  overall  condition  and  performance  by  assessing  five  rating
components:   Capital  adequacy,  Asset  quality,   Management,   Earnings,  and
Liquidity.  The revised rating system places additional emphasis on management's
effectiveness  in identifying,  measuring,  monitoring,  and controlling risk by
adding a sixth rating component:  "Sensitivity to market risk", thereby changing
the common  acronym to CAMELS.  The new "S"  component  rating will  address the
degree that changes in interest rates, commodity prices, and equity prices could
adversely  affect an  institution's  earnings  or economic  capital.  Management
believes that the new rating system will not materially  impact the Company,  as
the primary market price sensitivity  maintained by the Company is interest rate
risk,  which has been previously and regularly  reviewed in conjunction with OTS
examinations.

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



                                     32

<PAGE> 33



Nonperforming and Classified Assets
-----------------------------------

      The following table sets forth  information  regarding  non-accrual  loans
delinquent 90 days or more and real estate acquired through foreclosure (REO-F).

<TABLE>
<CAPTION>

                                                   MARCH 31, 1997  JUNE 30, 1996
                                                   --------------  -------------
                                                      (DOLLARS IN THOUSANDS)

<S>                                                        <C>            <C>   
Non-accrual loans before valuation reserves                $6,860         $1,301

Investment in REO before valuation reserves                 5,534          1,460
                                                           ------         ------

Total nonperforming assets                                $12,394         $2,761
                                                          =======         ======

Nonperforming loans to gross loans                          1.40%           .56%

Non performing assets to total assets                       1.26%           .33%

</TABLE>



      The following graph presents information concerning classified assets. The
category "OAEM" refers to "other assets especially  mentioned",  or those assets
which present indications of potential future credit deterioration.

[A graph depicting month end balances of classified assets segregated by
category for the period June 1996 through March 1997, is presented.  The
component categories are "Other Assets Especially Mentioned", "Substandard", and
"Loss".  The graph illustrates how classified assets increased from $22.4
million on August 31, 1996 to $43.5 million at September 30, 1996 in conjunction
with the acquisition of Palm Springs Savings Bank in September of 1996.  Since
then, classified assets have declined to $38.4 million at March 31, 1997.]




                               [GRAPHIC OMITTED]






<TABLE>
<CAPTION>

            OAEM         SUBSTANDARD      LOSS         TOTAL 
            ----         -----------      ----         -----
<S>       <C>           <C>              <C>           <C>
06-96     $11,070,083   $ 8,189,456      $3,139,484    $22,399,023
07-97      11,053,076     8,439,376       3,200,864     22,693,316
08-96      11,003,824     8,238,695       3,202,619     22,445,138
09-96      17,454,473    22,006,462       4,037,444     43,498,379
10-96      17,959,432    20,765,104       3,897,089     42,621,625
11-96      17,804,452    20,873,442       3,886,089     42,563,983
12-96      17,793,183    20,588,256       2,819,609     41,201,048
01-97      17,402,974    20,846,739       2,789,805     41,039,518
02-97      16,630,316    19,089,305       2,908,766     38,628,386
03-97      16,645,962    18,733,056       3,035,419     38,414,437

</TABLE>


      As detailed  below,  the Company  experienced an  anticipated  significant
increase in classified  assets upon the acquisition of PSSB in September,  1996.
During the six months since the acquisition, management has worked to reduce the
classified asset total through various means

                                     33



<PAGE> 34



including  aggressive  collection efforts,  foreclosure with subsequent property
sales,  and settlement of troubled  assets for less than face value. As a result
of its due  diligence  process  in  conjunction  with the  acquisition  of PSSB,
management  required PSSB to recognize $2.2 million in additional  loan and real
estate loss provisions prior to the consummation of the acquisition.

      The  Association  adopted  SFAS 114, as amended by SFAS 118, as of July 1,
1995 and recognized no impact upon adoption.  A loan is considered impaired when
it is probable that the  Association  will be unable to collect all  contractual
principal and interest in accordance with the terms of the loan agreement,  when
a loan is ninety days or more past due, or when the loan has been  classified as
"substandard" by an internal review process.

      At March 31, 1997 the  Association  had  impaired  loans  totalling  $11.1
million,  which have related specific  reserves of $1.6 million;  and there were
$5.6  million  of  impaired  loans as of March 31,  1997 for  which no  specific
reserves  had been  recorded.  Total  impaired  loans  as of June  30,  1996 and
December 31, 1996 were $8.9 million and $19.9 million, respectively. The average
recorded  investment in impaired  loans during the nine month period ended March
31, 1997 was $16.3 million.  The Association's  impaired loans increased by $7.8
million  during the nine months  ended  March 31,  1997,  primarily  due to $8.6
million in impaired loans obtained through the acquisition of PSSB.

      Interest is accrued on impaired  loans on a monthly basis except for those
loans  that  are 90 days or more  delinquent  (non-accrual  loans).  When a loan
becomes  90 days or more  delinquent,  the  accrual of  interest  ceases and all
previously  accrued  interest is  reversed.  For the nine months ended March 31,
1997,  accrued  interest on impaired  loans was $83,000 and interest of $577,000
was received in cash.

      If all  non-accrual  loans had been  performing in  accordance  with their
original loan terms and had been  outstanding  from the earlier of the beginning
of the period or  origination,  the  Association  would have  recorded  interest
income of $219,000 during the nine month period ended March 31, 1997.

      The allowance for loan losses is established  through a provision for loan
losses  based on  management's  evaluation  of the  risks  inherent  in its loan
portfolio and the general economy.  Management  reviews the  Association'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 Association'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.




                                     34

<PAGE> 35



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

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

      The following  tables set forth activity in the  Association's  allowances
for  estimated  loan losses and  estimated  real estate  losses  during the nine
months ended March 31, 1997 and 1996:

<TABLE>
<CAPTION>


                                                    Nine Months Ended March 31
                                                    --------------------------

                                                       1997           1996
                                                       ----           ----
                                                      (DOLLARS IN THOUSANDS)

<S>                                                    <C>            <C>   
Allowance for loan losses:
--------------------------

   Balance at June 30                                  $3,068         $2,694

   Allowance Acquired from PSSB                         2,963             --

    Net Chargeoffs:

     One to four family                                  (674)          (281)

     Multifamily                                          (26)            --

     Commercial real estate                               (70)          (304)

     Construction loans                                  (217)           (10)

     Land/acquisition and development                    (154)           (20)

     Consumer                                             (14)           (20)
                                                      --------       --------

     Total chargeoffs                                  (1,155)          (635)

   Provision for estimated loan losses                    309            613
                                                      -------        -------

   Balance at March 31                                 $5,185        $ 2,672
                                                       ======        =======

</TABLE>


                                       35

<PAGE> 36

<TABLE>
<CAPTION>

                                                    Nine Months Ended March 31
                                                    --------------------------

                                                       1997           1996
                                                       ----           ----
                                                      (DOLLARS IN THOUSANDS)

Allowance for Losses: Real Estate Foreclosure
---------------------------------------------
<S>                                                    <C>            <C>   

   Balance at June 30                                  $  381         $  532

   Allowance acquired from PSSB                           491              0

      Net Chargeoffs                                     (119)           (30)

     Provision for estimated real estate losses            65             89
                                                      -------        -------

   Balance at March 31                                 $  818         $  591


Allowance for Losses: Real Estate-Development
---------------------------------------------

   Balance at June 30                                  $1,536         $1,395

   Allowance acquired from PSSB                             0              0

   Net Chargeoffs                                      (1,008)             0

   Provision for estimated losses                          49            153
                                                       ------         ------

Balance at March 31                                    $  577         $1,548



Total Allowances For Real Estate Losses                $1,395         $2,139
                                                       ======         ======
</TABLE>


      The ratio of allowance for estimated loan losses to gross loans  decreased
from 1.33% at June 30, 1996 to 1.06% at March 31, 1997 due to:

   1.  a significant increase in gross loans over the nine month period as a 
       result of:
            a.  increased originations,
            b.  whole loan purchases, and
            c.  the acquisition of $175.9 million in gross loans associated with
                PSSB.

   2.  an increase in the volume of net charge-offs; which primarily resulted 
       from cycling some of the problem loans acquired from PSSB through to 
       foreclosure or other credit settlement.




                                     36

<PAGE> 37





      The ratio of allowance for estimated  loan losses to gross  non-performing
loans  decreased  from 235.75% at June 30, 1996, to 75.58% at March 31, 1997 due
primarily to an increase in non performing  loans, from $1.3 million at June 30,
1996 to $6.9 million at March 31, 1997. The increase in non-performing loans was
largely  attributable  to loans acquired from Palm Springs Savings Bank; as $4.6
million of the $6.9  million in non  performing  loans as of March 31, 1997 were
originated  by Palm  Springs  Savings  Bank  prior to its  acquisition  by Hemet
Federal.

      The ratio of allowance for total estimated losses to total  non-performing
assets  decreased  from  94.18% at June 30,  1996 to  48.43% at March 31,  1997,
primarily  due to an  increase  in the level of  non-performing  assets of $ 9.6
million.  Such increase is a result of higher levels of non-performing  loans of
$5.5 million and real estate owned from  foreclosure  of $4.1 million.  At March
31, 1997, the Company's inventory of foreclosed properties and related valuation
reserves was composed as follows:

<TABLE>
<CAPTION>


      (Dollars in thousands)

                                   Gross      Valuation       Net      Percent
      Type Of Property             Balance    Reserves      Balance    Of Total
      ----------------             -------    --------      -------    --------
      <S>                          <C>           <C>        <C>         <C>   
      Residential 1 - 4 Units      $2,166        $304       $1,862      39.48%
      Multifamily > 4 Units           187          26          161       3.41%
      Commercial / Industrial       1,061           0        1,061      22.50%
      Land / Developed Lots         2,120         488        1,632      34.61%
                                   ------        ----       ------      ------

         Total REO-F               $5,534        $818       $4,716     100.00%
</TABLE>



      The Association accounts for real estate owned through foreclosure (REO-F)
at fair market value upon  acquisition,  and  management  believes that adequate
valuation reserves have been established based upon current and projected market
conditions.



                                     37

<PAGE> 38




Comparison of Operating Results for the Three Months and Nine Months Ended March
--------------------------------------------------------------------------------
31, 1997 and 1996
-----------------

GENERAL:  The Company  reported  net earnings of $357,000 or $0.06 per share for
-------
the three months  ended March 31, 1997,  compared to net earnings of $799,000 or
$0.13 per share for the same quarter  during the prior year.  During the quarter
ended March 31, 1996,  the Company  benefitted  from  $373,000 in interest on an
income tax refund credited to Other Income ($219,000 addition to net income) and
a $176,000 tax credit received from the California  Franchise Tax Board.  During
the quarter ended March 31, 1997, the Company  realized the final conversion and
integration  costs  associated  with the September 27, 1996  acquisition of Palm
Springs Savings Bank, increasing general & administrative  expenses by $100,000.
By March  31,  1997,  all  staff  consolidations  and  other  operating  expense
reductions associated with the acquisition were completed.

When  comparing  results  for the  quarter  ended March 31 for current and prior
year, net interest income,  operating fee revenue,  and general & administrative
expenses are all considerably higher in 1997 than prior year due to the purchase
of  three  savings  branches  from  Hawthorne  Savings  in  June  of  1996,  the
acquisition of Palm Springs Savings Bank, and internal  growth,  particularly in
loan origination volume, experienced over the past year.

For the nine months  ended March 31,  1997,  the Company  reported a net loss of
$1.3  million or $(0.22) per share.  This loss  primarily  resulted  from a $4.8
million pre-tax charge ($2.8 million on an after tax basis)  associated with the
one  time  SAIF  assessment   assessed   against  all  SAIF  insured   financial
institutions  and  realized by the Company in the quarter  ended  September  30,
1996.  Exclusive of this non recurring  charge,  the Company's  earnings for the
nine  months  ended March 31,  1997 would have been $1.5  million,  or $0.26 per
share.  For the nine months  ended March 31,  1996,  the  Company  reported  net
earnings  of $1.6  million,  or $0.25 per  share.  Current  fiscal  year to date
results were  unfavorably  impacted by non recurring  costs  associated with the
integration of Palm Springs Savings Bank.

NET INTEREST INCOME:  Net interest income increased from $4.3 million during the
-------------------
quarter ended March 31, 1996 to $5.7 million  during the quarter ended March 31,
1997;  a rise of 34.9%.  This  increase  resulted  from both a rise in  interest
earning assets and an improvement in the net interest margin realized on earning
assets.  Average net interest  earning assets rose from $714.9 million to $929.8
million  (30.1%),  while the average margin on net earning assets increased from
2.38% to 2.47%. The net interest margin on earning assets during the most recent
quarter was  constrained  versus that of the same quarter in the prior year by a
decline in the ratio of interest earning assets to interest bearing liabilities,
from 1.12 at March 31, 1996 to 1.07 at March 31, 1997.  This  reduction  largely
stemmed from the core deposit  intangibles  recognized in  conjunction  with the
Hawthorne Savings branch purchase and the Palm Springs Savings Bank acquisition.

Net interest  income rose $4.7 million or 39.7% from $11.8  million for the nine
months ended March 31, 1996 to $16.5 million for the nine months ended March 31,
1997.  Similar to the results for the most recent quarter,  the fiscal 1997 year
to date net  interest  income  benefitted  from both a rise in average  interest
earning assets (from $671.8 million to $901.3 million, or 34.2%) and in increase
in the net interest  margin on earning  assets (from 2.35% to 2.45%)  versus the
prior year.

                                       38


<PAGE> 39


INTEREST INCOME:  Interest income increased $3.9 million,  or 29.3%,  from $13.2
---------------
million  for the quarter  ended March 31, 1996 to $17.1  million for the quarter
ended March 31,  1997.  Interest  income from loans  doubled from the prior year
quarter,  from $4.5  million to $9.0  million,  as a 109.4%  rise in average net
loans  outstanding  was  somewhat  offset by a  reduction  in average  effective
portfolio  rate from 8.29% to 7.94%.  Interest from mortgage  backed  securities
declined  20.3% from $4.8  million in the  quarter  ended March 31, 1996 to $3.8
million in the quarter ended March 31, 1997, as there were $52.3 million (16.4%)
less in average  balances  outstanding  during the  current  quarter and because
during the second fiscal  quarter of 1997 $34.0  million in higher rate,  higher
duration  mortgage backed securities were sold in conjunction with the Company's
asset / liability  management.  Interest  income and dividends  from  investment
securities  rose $0.3 million,  or 8.1%, from $4.0 million for the quarter ended
March 31, 1996 to $4.3 million for the quarter ended March 31, 1997.

For the nine months ended March 31,  1997,  interest  income was $49.4  million,
$12.6  million  (34.2%)  greater  than the same  period of the prior  year.  The
interest  income results for the nine months year to date paralleled that of the
latest  quarter,  with  interest  from loans and  interest  and  dividends  from
investment  securities  increasing  significantly,  while  interest  income from
mortgage  backed  securities  declined in  association  with the  balance  sheet
changes  resulting  from the  acquisitions  during the past year  combined  with
management's  efforts to more  effectively  employ capital in whole loans versus
mortgage backed  securities.  Average  interest  earning assets rose from $671.8
million during the first nine months of fiscal 1996 to $901.3 million during the
first nine months of fiscal  1997,  an  increase of 34.2%.  This rise in average
earning assets generated all of the year to year increase in interest income, as
the average  effective rate on earning assets remained  constant at 7.30% during
both nine month periods.

INTEREST  EXPENSE:  Interest  expense  rose from $9.0  million  during the three
-----------------
months ended March 31, 1996 to $11.3 million during the three months ended March
31, 1997, an increase of 26.6%, as average  interest  bearing  liabilities  rose
35.8%,  somewhat offset by a reduction in the average effective cost of interest
bearing  liabilities  from  5.62%  during  the 1996  period to 5.24%  during the
current year period. Interest expense on deposits rose from $5.9 million for the
three  months ended March 31, 1996 to $9.9 million for the same period in fiscal
1997,  an increase of 66.9%  generated  by a similar  rise in average  balances.
Interest expense on borrowings  declined  significantly from $2.3 million during
the quarter ended March 31, 1996 to $0.7 million  during the quarter ended March
31, 1997,  as the Company  replaced  maturing  FHLB  advances and prepaid  $20.0
million in FHLB advances with deposits from its two acquisitions.

Interest expense for the nine months ended March 31, 1997 totaled $32.8 million,
up $7.9  million  or 31.5%  from the same  period  during  the prior  year.  The
weighted average  effective cost of interest bearing  liabilities  declined from
5.63%  during the nine  months  ended  March 31,  1996 to 5.22%  during the nine
months ended March 31,  1997.  This  reduction  in the cost of interest  bearing
liabilities resulted from decreases in average effective costs for both deposits
(5.01% to 4.81%) and borrowings (5.37% to 5.28%).  In addition,  the net cost of
the  Company's  interest  rate swaps (both  terminated  and active),  while down
$85,000 or 3.5% from year to year,  also presented a smaller average cost impact
on the larger average balance sheet maintained by the Company during the current
fiscal year. The aforementioned  reductions in average costs, however, were more
than  offset  by  interest  bearing   liability  average  balance  increases  in
generating a greater  nominal total for year to date interest  expense in fiscal
1997 than during the prior year. Specifically,  average interest 


                                       39


<PAGE> 40



bearing  deposit  accounts  rose 64.9% from  $470.1  million for the nine months
ended March 31, 1996 to $776.5 million for the nine months ended March 31, 1997.

PROVISION FOR  ESTIMATED  LOAN LOSSES:  The provision for estimated  loan losses
-------------------------------------
decreased  by $318,000 or 75.9% from  $419,000  for the quarter  ended March 31,
1996 to $101,000  during the quarter  ended March 31, 1997.  The  provision  for
estimated  loan losses for the nine month period ended March 31, 1997  decreased
$313,000,  or 50.3%,  from $622,000 during the nine month period ended March 31,
1996.  The balance of the allowance for estimated  loan losses (both general and
specific) increased from $2.7 million at March 31, 1996 to $5.2 million at March
31, 1997, as $3.0 million in allowances  added by the Palm Springs  Savings Bank
acquisition  were somewhat offset by the charge off of  specifically  identified
and reserved credit losses highlighted during the due diligence process prior to
acquisition.  Total non-performing loans as of March 31, 1997 were $6.9 million,
up from $2.4 million one year earlier,  with $4.6 million of the  non-performing
loans as of March 31, 1997  originated by Palm Springs Savings Bank prior to the
acquisition.  The ratio of  non-performing  loans to gross loans  increased from
1.06% at March 31, 1996 to 1.40% at March 31, 1997,  as the  portfolio  acquired
from Palm Springs Savings Bank presented a higher  proportion of problem credits
than that historically experienced by Hemet Federal prior to the acquisition.

OTHER INCOME & EXPENSE: Other income & expense decreased from $543,000 in income
----------------------
for the three  months ended March 31, 1996 to a $52,000 in expense for the three
months  ended  March 31,  1997 due to the non  recurring  receipt of $373,000 in
interest on an income tax refund from the California  Franchise Tax Board in the
1996 period and because of $579,000 in amortization of intangible  assets during
the 1997  period  following  the  Hawthorne  Savings  branch  purchases  and the
acquisition  of Palm Springs  Savings Bank.  Partially  offsetting the above two
items was an increase in savings  fees,  from  $151,000  during the three months
ended March 31, 1996 to $400,000  during the three  months ended March 31, 1997.
This  increase  resulted  from the  addition  of deposit  accounts  from the two
acquisitions  combined with the  continuing  community  banking and  transaction
services focus of the Company.

For the nine months  ended March 31,  other income & expense rose to $870,000 in
1997 from  $753,000  during 1996 because of $1.0 million in gains on the sale of
mortgage backed and investment securities during the 1997 fiscal year, for which
no comparable  activity  occurred  during the prior fiscal year.  These security
gains  combined with higher  savings fees to more than offset the non recurrence
of the income from the interest on the State tax refund  described above and the
recognition of $1.4 million in amortization of intangible  assets during year to
date fiscal 1997.  During the 1997 fiscal year, the Company has also commenced a
limited  mortgage banking  operation,  whereby certain credit products (e.g. FHA
and VA loans) are  originated  for sale to  various  conduits  in the  secondary
market.  Fiscal  1997 year to date  gains on loan  sales  totaled  $20,000.  The
Company  anticipates  greater activity in this regard in coming periods,  should
market conditions support the continued origination of applicable products.



                                     40

<PAGE> 41



GENERAL & ADMINISTRATIVE  EXPENSES:  General & administrative expenses increased
----------------------------------
by $1.6  million or 48.7% from $3.3  million to $4.9  million  for the  quarters
ended  March 31,  1996 and  1997,  respectively.  This  increase  was  primarily
attributable  to the  additional  operating  overhead  associated  with a branch
network which expanded from 12 to 19 full service  locations over the past year,
with a related increase in the number of deposit  accounts  serviced from 37,785
to 58,992.  The increase  also stemmed from the  Company's  implementation  of a
consolidated  loan service center  facility  during the second fiscal quarter of
1997, as the number of mortgage loans serviced  expanded from 2,885 at March 31,
1996 to 4,498 at March 31, 1997. General & administrative  expenses expressed as
a  percentage  of average  total  assets  increased  from 1.78% during the three
months  ended March 31, 1996 to 1.97%  during the three  months  ended March 31,
1997,  as the final non  recurring  expenses  associated  with the Palm  Springs
Savings Bank integration were realized during the most recent quarter. The 1.97%
figure  compares  favorably  to the  2.18%  ratio of  general  &  administrative
expenses to average total assets  experienced  during the second fiscal  quarter
ended December 31, 1996.

General & administrative  expenses for the nine months ended March 31, 1997 were
$19.2  million,  double  those for the  comparable  period  in the  prior  year.
However,  the 1997  fiscal  year  figure  included  a  one-time  FDIC  insurance
assessment of $4.8 million as mandated to recapitalize  the SAIF insurance fund.
Excluding the one-time SAIF  assessment.  total general &  administrative  costs
were $14.4 million and $9.6 million for the nine months ended March 31, 1997 and
1996,  respectively.  Expenses for salaries and employee benefits rose from $5.0
million  during the nine months ended March 31, 1996 to $7.0 million  during the
nine months ended March 31, 1997 due to increases  in staffing  associated  with
the significant  expansion in the Company,  including the addition of seven full
service branches.  General & administrative expenses excluding the one time SAIF
assessment  expressed  as a  percentage  of average  total  assets rose to 2.00%
during  fiscal year to date 1997 versus 1.83% during the prior year. In addition
to the  operating  expense  savings  now  implemented  in  conjunction  with the
integration of the two  acquisitions,  the Company has during the current fiscal
year reduced its benefit  accrual rate for its defined benefit pension plan, and
commenced a series of other  initiatives  as part of a  comprehensive  effort to
improve the efficiency of the organization.

INCOME TAXES:  Income tax expense  increased from $296,000 for the quarter ended
------------
March 31, 1996 to $346,000  during the  quarter  ended March 31, 1997  despite a
reduction  in pre  tax  income  due to the  receipt  of a tax  credit  from  the
California  State  Franchise Tax Board in the amount of $176,000 during the 1996
quarter. The Company's nominal tax rate remained substantially unchanged between
current and prior year.  For the nine months ended March 31,  income tax expense
decreased from $839,000 in 1996 to a benefit of $788,000 in 1997 due to the year
to date loss in fiscal 1997 stemming from the one-time SAIF assessment.






                                     41

<PAGE> 42



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

        Not applicable.

Item 6. Exhibits and Reports on Form 8-K
        --------------------------------

        A.  Exhibits

            (3) (i)  Articles of Incorporation*
                (ii) By-laws*

            (4) Stock Certificate*

           (27) Financial Data Schedule

        B.  Reports on Form 8-K

      (1) A report on Form  8-K/A was filed  with the  Securities  and  Exchange
      Commission  on February 26, 1997,  under  commission  file number  0-25722
      reflecting  a  revision  to  the  previously  filed  pro  forma  financial
      information  required  by  Article  11 of  Regulation  S-X  regarding  the
      acquisition  of Palm Springs  Savings  Bank which was  completed as of the
      close of business on September 27, 1996.

------------------------------------
*Incorporated  herein by reference  into this document from the Exhibits to Form
S-1  Registration  Statement and any amendments  thereto,  filed March 14, 1994,
Registration No. 33-90286.




                                     42

<PAGE> 43













                                 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 9, 1997                 By:    /s/ J. Robert Eichinger
                                         ------------------------
                                         J. Robert Eichinger
                                         Chairman/President
                                         Chief Executive Officer



Date: May 9, 1997                  By:   /s/ Mark R. Andino
                                         -------------------
                                         Mark R. Andino
                                         Vice President/Treasurer












                                     43