<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 December 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 6,300,906 shares of the Registrant's  common stock  outstanding
as of February 2, 1998.




<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
            December 31, 1997 (unaudited), and June 30, 1997              3-4

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

            Earnings Per Share Disclosures (unaudited)                      7

            Changes in Stockholders' Equity (unaudited)                     8

            Consolidated Statements of Cash Flows (unaudited) for the
            Six Months ended December 31, 1997 and 1996                   9-11

            Introduction                                                   12

            Description of Business                                      13-16

            Notes to Consolidated Financial Statements (unaudited)       17-21

            Recent Developments                                          22-25

ITEM 2.              MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                     ---------------------------------------
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS          26-55
                  ---------------------------------------------

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

Item 1.           Legal Proceedings                                         56

Item 2.           Changes in Securities                                     56

Item 3.           Defaults Upon Senior Securities                           56

Item 4.           Submission of Matters to a Vote of Security Holders       56

Item 5.           Other Information                                         57

Item 6.           Exhibits and Reports on Form 8-K                          57

        Signature Page                                                      58


                                         2

<PAGE> 3




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

<TABLE>
<CAPTION>

                                                                                   Dec. 31,         June 30,
                                                                                    1997              1997
                                                                                   --------         --------

                                                                                 (Unaudited)

                                                                                    (Dollars In Thousands)

<S>                                                                               <C>               <C>    
ASSETS

Cash and cash equivalents                                                         $ 19,199          $18,411
Investment securities held to maturity (estimated fair value of $10,444
 and $26,557 at December 31, 1997 and June 30, 1997, respectively)                  10,325           26,794
Investment securities available for sale (amortized cost of $91,829
 and $147,507 at December 31, 1997 and June 30, 1997, respectively)                 91,641          144,997
Loans held for sale                                                                  3,861              335
Loans receivable (net of allowance for estimated loan losses of $3,981
 and $4,780 at December 31, 1997 and June 30, 1997, respectively)                  590,114          484,334
Mortgage-backed securities held to maturity (estimated fair value of $137,676
 and $148,907 at December 31, 1997 and June 30, 1997, respectively)                138,096          151,369
Mortgage-backed securities available for sale (amortized cost of $164,266
 and $108,771 at December 31, 1997 and June 30, 1997, respectively)                165,097          109,493
Accrued interest receivable                                                          6,781            7,332
Investment in capital stock of the Federal Home Loan Bank, at cost                   6,424            6,224
Premises and equipment, net                                                          7,724            8,289
Real estate owned, net of valuation allowances
 Acquired through foreclosure                                                        5,167            5,298
 Acquired for sale or investment                                                         0              418
Intangible assets                                                                   13,295           14,471
Other assets                                                                         5,543            6,984
                                                                                 ---------          -------

Total assets                                                                    $1,063,267         $984,749
                                                                                ==========         ========
</TABLE>



                                              3

<PAGE> 4




                               HF BANCORP, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)
<TABLE>
<CAPTION>


                                                                               Dec 31,         June 30,
                                                                                  1997             1997
                                                                                  ----             ----   

                                                                            (Unaudited)
 
                                                                     (Dollars In Thousands Except Per Share Amounts)


<S>                                                                          <C>                <C>     
LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
   Checking deposits                                                           $ 77,799         $ 73,771
   Savings deposits                                                             103,753          111,742
   Money market deposits                                                         65,583           38,620
   Certificates of deposit                                                      608,429          615,522
                                                                                -------          -------
Total deposits                                                                 $855,564         $839,655

Advances from the Federal Home Loan Bank                                        110,000           50,000
Accounts payable and other liabilities                                            5,739            6,888
Income taxes                                                                      8,329            7,179
                                                                              ---------       ----------

     Total liabilities                                                          979,632          903,722


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,
   6,292,975 outstanding at December 31, 1997 and 6,281,875 outstanding at           66             66
   June 30, 1997
Additional paid-in capital                                                       51,331           51,355
Retained earnings, substantially restricted                                      39,670           38,441
Net unrealized gain (loss) on securities available for sale, net of taxes           378           (1,050)
Deferred stock compensation                                                      (4,575)          (4,437)
Treasury stock                                                                   (3,235)          (3,348)
                                                                           ------------       ----------

     Total stockholders' equity                                                  83,635           81,027
                                                                           ------------       ----------

Total liabilities and stockholders' equity                                   $1,063,267         $984,749
                                                                           ============       ==========



Nominal book value per share                                                     $13.29           $12.90
Tangible book value per share                                                    $11.69           $11.15
Average market price per share on the final trading day of the period            $17.50           $14.38


Shares utilized in above book value calculations                              6,292,975        6,281,875

</TABLE>



See notes to consolidated financial statements



                                                              4

<PAGE> 5





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

<TABLE>
<CAPTION>
                                                           FOR THE THREE            FOR THE SIX
                                                            MONTHS ENDED           MONTHS ENDED
                                                            DECEMBER 31,           DECEMBER 31,
                                                           -------------           ------------



                                                       1997       1996          1997      1996
                                                       ----       ----          ----      ----
                                                              (Dollars In Thousands)

<S>                                                  <C>          <C>         <C>         <C>    
INTEREST INCOME:
Interest on loans                                    $10,647      $9,078      $20,476     $14,088
Interest on mortgage-backed securities                 4,865       4,357        9,483       9,012
Interest and dividends on investment securities        3,247       4,459        7,036       9,193
                                                    --------    --------     --------    --------

     Total interest income                            18,759      17,894       36,995      32,293

INTEREST EXPENSE:
Interest on deposit accounts                          10,370       9,988       20,753      18,127
Interest on advances from the Federal Home Loan
 Bank and other borrowings                             1,830         915        3,076       1,830
Net interest expense of hedging transactions             462         777          948       1,556
                                                     -------     -------     --------    --------

     Total interest expense                           12,662      11,680       24,777      21,513

NET INTEREST INCOME BEFORE PROVISION
 FOR ESTIMATED LOAN LOSSES                             6,097       6,214       12,218      10,780

PROVISION FOR ESTIMATED LOAN LOSSES                      300          29          400         208
                                                     -------     -------     --------    --------

NET INTEREST INCOME AFTER PROVISION
 FOR ESTIMATED LOAN LOSSES                             5,797       6,185       11,818      10,572

OTHER INCOME (EXPENSE):
Loan and other fees                                       99          96          197         148
Loss from real estate operations, net                   (198)       (135)        (641)       (187)
Gain on sale of mortgage-backed and investment
   securities available for sale                           6         664           62       1,030
Gain on sale of loans held for sale                       44          10           70          10
Deposit related fees                                     620         412        1,071         582
Other income                                              30          30           91         151
Amortization of intangible assets                       (588)       (575)      (1,177)       (812)
                                                     -------     -------     --------   ---------

     Total other income (expense)                         13         502         (327)        992

</TABLE>


See notes to consolidated financial statements




                                              5

<PAGE> 6




                                HF BANCORP, INC. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
                                          (Unaudited)
<TABLE>
<CAPTION>

                                                           FOR THE THREE            FOR THE SIX
                                                            MONTHS ENDED           MONTHS ENDED
                                                            DECEMBER 31,           DECEMBER 31,
                                                            ------------           ------------

                                                       1997       1996         1997           1996
                                                       ----       ----         -----          ----

<S>                                                   <C>         <C>         <C>           <C>    
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and employee benefits                        $2,065      $2,654      $ 4,610       $ 4,651
Occupancy and equipment expense                          926         906        1,908         1,536
FDIC insurance and other assessments                     181         504          362           826
SAIF special assessment                                    0           0            0         4,757
Legal and professional services                          222         240          346           408
Data processing service costs                            579         461        1,050           753
Marketing                                                157         150          245           308
Deposit servicing expense                                 38         141           67           243
Other                                                    400         433          803           783
                                                     -------     -------      -------       -------

     Total general and administrative expenses         4,568       5,489        9,391        14,265

EARNINGS (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT)                                      1,242       1,198        2,100        (2,771)

INCOME TAX EXPENSE (BENEFIT)                             515         496          871        (1,134)
                                                     -------      ------       ------    -----------

NET EARNINGS (LOSS) APPLICABLE TO BOTH BASIC AND
DILUTED EPS                                           $  727      $  702      $ 1,229    $   (1,637)
                                                      ======      ======      =======    ===========

SHARES APPLICABLE TO BASIC EPS                     6,286,157   6,281,875    6,284,016     6,281,875

BASIC EARNINGS PER SHARE                               $0.12      $ 0.11        $0.20       *$(0.26)
                                                   ==========  =========   ==========       ========

SHARES APPLICABLE TO DILUTED EPS                   6,499,729   6,331,434    6,476,785     6,281,875

DILUTED EARNINGS PER SHARE                             $0.11       $0.11        $0.19       *($0.26)
                                                   =========   =========   ==========       ========


</TABLE>


*$0.18 per share, net of the after-tax effect
of the SAIF special assessment.

See notes to consolidated financial statements






                                                  6

<PAGE> 7




<TABLE>
<CAPTION>

                                              HF BANCORP, INC. AND SUBSIDIARY
                                 ADDITIONAL INFORMATION FOR EARNINGS PER SHARE DISCLOSURES
                                                        (Unaudited)


                                                         PLUS:      PLUS:
                                                     Treasury    Treasury
                                         EQUALS:       Shares       Stock      Stock       EQUALS:       Shares*
                              LESS:      Shares           For     Method:    Method:       Shares*           For
                Average    Average          For        Fiscal      Shares     Shares           For        Fiscal     Quarterly
                  Total     Shares    Quarterly           YTD         For        For     Quarterly           YTD       Average
   Quarter       Shares   Treasury        BASIC         BASIC       Stock      Stock       DILUTED       DILUTED         Share
   Ending        Issued      Stock          EPS           EPS     Options     Awards           EPS           EPS         Price
   ------        ------      -----          ---           ---     -------     ------           ---           ---         -----
  <S>         <C>          <C>        <C>           <C>           <C>         <C>        <C>           <C>              <C>
  09/30/96    6,612,500    330,625    6,281,875     6,281,875          25         10     6,281,910     6,281,910         $9.54
  12/31/96    6,612,500    330,625    6,281,875     6,281,875      41,097      8,462     6,331,434     6,306,672        $10.86
  03/31/97    6,612,500    330,625    6,281,875     6,281,875      91,746     15,492     6,389,113     6,334,152        $12.47
  06/30/97    6,612,500    330,625    6,281,875     6,281,875     113,369     18,232     6,413,476     6,353,983        $13.47
  09/30/97    6,612,500    330,625    6,281,875     6,281,875     148,044     23,922     6,453,841     6,453,841        $14.94
  12/31/97    6,612,500    326,343    6,286,157     6,284,016     184,928     30,785     6,499,729     6,476,785        $16.60

</TABLE>


      HF Bancorp, Inc. Stock Based Incentive Plan:  Stock Option Information


<TABLE>
<CAPTION>

                                           Stock                       Stock    Average
                                         Options          Stock      Options   Exercise
                Stock        Stock  Cumulatively        Options    Available   Price Of
              Options      Options      Vested &   Cumulatively   For Future     Vested
     Date  Authorized  Outstanding   Outstanding      Exercised       Grants    Options
     ----  ---------   -----------   -----------      ---------       ------    -------
 <S>          <C>          <C>           <C>             <C>         <C>         <C>
 09/30/96     661,250      630,340             0              0       30,910        N/A
 12/31/96     661,250      618,250             0              0       43,000        N/A
 03/31/97     661,250      528,853       112,850              0      132,397     $10.05
 06/30/97     661,250      523,185       109,182              0      138,065     $10.04
 09/30/97     661,250      638,545       125,182              0       22,705     $10.59
 12/31/97     811,250      629,945       115,882         11,100      170,205     $10.65

</TABLE>

      HF Bancorp, Inc. Stock Based Incentive Plan:  Stock Award Information

<TABLE>
<CAPTION>

                                                       Stock
                                                      Awards
                  Stock        Stock       Stock   Available
                 Awards       Awards      Awards  For Future
     Date    Authorized  Outstanding      Vested      Grants
     ----    ----------  -----------      ------      ------
 <S>            <C>          <C>          <C>         <C> 
 09/30/96       198,375      195,075           0       3,300
 12/31/96       198,375      189,801           0       8,574
 03/31/97       198,375      121,887      37,294      39,194
 06/30/97       198,375      121,227      37,954      39,194
 09/30/97       198,375      154,527      37,954       5,894
 12/31/97       198,375      154,527      37,954       5,894
 
*Applicable in the event of positive earnings.

</TABLE>

                                                              7

<PAGE> 8






<TABLE>
<CAPTION>

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

                                       Common    Additional     Retained     Unrealized   Deferred stock    Treasury      Total
                                        stock       paid-in     earnings    gain (loss)     compensation       stock
                                                    capital                          on
                                                                             securities
                                                                              available
                                                                               for sale
                                    ------------------------------------------------------------------------------------------------
                                                                             (Dollars In Thousands) 
                         
<S>                                       <C>        <C>          <C>          <C>            <C>              <C>          <C>
Balance at June 30, 1997                  $66        $51,355      $38,441      ($1,050)       ($4,437)         ($3,348)     $81,027

Net income for the six months
ended December 31, 1997                    --             --        1,229            --             --             --         1,229

Change in net unrealized loss on
securities available for sale, net    
of taxes                                   --             --           --         1,428             --             --         1,428

Change in deferred stock
compensation                               --            (23)          --            --           (138)            --          (161)

Utilization of Treasury shares for
exercised stock options                                   (1)                                                     113           112

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

                                    ------------------------------------------------------------------------------------------------
Balance at December 31, 1997               $66        $51,331     $39,670          $378        ($4,575)      ($3,235)       $83,635
                                    ================================================================================================

</TABLE>


See notes to consolidated financial statements









                                                                 8

<PAGE> 9








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

<TABLE>
<CAPTION>

                                                                              FOR THE SIX MONTHS
                                                                              ENDED DECEMBER 31
                                                                              ------------------
                                                                              1997          1996
                                                                              ----          ----

                                                                            (Dollars In Thousands)


<S>                                                                        <C>           <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)                                                        $   1,229     $ (1,637)

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

Origination of loans held for sale                                            (9,298)         (457)
Proceeds from sale of loans held for sale                                      5,507           467
Provisions for estimated loan and real estate losses                             960           317
Direct write-offs from real estate operations                                     --            49
Depreciation and amortization                                                    651           551
Amortization of deferred loan fees                                              (421)         (347)
Amortization (accretion) of premiums (discounts) on loans
 and investment and mortgage-backed securities, net                              161           (64)
Amortization of intangible assets                                              1,177           812
Federal Home Loan Bank stock dividend                                           (200)         (199)
Gain on sales of loans held for sale                                             (70)          (10)
Loss (gain) on sales of real estate, net                                         (25)            9
Gain on sale of mortgage-backed and investment securities, available for sale    (62)       (1,030)
Loss (gain) on sale of premises and equipment                                     19           (14)
Decrease (increase) in accrued interest receivable                               551          (894)
(Decrease) increase in accounts payable and other liabilities                 (1,149)        2,250
Decrease in other assets                                                       1,440            42
Other, net                                                                        83         1,452
                                                                            --------      --------

Net cash provided by operating activities                                        553         1,297

</TABLE>


                                               9

<PAGE> 10




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

<TABLE>
<CAPTION>
                                                                                           FOR THE SIX MONTHS
                                                                                            ENDED DECEMBER 31
                                                                                           ------------------
                                                                                           1997          1996
                                                                                           ----          ----

                                                                                         (Dollars In Thousands)

<S>                                                                                      <C>            <C>     
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans receivable                                                         (108,610)      (65,881)
Purchases of mortgage-backed securities held to maturity                                       --       (15,039)
Purchases of mortgage-backed securities available for sale                                (80,163)      (14,272)
Principal repayments on mortgage-backed securities held to maturity                        13,131         9,379
Principal repayments on mortgage-backed securities available for sale                      16,198         6,148
Purchases of investment securities held to maturity                                            --            --
Purchases of investment securities available for sale                                          --       (37,968)
Principal repayments on investment securities held to maturity                                485           363
Principal repayments on investment securities available for sale                            2,614         2,992
Proceeds from sales of mortgage-backed and investment securities available for sale        58,254        71,381
Matured / called investment and mortgage backed securities held to maturity                16,000         9,535
Matured / called investment and mortgage backed securities available for sale               3,032        35,428
Proceeds from sales of real estate acquired by foreclosure                                  3,063           285
Proceeds from sales of real estate held for investment                                        427           528
Additions to real estate owned                                                                 --            (6)
Proceeds from sale of premises and equipment                                                   43            (3)
Additions to premises and equipment                                                          (148)       (1,406)
Cash payment for acquisition, net of cash received                                             --       (14,707)
                                                                                       ----------      --------

Net cash used in investing activities                                                     (75,674)      (13,243)

</TABLE>


                                                            10

<PAGE> 11




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

<TABLE>
<CAPTION>
                                                                              FOR THE SIX MONTHS
                                                                              ENDED DECEMBER 31,
                                                                              ------------------
                                                                              1997         1996
                                                                              ----         ----

                                                                            (Dollars In Thousands)

<S>                                                                         <C>          <C>      
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances received from FHLB                                                 $ 60,000     $      --
Proceeds from other borrowings                                               182,000            --
(Decrease) in certificate accounts                                            (7,090)          (43)
Net increase in NOW, passbook, money market investment and
 non-interest-bearing accounts                                                22,999        11,752
Repayment of other borrowings                                               (182,000)           --
                                                                            --------        ------

Net cash provided by financing activities                                     75,909        11,709
                                                                             -------     ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             788          (237)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                              18,411       100,633
                                                                           ---------      --------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                  $ 19,199     $ 100,396
                                                                            ========     =========

SUPPLEMENTAL CASH FLOW DISCLOSURES:

Cash paid during the period for:
Interest on deposit accounts and other borrowings                          $   4,857     $   3,648
                                                                           =========     =========

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

SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES:

Real estate acquired through foreclosure                                   $   3,823     $   1,022

Loans to facilitate sale of real estate through foreclosure                $     358     $     481

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
                                                                           =========     =========



See notes to consolidated financial statements

</TABLE>



                                                    11

<PAGE> 12
 

HF BANCORP, INC. AND SUBSIDIARY
DECEMBER 31, 1997

(UNAUDITED)


                                INTRODUCTION

      In addition to historical  information,  this document may include certain
forward looking  statements within the meaning of the Private  Securities Reform
Act of 1995 (the "Reform  Act").  These forward  looking  statements  relate to,
among  other  things,  expectations  of the  business  environment  in which the
Company operates, projections of future performance,  perceived opportunities in
the market,  and statements  regarding the Company's  mission and vision.  These
forward looking statements are based upon current management  expectations,  and
therefore may involve risks and  uncertainties.  The Company's  actual  results,
performance,  or  achievements  may  differ  materially  from  those  suggested,
expressed,  or implied by the forward looking  statements due to a wide range of
factors, including, but not limited to:

o     vacillation in general economic conditions

o     legislative and regulatory changes

o     monetary and fiscal policies of the federal government

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

o     fluctuations in interest rates

o     variation in the cost of funds

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

o     actions by competitors

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

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

o     alterations in accounting principles, policies, or guidelines

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

Further  description  of the  risks and  uncertainties  to the  Company  and its
business are presented in Form 10-K "Item 1.  Description Of Business -- Factors
That May Affect Future Results".




                                     12

<PAGE> 13


HF BANCORP, INC. AND SUBSIDIARY
DECEMBER 31, 1997

(UNAUDITED)

                                   PART I

ITEM 1.     DESCRIPTION OF BUSINESS


GENERAL

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

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

      At December 31, 1997,  the Company had $1,063.3  million in total  assets,
$590.1  million  in total net loans  receivable,  and  $855.6  million  in total
deposits.  The  Company  is  subject  to  regulation  by the  Office  Of  Thrift
Supervision ("OTS"), the Federal Deposit Insurance Corporation ("FDIC"), and the
Securities and Exchange Commission  ("SEC").  The principal executive offices of
the  Company  and the  Bank  are  located  at 445 East  Florida  Avenue,  Hemet,
California,  92543, telephone number (909) 658 - 4411, toll free (800) 540-4363,
facsimile number (909) 925 - 5398. The Bank is a member of the Federal Home Loan
Bank of San Francisco  ("FHLB") and its deposit accounts are insured by the FDIC
through the Savings  Association  Insurance  Fund ("SAIF") to the maximum extent
permitted by law.








                                     13

<PAGE> 14


HF BANCORP, INC. AND SUBSIDIARY
DECEMBER 31, 1997

(UNAUDITED)


      On  September  27,  1996,   Hemet  Federal  Savings  &  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 acquisition was
accounted for under  purchase  accounting  guidelines  and  therefore  generated
intangible assets (see "Intangible Assets").

      On June 21,  1996,  the Bank  entered  the North San Diego  County  market
through the  purchase of three  branch  offices  and the  assumption  of deposit
liabilities  totaling $185.2 million from Hawthorne Savings Bank. In conjunction
with the purchase, the Bank generated a core deposit intangible of $6.6 million,
or 3.6% of the deposits assumed (see "Intangible Assets").

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



                                     14

<PAGE> 15


HF BANCORP, INC. AND SUBSIDIARY
DECEMBER 31, 1997

(UNAUDITED)


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

Greater Hemet / San Jacinto  Valley Area
----------------------------------------

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

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

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

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








                                     15

<PAGE> 16


HF BANCORP, INC. AND SUBSIDIARY
DECEMBER 31, 1997

(UNAUDITED)

      Through its network of banking offices,  the Bank emphasizes  personalized
service focused upon two primary markets:  households and small businesses.  The
Bank offers a wide complement of lending and depository products.  The Bank also
supports its customers by  functioning  as a federal tax  depository,  providing
merchant  bankcard  services,  and supplying  various forms of electronic  funds
transfer.  In  addition,  the Bank,  through  third party  relationships,  makes
various  non  FDIC  insured  investment  products  available  to its  customers,
including mutual funds and selected insurance related products.

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

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

      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 six month
period ended  December 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 fiscal year
ended June 30, 1997 included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1997.




                                     16

<PAGE> 17


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

Termination of Swap Agreements
------------------------------

      On  July  10,  1995,  the  Company  terminated  four  interest  rate  swap
agreements with an aggregate  outstanding  notional amount of $60.0 million.  At
June 30, 1995,  the weighted  average  fixed  payment rate and variable  payment
received rate were 9.53% and 6.11%, respectively. The Company paid a termination
fee of  $4,856,000  which  has been  deferred  and is being  amortized  over the
remaining original terms of the respective swap agreements.  The expected future
annual  amortization  is as follows:  $343,000 for the last six months of fiscal
1998 and  $272,000  for the  fiscal  year  1999.  As of  December  31,  1997 the
remaining deferred amount was $615,000.


Defined Benefit Plan and Retirement Restoration Plan Terminations
-----------------------------------------------------------------

      In the quarter ended June 30, 1997, the Company's  management and Board Of
Directors  determined to terminate two  retirement  plans.  The defined  benefit
pension plan was a traditional  pension  program which  provided  employees with
monthly  retirement  income  based  upon  years of  service  and the  employee's
earnings during the sixty months prior to retirement. The retirement restoration
plan was a non qualified supplemental plan designed to compensate certain highly
salaried  employees  for the impact of wage caps under the  Employee  Retirement
Income  Security Act ("ERISA"),  which are applicable to qualified plans such as
the defined benefit pension plan.

      A  non-recurring  $3.0 million  charge to accrue  expenses  related to the
termination  of the two  retirement  plans was recorded in the fourth quarter of
fiscal  1997.  As of  December  31,  1997,  all  of the  Plan  assets  had  been
distributed,  with vested participants  receiving,  at their election,  either a
lump sum or an annuity contract. The Company has applied for IRS approval of the
defined benefit  pension plan  termination and liquidation and is in the process
of preparing a final plan annual  return.  While the amount  accrued  during the
fourth quarter of fiscal 1997 was sufficient to fund the  distributions,  future
events could possibly  produce an actual expense total higher than that accrued.
The  timing  of the  receipt  of the IRS  determination  letter  is  beyond  the
Company's control.









                                     17

<PAGE> 18


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

Change in Accounting Principles
-------------------------------

      Effective  January 1, 1998, the Company  adopted those  components of SFAS
No.  125  "ACCOUNTING  FOR  TRANSFERS  AND  SERVICING  OF  FINANCIAL  ASSETS AND
EXTINGUISHMENTS  OF  LIABILITIES"  which  were  postponed  under  SFAS  No.  127
"DEFERRAL OF THE  EFFECTIVE  DATE OF CERTAIN  PROVISIONS  OF FASB  STATEMENT NO.
125".  The Company has  recently  updated its Master  Repurchase  Agreements  to
permit  substitution  of  collateral  involved  in  its  repurchase   agreements
conditional  upon  economic  equivalency.  Management  does not believe that the
adoption  of the  deferred  components  of SFAS No. 125 will have a  significant
impact on its financial statements.

      Effective  December 15, 1997, the Company adopted SFAS No. 128,  "EARNINGS
PER SHARE".  The statement  establishes  standards for computing and  presenting
earnings per share (EPS) and applies to entities with publicly held common stock
or potential common stock.  This statement  modifies the standards for computing
earnings per share previously found in APB Opinion No. 15, "EARNINGS PER SHARE,"
and makes them  comparable  to  international  EPS  standards.  It replaces  the
presentation  of primary EPS with a presentation  of basic EPS. It also requires
dual  presentation of basic and diluted EPS on the face of the income  statement
for all entities with complex capital  structures and requires a  reconciliation
of the numerator and  denominator of the basic EPS  computation to the numerator
and  denominator of the diluted EPS  computation.  In addition,  EPS figures for
prior periods must be restated.

      Effective December 15, 1997, the Company adopted SFAS No. 129, "DISCLOSURE
OF INFORMATION ABOUT CAPITAL STRUCTURE". The statement establishes standards for
disclosing information about an entity's capital structure.

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



                                     18

<PAGE> 19


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


Stock Plans
-----------

      The Company established for eligible employees an Employee Stock Ownership
Plan and Trust ("ESOP"),  which became effective upon the conversion of the Bank
from a  mutual savings  and loan  association  to a  public  stock  company (the
"Conversion"). On June 30, 1995, the ESOP:

o     subscribed  for 7.0%  (462,875) of the total shares  (6,612,500) of common
      stock issued in the Conversion pursuant to the subscription rights granted
      under the ESOP plan document

o     borrowed  $3,703,000  from the  Company  under a 9.5 year  loan  agreement
      bearing  a 9.0%  interest  rate in order to fund the  purchase  of  common
      stock, pledging the common stock as collateral for the loan

      Under the terms of the ESOP  plan,  shares  are  allocated  to  individual
eligible  employee  accounts at the conclusion of each calendar year.  Under the
terms of the original loan  agreement,  annual  principal and interest  payments
were to be made to the Company at the end of each calendar year.

      In December 1997, the ESOP and the Company  amended their loan  agreement,
implementing the following revisions:

o     The loan payment for calendar  year 1997 would be interest  only.  No loan
      principal would be retired on December 31, 1997.

o     The final  maturity of the loan was  extended  from  December  31, 2004 to
      December 31, 2012, with an associated reduction in periodic loan principal
      amortization.

      As of  December  31,  1997,  prior to the 1997  allocation  of  shares  to
eligible employee accounts, a cumulative 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  15 year life of the ESOP,
including  17,841  shares to be assigned in  conjunction  with the calendar year
1997 allocation.



                                     19

<PAGE> 20


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


      At the  Company's  Annual  Meeting of  Shareholders  on January 11,  1996,
shareholders  approved the Hemet Federal Savings & Loan  Association 1995 Master
Stock Compensation Plan (the "Stock Compensation Plan") and the HF Bancorp, Inc.
1995 Master Stock Option Plan (the "Stock  Option  Plan"),  both of which became
effective  as of the date of  approval.  These two  plans  were  established  to
provide  Directors and employees in key management  positions with a proprietary
interest in the Company,  to attract and retain highly  qualified  staff, and to
more directly  align the objectives of the  individuals  with the success of the
Company.

      The Stock  Compensation  Plan was authorized to acquire  198,375 shares of
common  stock  in the  open  market.  The Bank  contributed  funds to the  Stock
Compensation  Plan to enable the Plan trustees to acquire the authorized  shares
of common stock.  On February 28, 1996, the Bank acquired  198,375 shares in the
open market at a price of $10.00 per share. Stock shares are held in trust.

      The Stock Option Plan was  authorized  to issue up to 661,250  options for
the purchase of common shares,  including  both Incentive  Stock Options and Non
Qualified Stock Options.

      On May 22, 1997,  the Board Of Directors of HF Bancorp,  Inc.  adopted the
Amended and Restated HF Bancorp, Inc. Stock Based Incentive Plan (the "Incentive
Plan").  The  Incentive  Plan merged the Stock  Compensation  Plan and the Stock
Option Plan, and amended the provisions of these plans to, among other things:

o     Provide  benefits  that were not  available  when the two 1995  Plans were
      adopted,  including  the  accelerated  vesting  of stock  awards and stock
      options following a change in control of the Company or the Bank

o     Eliminate a number of outdated regulatory requirements no longer necessary
      due to amendments to Section 16(b) of the Securities  Exchange Act of 1934
      (the "Exchange Act").

      At December 31, 1997, a total of 37,954 shares of stock awards have vested
under the  Incentive  Plan. An additional  154,527  non-vested  shares have been
allocated to Directors and  employees in key  management  positions.  A total of
5,894 shares  remained in the trust on an  unallocated  basis as of December 31,
1997.  Stock awards under the  Incentive  Plan  typically  vest over a five year
period.




                                     20

<PAGE> 21


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


      At the  Company's  Annual  Meeting of  Shareholders  on October 28,  1997,
shareholders  approved an amendment to the Incentive  Plan,  which increased the
number of option shares authorized for issuance by 150,000 shares,  from 661,250
shares  to  811,250   shares.   The  Incentive  Plan  retains  the  prior  Stock
Compensation Plan's limitation of 198,375 shares authorized for stock awards.

      Of the  811,250  option  shares  authorized  under the  Incentive  Plan at
December  31,  1997,  options  representing  a  total  of  629,945  shares  were
outstanding  as of that  date.  Of these  629,945  options,  a total of  115,882
options were vested at a weighted  average  exercise  price of $10.65,  with the
exercise  price of  individual  vested  options  ranging from a low of $9.50 per
share to a high of $14.34 per share.  As of December 31, 1997, a total of 11,100
shares had been  cumulatively  exercised  under the Incentive Plan or any of its
predecessor plans, and 170,205 options remained available for future grant.


Commitments and Contingencies
-----------------------------

      At December  31, 1997,  the Company  maintained  commitments  to sell $2.1
million in residential  fixed rate mortgage loans on a servicing  released basis
and to originate $12.7 million in various types of loans. The Company maintained
no commitments to purchase loans or assume borrowings at December 31, 1997.




                                     21

<PAGE> 22


HF BANCORP, INC. AND SUBSIDIARY
DECEMBER 31, 1997

(UNAUDITED)

Recent Developments
-------------------

      Year 2000 Computer Issue
      ------------------------

      The Year 2000 Issue  concerns the  potential  impact of historic  computer
software code that only utilizes two digits to represent the calendar year (e.g.
"98"  for  "1998").   Software  so  developed   could   produce   inaccurate  or
unpredictable  results  upon  January 1, 2000,  when  current  and future  dates
present a lower two digit  year  number  than  dates in the prior  century.  The
Company,  similar to most financial services providers, is significantly subject
to the potential  impact of the "Year 2000 Issue" due to the nature of financial
information. Potential impacts to the Company may arise from software, hardware,
and  equipment  both  within the  Company's  direct  control  and outside of the
Company's ownership,  yet with which the Company electronically or operationally
interfaces (e.g. vendors providing credit bureau information).

      Financial institution  regulators have recently increased their focus upon
Year 2000 issues,  issuing guidance  concerning the  responsibilities  of senior
management and directors. Year 2000 testing and certification is being addressed
as a key safety and soundness issue in conjunction with regulatory exams.

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

o      awareness
o      assessment
o      renovation
o      validation
o      implementation

      The Company has  substantially  completed the first two phases of the plan
and is currently working internally and with external vendors on the final three
phases.  Because the Company  outsources its data processing and item processing
operations,  a  significant  component  of the Year  2000  plan is to work  with
external  vendors to test and  certify  their  systems  as Year 2000  compliant.
Another  important  segment  of the Year 2000  plan is to  identify  those  loan
customers whose possible lack of Year 2000 preparedness might expose the Bank to
financial loss.



                                     22

<PAGE> 23


HF BANCORP, INC. AND SUBSIDIARY
DECEMBER 31, 1997

(UNAUDITED)


      In  conjunction   with  the  above  efforts,   the  Company  is  currently
calculating  both  capital  and  operating  expenditures  required  to meet  the
objectives of its Year 2000 plan. Many of the costs identified to date relate to
computer  hardware  (including ATM's) and software that would be replaced in the
next year even without the presence of the Year 2000 Issue in  conjunction  with
the Company's ongoing programs for updating its delivery infrastructure. Certain
other costs relate exclusively to the Year 2000 Issue,  including internal staff
time  and  external  resources  hired to  perform  renovation,  validation,  and
implementation.


      Potential Federal Legislation
      -----------------------------

      During  its past  session,  the U.S.  House Of  Representatives  failed to
approve a significant  financial  industry reform bill which had been designated
"HR 10".  However,  Congress  continues to debate a series of issues 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 deposit insurance funds

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

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     possible federal controls on the amount and disclosure of ATM fees

o     regulations  addressing allowable financial  relationships between insured
      depository  institutions and mortgage brokers,  and possible  revisions in
      the Real  Estate  Settlement  Procedures  Act  ("RESPA")  and the Truth In
      Lending Act ("TILA")

o     potential federal laws governing private mortgage insurance




                                     23

<PAGE> 24


HF BANCORP, INC. AND SUBSIDIARY
DECEMBER 31, 1997

(UNAUDITED)


      Supervisory Goodwill Cases
      --------------------------

      Approximately 120 cases are pending involving claims for damages resulting
from  the  U.S.   government's  alleged  breach  of  contracts  related  to  the
amortization  periods for treating  supervisory  goodwill as regulatory capital.
Recent  rulings  by U.S.  federal  courts  have  generally  been in favor of the
plaintiffs.  Should the plaintiffs,  some of whom are the Company's competitors,
prevail in their  litigation  and  collect the  significant  sums  claimed,  the
Company could face a number of competing financial  institutions  bolstered with
significant  financial resources.  The Company maintains no supervisory goodwill
claim of its own and cannot  predict  what  results,  if any, may arise from the
current litigation.


      Financial And Currency Turmoil In Asia
      --------------------------------------

      While  the  Company   maintains   relatively  little  direct  exposure  to
businesses and consumers in Asia, the California  economy as a whole is impacted
by the significant foreign trade with Asian economies.  A slowdown in the volume
of California  exports to Asia could cool the State  economy,  thereby having an
indirect  impact upon the Company through less robust personal income growth and
real estate values.


      Proposed Accounting Statement
      -----------------------------

      FASB has  delayed  issuing  a final  statement  entitled  "ACCOUNTING  FOR
DERIVATIVE AND SIMILAR FINANCIAL  INSTRUMENTS AND FOR HEDGING ACTIVITIES".  This
extensive  and complex  drafted  statement has  generated  significant  response
throughout  industry  and  government.  The FASB  recently  delayed the proposed
implementation date to fiscal years commencing after June 15, 1999. In addition,
the FASB has recently issued several  modifications to the proposed statement in
response  to issues  raised by industry  and  government.  Legislation  has been
introduced in Congress that would empower bank regulators to reject the proposed
statement. The Company's management cannot predict what, if any, final statement
might be issued,  what  legislation  might be adopted,  the  response of federal
banking  and thrift  regulators,  and the  potential  impact of such  statement,
legislation,  and regulatory  response upon the Company's  reported earnings and
financial disclosure.




                                     24

<PAGE> 25


HF BANCORP, INC. AND SUBSIDIARY
DECEMBER 31, 1997

(UNAUDITED)


      Credit Unions
      -------------

      The U.S.  Supreme Court is currently  reviewing the extent to which credit
unions may extend their affiliations to various groups. In addition,  members of
the U.S.  Congress  have  circulated  legislative  proposals  which would define
limitations  on  credit  union  membership  and  potentially   extend  Community
Reinvestment  Act ("CRA")  requirements  to larger credit unions.  To the extent
that credit union  membership is restricted,  the Company would  benefit,  as it
competes  with a number  of credit  unions in its  market  areas.  However,  the
Company's  management  cannot  predict  what,  if any,  Supreme Court rulings or
legislation  may  evolve,  and the  potential  impact  of such  events  upon the
Company.


      Federal Reserve
      ---------------

      Various proposals  involving the regulations  developed or administered by
the Federal Reserve are under consideration,  including the potential ability of
insured  depository  institutions  to pay interest on commercial  demand deposit
accounts  and the  potential  payment of  interest  on  balances  maintained  by
depository  institutions  at Federal  Reserve  Banks.  The Company's  management
cannot predict what, if any, changes may arise from these proposals.


      Consolidation In The Financial Services Industry
      ------------------------------------------------

      During  calendar  year  1997,  a series of  mergers  and  acquisitions  of
financial  institutions  were consummated or announced in the Company's  primary
market  areas.  Acquired  companies  range from small  community  banks to large
financial  services  providers  such as Great  Western  Bank.  These mergers and
acquisitions  have  presented  both  opportunities  and  risks  to the  Company.
Opportunities  have included the chance to acquire former customers of purchased
institutions, many of whom are receptive to the idea of altering their financial
institution affiliation once informed that their historical bank will disappear.
Risks have included the development of an expanded number of larger competitors,
which enjoy greater  financial  resources,  market reach, and product depth than
the Company.

      The  opportunities  and risks  described above have been manifested in the
Company's  recent  experiences in various markets.  For example,  the closure of
competitor  branches in several  locations has led to an inflow of new business,
particularly  transaction  related deposit accounts.  On the other hand, in some
markets,  larger  competitors with stronger and more diversified  income streams
have priced  selected  products  and  services  very  aggressively,  causing the
Company to either lose  business  relationships  or decrease  profit  margins to
retain customers.



                                     25

<PAGE> 26



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

General
-------

      During the six months ended December 31, 1997,  the Company  continued the
implementation  of the business  strategy  presented in Form 10-K for the fiscal
year ended June 30, 1997.  This strategy  centered upon the Company's  evolution
into a  community  bank  offering a more  comprehensive  array of  products  and
services while at the same time augmenting earnings.  Key objectives within this
strategy included:

o      Increasing long term shareholder returns

o      Improving customer service

o      Enhancing employee relations

o      Bolstering profitability

o      Instilling a sales culture throughout the Company

o      Strengthening  the  Company's involvement  in  and  contributions  to the
       communities it serves

      During the  second  quarter  of fiscal  1998,  the  Company  advanced  its
evolution on several fronts:

o     The Company's  strong equity position was more  effectively  deployed,  as
      total assets expanded by $12.9 million, net loans receivable grew by $66.0
      million,  and the  Company  exited the real estate  development  business,
      freeing  over  $1.0  million  in  regulatory  capital  for more  effective
      investment in other Company operations.

o     The  Company  became  more  active  in  fulfilling  the  credit  needs  of
      California consumers and businesses, with the Company's ratio of net loans
      receivable to deposits increasing from 61.2% to 69.0%. As recently as June
      30, 1996, this ratio stood at just 33.6%.

o     The Company experienced a significant  improvement in its aggregate credit
      profile,  with  total  gross  nonperforming  assets  declining  from $10.4
      million to $8.2  million,  spurred  by both the  improvement  in  Southern
      California's   economy  and  real  estate  markets  and  by   management's
      aggressive  efforts  to  complete  the  liquidation  of the  portfolio  of
      troubled assets obtained in conjunction with the acquisition of PSSB. Loan
      loss reserves to non-performing loans increased to 179.01%,  with the vast
      majority of the Company's non-performing loans secured by real estate.



                                     26

<PAGE> 27




o     In conjunction  with the Trustees of the ESOP, the Company  refinanced its
      loan to the ESOP,  resulting in a $533,000 reduction in periodic personnel
      expense during the second quarter of fiscal 1998, as well as calendar 1998
      operating  expense  savings  of  approximately  $350,000  based  upon  the
      Company's recent stock price.

o     The Company  continued its focus upon fee revenue  growth,  implementing a
      new safe deposit box inventory and billing system, and commencing plans to
      offer debit cards, credit cards, and foreign banknote services through its
      retail branch network.

o     Management  continued its emphasis upon improving the Company's efficiency
      ratio,  implementing revised transit settlement,  inclearings  management,
      courier,  and cash vault  operations  during the second  quarter of fiscal
      1998.  In  addition,  favorable  revisions  in  vendor  pricing  for check
      printing,   branch  rent,  and  certain  data  processing   services  were
      negotiated  during the most recent quarter,  with effect commencing in the
      third quarter of fiscal 1998.

o     The Company's  exposure to rising  interest rates  significantly  declined
      during the three months ended  December 31, 1997,  reducing the volatility
      of the  Company's  net  interest  income and net  portfolio  value  during
      periods of increasing interest rates.

      To some extent, the above  accomplishments were offset by the particularly
flat and low state of the  Treasury  security  yield  curve  during  much of the
second  fiscal  quarter,  as  exhibited by the  differential  between the 1 year
Treasury  security  and the 10 year  Treasury  security  totaling  just 27 basis
points at  December  31,  1997.  Flat and  nominally  low yield  curves  present
particular challenges to portfolio lenders such as the Company, who maintain net
liability  sensitive  positions.  The  shape  of  the  yield  curve  discourages
borrowers from selecting the adjustable rate loans that the Company  utilizes to
build its balance  sheet,  while  encouraging  refinancing of existing loans and
securities,  a significant volume of which the Company owns at a premium to par.
In addition, the flatness of the yield curve reduces the interest spread derived
from the Company's net liability  sensitive  position,  pressuring  net interest
income.  Management has responded to this environment by augmenting its mortgage
banking activity and  aggressively  focusing upon reducing the Company's cost of
funds.  However,  should the current capital markets environment persist,  there
can be no  assurance  that the Company  will be  successful  in  offsetting  its
unfavorable financial effects.

Additional  information  concerning the above  accomplishments and challenges is
presented in the pages which follow.



                                     27

<PAGE> 28




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

      Total assets increased $78.5 million, or 8.0%, from $984.7 million at June
30, 1997 to $1,063.3  million at December 31, 1997.  Net loans  receivable  rose
$105.8 million, or 21.8%, from $484.3 million at June 30, 1997 to $590.1 million
at December 31, 1997.  The nominal and relative  increases in the loan portfolio
have been strategic objectives of management,  as such increases, when conducted
with prudent underwriting, provide for:

o      a more effective deployment of the Company's strong capital position

o      a greater return on shareholders' equity

o      enhanced support of the communities in which the Company operates

      The loan  portfolio  growth during fiscal 1998 has been augmented with the
purchase  of $107.7  million in  adjustable  rate  residential  mortgage  loans,
primarily  new and seasoned  "3/1" loans which  reprice based upon a margin over
the Treasury 1 Year Constant  Maturities  Index  ("CMT").  In  purchasing  these
mortgages,  the Company utilized the same underwriting criteria employed for its
own internal originations.

      Net loans held for sale  increased  from $335,000 at June 30, 1997 to $3.9
million at December 31,  1997,  as the Company  continued  building its mortgage
banking operation. The Company has been expanding the volume of loans originated
for sale and the range of secondary market avenues utilized for selling in order
to:

o      better manage the Company's interest rate risk position

o      maintain strong liquidity

o      generate a recurring stream of non-interest income

o      obtain improved sales execution

o      respond to increased customer demand for fixed rate financing in light of
       the recent state of  general capital market interest rates

      Investment securities held to maturity declined from $26.8 million at June
30, 1997 to $10.3  million at December  31,  1997  primarily  due to the call of
Agency debentures. Investment securities available for sale declined from $145.0
million at June 30, 1997 to $91.6 million at December 31, 1997  primarily due to
the sale of long term,  fixed rate Agency  debentures  in  conjunction  with the
Company's  interest  rate  risk  management  program  (see  "Interest  Rate Risk
Management and Exposure").



                                     28

<PAGE> 29




      Mortgage  backed  securities  held to maturity  declined  8.8% from $151.4
million  at June 30,  1997 to  $138.1  million  at  December  31,  1997,  due to
amortization,  which  generally  increased  during  the most  recent  quarter in
conjunction  with new, 30 year, fixed rate, first mortgage loans being available
with interest rates as low as 7.0%.

      Mortgage  backed  securities  available  for sale rose $55.6  million,  or
50.8%,  from $109.5  million at June 30, 1997 to $165.1  million at December 31,
1997.  During  the six  months  fiscal  year to  date,  the  Company  redirected
substantially  all cash flows which would not be deployed  into whole loans into
low duration  mortgage backed  securities  designated as available for sale. The
low duration securities were selected in order to avoid adding  significantly to
the Company's net liability  sensitive  interest rate risk exposure and in order
to moderate  value  sensitivity  until the funds could be  redeployed  into loan
originations or purchases.

      The  Company's  investment  in the capital  stock of the Federal Home Loan
Bank Of San  Francisco  increased  from $6.2  million  at June 30,  1997 to $6.4
million at December 31, 1997 due to dividends credited.

      The Company's net investment in real estate acquired  through  foreclosure
fell slightly from $5.3 million at June 30, 1997 to $5.2 million at December 31,
1997.  However,  the  portfolios of  foreclosed  properties at June 30, 1997 and
December 31, 1997 varied considerably,  as the Company continued to aggressively
dispose of problem assets acquired in conjunction with the PSSB purchase.

      Net real estate acquired for investment declined from $418,000 at June 30,
1997 to none at December 31, 1997,  as the Company sold its final two  projects,
"VISTA BONITA II" and "MAYBERRY ESTATES",  during the first six months of fiscal
1998 at a small  gain,  and in  doing so  exited  the  real  estate  development
business.

      Other assets declined from $21.5 million at June 30, 1997 to $18.8 million
at  December  31,  1997,  in  part  due to  the  continued  amortization  of the
intangible  assets  generated  in  conjunction  with the  branch  purchase  from
Hawthorne Savings Bank and the PSSB acquisition.

      Although  deposits  increased  $15.9  million  during the six months ended
December 31, 1997,  they  declined  $1.4  million  during the second  quarter of
fiscal 1998 due to management's  focus upon moderating the cost of its portfolio
of certificates of deposit. Key trends within the deposit portfolio include:



                                     29

<PAGE> 30




o     Management  continued  the Bank's  emphasis upon  attracting  consumer and
      small business checking accounts as a means of lowering the Bank's cost of
      funds,  bolstering fee income, and establishing customer relationships for
      the  future  sale  of  other  products  and  services.  Checking  deposits
      increased $4.0 million, or 5.5%, fiscal year to date.

o     Towards the end of the second fiscal  quarter,  the Bank  introduced a new
      high balance,  tiered rate consumer  checking product  ("Premium  Access")
      which  generated  favorable  initial  response.  In addition,  the Bank is
      currently developing two new small business checking programs to provide a
      comprehensive  range of  transaction  services  to various  sizes of small
      businesses.

o     Customers continued their positive response to the Bank's "Platinum" money
      market deposit account,  which provides  competitive money market interest
      rates for liquid funds.  In  conjunction  with this  product,  total money
      market  deposits  increased  from $38.6  million at June 30, 1997 to $65.6
      million at December 31, 1997.

o     The introduction of new "President's  Special" CD products which roll over
      upon maturity into lower cost accounts.

o     The ongoing  consolidation in the financial services industry continues to
      leave more customers without a local and / or full service branch of their
      former bank, and therefore  receptive to sampling Hemet Federal's  quality
      customer service.

      Advances from the FHLB-SF  increased $60.0 million during fiscal 1998 from
$50.0  million at June 30, 1997 to $110.0  million at December  31,  1997. A new
$15.0  million one year fixed rate  advance was added  during the second  fiscal
quarter. These incremental borrowings:

o      have  been  utilized to  expand the Company's  balance sheet  and thereby
       decrease net interest income

o      were all fixed rate, composed of terms from 6 months through 3 years

o      included some advances callable by the FHLB-SF

      Total  stockholder's  equity increased from $81.0 million at June 30, 1997
to $83.6 million at December 31, 1997 primarily due to the net income  generated
fiscal  year to date  and  the  appreciation  in the  portfolios  of  securities
designated  as  available  for sale.  The  appreciation  in the market  value of
available for sale securities  largely stemmed from a decline in Treasury rates,
as  exemplified  by the bond  equivalent  yield  for the 10 year  Treasury  note
declining  from 6.49% at June 30, 1997 to 5.74% at December 31,  1997.  Deferred
stock  compensation  reversed  its long term  trend  during  the  second  fiscal
quarter,  and increased,  in conjunction  with the  refinancing of the Company's
loan to the ESOP. The amount of Treasury stock declined during the second fiscal
quarter  due to the  Company's  use of Treasury  shares to fund the  exercise of
vested stock options.




                                     30

<PAGE> 31



Interest Rate Risk Management And Exposure
------------------------------------------

      In an effort to limit the  Company's  exposure to interest  rate  changes,
management  monitors  and  evaluates  interest  rate risk on an  ongoing  basis,
through an internal simulation and modeling process, various management reports,
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 match 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  typically translates to improved  profitability and higher economic
value during decreasing rate  environments.  Conversely,  this position presents
the likelihood of  constrained  net interest  income and average  spreads during
periods of increases in general market interest  rates. In addition,  due to the
significant  volume of mortgage related assets  maintained on the balance sheet,
and the embedded  optionality present in such assets, the Company is financially
exposed to both the nominal levels of interest rates and the relative  levels in
interest rates,  most often  characterized by the shape or slope of the Treasury
yield curve.


      During the six months ended December 31, 1997,  the Company  continued its
program of moderating  interest rate risk while building a less volatile base of
core  earnings.  Specific  actions during the six months ended December 31, 1997
included:

o     The  sale  of $50.0  million and the call of $16.0 million in longer term,
      fixed rate Agency debentures.

o     The  sale of  $5.4  million  in  current,  fixed  rate,  residential  loan
      originations on a servicing released basis.

o     The  secondary  market  purchase  of $107.7  million  in  adjustable  rate
      residential  mortgages  which,  when  added  to  the  impact  of  internal
      originations,  increased  the  percentage of loans  presenting  adjustable
      interest rates to 74.2% of total gross loans at December 31, 1997.

o     The  continuation  of  the  Company's  loan   origination   program  which
      encourages the generation of adjustable rate mortgages  through  favorable
      pricing  and  terms  to  the  customer  combined  with  incentives  to the
      Company's sales force.



                                     31

<PAGE> 32




o     The  continued  migration  away  from  originations  and  purchases  which
      reprice  based upon  the 11th  District  Cost Of Funds  Index  ("COFI") in
      favor of  loans which reprice  based upon Prime Rate or Treasury  indices,
      including the Company's  recent  development of  a loan product based upon
      the "12MAT" index. The Company has emphasized the  non-COFI indices due to
      their greater responsiveness to changes in capital  markets interest rates
      and due to  increased  concentration  of control of  the COFI into a small
      number of very large thrifts.  At  December 31, 1997,  approximately 27.2%
      of the Company's gross loans repriced based upon COFI.

o     The  development and marketing of new products which improve the Company's
      interest  rate risk  profile by  addressing  both the asset and  liability
      sides of the balance  sheet,  including new checking  programs,  and Prime
      based home equity lines of credit ("HELOC's").

o     The  redeployment  of  periodic  cash flows from longer  term,  fixed rate
      mortgage  backed  securities  and  loans  into  adjustable  rate  loans or
      securities presenting much lower duration.

      Management  believes that,  although investment in adjustable rate assets,
some of which  present  introductory  discount  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 Bank  terminated  four interest
rate swap contracts with an aggregate notional amount of $60.0 million, invoking
a termination  fee of $4.9 million  which,  for  accounting  purposes,  is being
amortized to interest  expense over the individual  remaining  contract lives of
each swap.




                                     32

<PAGE> 33



      During the six months ended December 31, 1997, the Bank amortized $456,000
of the  deferred  loss to interest  expense,  and charged  interest  expense for
$493,000  related  to current  existing  interest  rate swaps with an  aggregate
notional  amount of $35.0  million.  During the quarter ended December 31, 1997,
the conclusion of the  amortization  period for one of the  terminated  interest
rate  swaps was  realized,  leaving  a single  terminated  swap to be  amortized
through November 21, 1998. Additional  information concerning the Bank'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    Bank              Bank            Bank             Bank       Swap
             Amount        Date    Receives          Receives        Pays             Pays       Resets
             ------        ----    --------          --------        ----             ----       ------
        <S>            <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      12/31/97              Loss           Daily
           Notional    Termination         Deferred      Deferred      Amortization            Loss
             Amount           Date             Loss          Loss        Completion    Amortization
             ------           ----             ----          ----        ----------    ------------
        <S>               <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            $0          04/30/97          $2,024
        $10,000,000       07/10/95         $631,816            $0          11/25/97            $726
        $20,000,000       07/10/95       $2,328,601      $614,784          11/21/98          $1,892

Total   $60,000,000                      $4,856,292      $614,784

</TABLE>




                                                   33


<PAGE> 34



INTANGIBLE ASSETS
-----------------


      The purchase of three branches from Hawthorne  Savings and the acquisition
of  PSSB  each  generated   intangible  assets.  The  following  tables  provide
information  concerning  the initial  amount of such  intangible  assets,  their
periodic  amortization against income, and their current balances as of December
31, 1997. Under OTS regulations,  intangible assets reduce  regulatory  capital,
resulting in lower capital ratios than would otherwise be the case.

<TABLE>
<CAPTION>

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

<S>                                               <C>   
Transaction Date                                           06/21/96  
Deposits Acquired                                        $185,189,446
Initial Core Deposit Intangible Created                   $6,642,079
Book Amortization  Method / Term                  Straight Line / Seven Years 
Tax Return  Amortization Method / Term            Straight Line / Fifteen Years
Monthly Pre-Tax Charge To Book Income                       $79,072
Monthly Book Amortization Reported As                 Non Operating Expense
Core Deposit Intangible Balance As Of 12/31/97             $5,218,776
Reduction In Regulatory Capital As Of 12/31/97             $5,218,776
Reduction In Tangible Book Value As Of 12/31/97            $5,218,776

</TABLE>













                                     34

<PAGE> 35

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


<S>                                                      <C> 
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 12/31/97                                  Assets          Tax Liabilities    Net
                                                         ------          ---------------    ---     
     <S>                                                 <C>             <C>                <C>       
     Loan Premium                                        $ 1,915,355     $  791,160         $1,124,195
     Core Deposit Intangible                             $ 7,758,783     $3,204,859         $4,553,924
                                                         -----------     ----------         ----------
          Total                                          $ 9,674,138     $3,996,019         $5,678,119

Reduction In Regulatory Capital As Of 12/31/97
     Loan Premium                                        None
     Core Deposit Intangible, Net                        $ 4,553,924   

Reduction In Tangible Book Value As Of 12/31/97
     Loan Premium                                        None
     Core Deposit Intangible, Net                        $ 4,553,924

</TABLE>




                                                        35

<PAGE> 36





<TABLE>
<CAPTION>

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
<S>                                                    <C>     
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 12/31/97          $316,879
Reduction In Regulatory Capital As Of 12/31/97          $316,879
Reduction In Tangible Book Value As Of 12/31/97         $316,879
</TABLE>


      In March of 1997, the Bank  commenced  payment to a former officer of Palm
Springs  Savings 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 Bank. 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 Bank 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.



                                      36

<PAGE> 37



LIQUIDITY
---------

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

For the Bank, the primary sources of liquidity are:

o     deposits (both retail and wholesale)

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

o     retained earnings

o     FHLB advances

o     other borrowings, including reverse repurchase agreements

For the Bank, the primary uses of funds include:

o     loan originations

o     customer drawdowns on lines of credit

o     loan purchases

o     investment and mortgage backed securities purchases

o     customer withdrawals of deposits

o     interest paid on liabilities

o     operating expenses

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




                                     37

<PAGE> 38



      During the  quarter  ended  December  31,  1997,  the Bank was  granted an
unsecured  "federal funds" line of credit from one of the institution's  primary
correspondent  banks, as an additional means to provide for contingent liquidity
needs. In addition, at December 31, 1997 the Bank was in the process of pursuing
two additional unsecured "federal funds" lines of credit.  However, there can be
no assurance that the Bank will be successful in securing such additional  lines
of credit.

      At December 31, 1997, the Bank maintained  untapped  borrowing capacity at
the FHLB-San  Francisco in the amount of $210.6  million,  up $82.4 million from
the prior  quarter end.  During the quarter  ended  December 31, 1997,  the Bank
pledged  additional  loans to the FHLB to augment  its  liquidity  position.  In
addition,  due to the Company's relatively low loan to deposit ratio of 69.0% at
December 31, 1997, the Company maintained  significant excess collateral in both
loans and securities;  collateral  which is available for either  liquidation or
secured borrowings in order to meet future liquidity requirements.

      At December 31, 1997,  cash and cash  equivalents  totaled $19.2  million,
compared to $18.4 million at June 30, 1997. It is management's intention,  while
ensuring  adequate cash  availability for operating needs, to constrain cash and
cash equivalent balances in favor of higher yielding assets,  subject to meeting
all regulatory liquidity requirements.

      Effective  November  24,  1997,  the OTS  reduced  the  thrift  regulatory
liquidity  requirement from 5.0% to 4.0%,  removed the 1.0% short term liquidity
requirement,  significantly  increased  the range of assets  qualifying  for the
"numerator" in the liquidity  formula,  and decreased the  "denominator"  of the
formula.  The Bank elected to adopt the new  requirement  as of January 1, 1998.
Under the prior formula,  the Bank's regulatory liquidity ratio for the month of
December,  1997 was 10.65%, placing the Bank in compliance.  The revision in the
OTS liquidity requirement is a favorable event for the Company, as the Bank will
be able to  focus  its  liquidity  management  upon  almost  purely  operational
criteria, no longer pursuing certain positions and assets solely for the purpose
of meeting a regulatory  formula.  Congress has been petitioned to eliminate the
thrift regulatory liquidity  requirement in its entirety,  thereby providing the
same regulatory treatment to thrifts that is enjoyed by national banks.

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






                                     38

<PAGE> 39



CAPITAL RESOURCES
-----------------

     The  Bank  must  maintain  capital   standards  as  set  forth  by  federal
regulations. As of December 31 1997, these requirements are: 1) tangible capital
of 1.5 % of adjusted assets; 2) core capital of 4.0% of adjusted assets;  and 3)
risk-based  capital of 8.0 % of risk-weighted  assets. At December 31, 1997, the
Bank exceeded all minimum regulatory capital  requirements as shown in the table
below:

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

<S>                                    <C>                   <C>  
Tangible Capital
----------------

Actual capital                         $64,580               6.17%

Minimum required                        15,700               1.50
                                        ------               -----
Excess                                 $48,880               4.67%
                                       =======               =====
Core Capital
------------

Actual capital                         $64,580               6.17%

Minimum required                        41,866               4.00
                                       -------               -----
Excess                                 $22,714               2.17%
                                       =======               =====
</TABLE>


<TABLE>
<CAPTION>
                                                   PERCENT OF RISK-
                                        AMOUNT     WEIGHTED ASSETS
                                        ------     ---------------
Risk-based Capital
------------------

<S>                                    <C>                  <C>   
Actual capital                         $67,540              15.58%

Minimum required                        34,688               8.00
                                       -------              ------
Excess                                 $32,852               7.58%
                                       =======              ======
</TABLE>







                                       39

<PAGE> 40



      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:

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

      The Bank's Tier 1 risk based  capital  ratio as of  December  31, 1997 was
14.89%.  At December 31, 1997, the Bank's  regulatory  capital levels exceed the
thresholds  required to be classified as a "well capitalized"  institution.  The
Bank's capital ratios detailed above do not reflect the additional  capital (and
assets) maintained by the holding company.

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












                                     40

<PAGE> 41



CREDIT PROFILE
--------------

      Nonperforming Assets
      --------------------

      The following table sets forth information  regarding nonaccrual loans and
real estate acquired through foreclosure.

<TABLE>
<CAPTION>
                                              December 31, 1997    June 30, 1997
                                              -----------------    -------------
                                                     (Dollars In Thousands)

<S>                                                 <C>               <C>   
Nonaccrual loans before valuation reserves          $2,224             $5,217
Investment in foreclosed real estate before
valuation reserves                                   5,989              6,308
Investment in repossessed consumer assets before
  valuation reserves                                     0                 10
                                                   -------            -------
Total nonperforming assets                          $8,213            $11,535
                                                   =======            =======
Nonperforming loans to gross loans net of
undisbursed loan funds                               0.37%              1.06%
Nonperforming assets to total assets                 0.77%              1.17%

</TABLE>

      The reduction in nonperforming assets during the first half of fiscal 1998
primarily resulted from the Company's  continuing to cycle through the portfolio
of  troubled  assets  acquired  in  conjunction  with  the  purchase  of PSSB on
September 27, 1996, as highlighted by the table presented below. In addition,  a
gradual recovery in real estate markets and the economy in the Company's primary
lending areas has favorably impacted the Company's aggregate credit profile.










                                     41

<PAGE> 42



      Classified Assets
      -----------------

      The following table 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.
<TABLE>
<CAPTION>


                                 HF Bancorp, Inc.
                          History of Classified Assets

                             (Dollars In Thousands)

                             OAEM       Substandard       Loss          Total
                             ----       -----------       ----          -----

<S>                        <C>            <C>            <C>           <C> 
December 31, 1995           $9,217        $ 9,130        $2,618        $20,965

March 31, 1996              $8,287        $10,207        $3,030        $21,524

June 30,1996               $11,070        $ 8,189        $3,140        $22,399

September 30, 1996         $17,454        $22,007        $4,037        $43,498

December 31, 1996          $17,793        $20,588        $2,820        $41,201

March 31, 1997             $16,646        $18,733        $3,035        $38,414

June 30, 1997               $9,586        $19,834        $2,952        $32,372

September 30, 1997          $8,656        $15,805        $3,051        $27,512

December 31, 1997           $9,572        $12,932        $1,843        $24,347

</TABLE>

      The Company experienced an anticipated  significant increase in classified
assets upon the acquisition of PSSB in September,  1996.  Since the acquisition,
management has worked to reduce the classified asset total through various means
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.





                                     42

<PAGE> 43



      Impaired Loans
      --------------

      The Bank  adopted  Statement  of  Financial  Accounting  Standards  (SFAS)
No.114,  "ACCOUNTING  BY CREDITORS FOR  IMPAIRMENT OF A LOAN" as amended by SFAS
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 loans'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  Bank  applies  the  provisions  of SFAS No.  114 to all  loans in its
portfolio.  As a majority of the Bank'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 Bank  considers a loan to be
impaired  when it is  probable  that the Bank  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 Bank considers all nonaccrual loans
and all loans that have a specific loss allowance  applied to adjust the loan to
fair value as impaired.

      At December 31, 1997, the Company  maintained  total gross impaired loans,
before  specific  reserves,  of $9.3  million,  constituting  95  credits.  This
compares  favorably to total gross  impaired  loans of $16.3 million at June 30,
1997.  A total of $1.0 million in specific  reserves  were  established  against
impaired loans at December 31, 1997. The average recorded investment in impaired
loans  during the quarter  ended  December 31, 1997 was $10.7  million,  and the
average  recorded  investment  in impaired  loans  during  fiscal 1998 was $11.9
million.  The  Company's  impaired  loan  portfolio  at  December  31,  1997 was
disproportionately  represented  by  credits  originated  by PSSB  prior  to its
acquisition, as highlighted in the following table.
<TABLE>
<CAPTION>

                  Gross Impaired Loans At December 31, 1997


                           (Dollars In Thousands)


                           Originated           Originated

                                   By                   By

                                 PSSB        Hemet Federal                TOTAL
                                 ----        -------------                -----

<S>                             <C>                 <C>                  <C>   
Accrual Status                  $3,982              $3,131               $7,113

Non Accrual Status              $1,203              $1,021               $2,224

TOTAL                           $5,185              $4,152               $9,337

</TABLE>



                                         43

<PAGE> 44


      The above table also highlights that many of the Company's  impaired loans
at December 31, 1997 were either fully  current or with only minor  delinquency,
as $7.1 million (76.2%) were  maintained on accrual status.  Interest is accrued
on impaired  loans on a monthly basis except for those loans that are 90 or more
days  delinquent or those loans which are less than 90 days delinquent but where
management has identified  concerns  regarding the collection of the credit. For
the six months ended December 31, 1997,  accrued  interest on impaired loans was
$82,000 and interest of $318,000 was received in cash.

      If all  nonaccrual  loans had been  performing  in  accordance  with their
original loan terms, the Company would have recorded interest income of $172,000
during the six months  ended  December  31,  1997,  instead of  interest  income
actually recognized on cash payments of $50,000.


      Allowance for Loan Losses
      -------------------------

      The allowance for loan losses is established  through a provision for loan
losses  based on  management's  evaluation  of the  risks  inherent  in its loan
portfolio  and the  general  economy.  Management  reviews  the Bank's loan loss
allowance  on a  monthly  basis.  In  determining  levels  of  risk,  management
considers  a variety  of  factors,  including  asset  classifications,  economic
trends,  industry experience and trends,  geographic  concentrations,  estimated
collateral  values,  management's  assessment of the credit risk inherent in the
portfolio,   historical  loan  loss  experience,  and  the  Bank's  underwriting
policies.  The allowance  for loan losses is maintained at an amount  management
considers adequate to cover losses in loans receivable which are deemed probable
and estimable.

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

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




                                     44

<PAGE> 45



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

<TABLE>
<CAPTION>
                                                   Six Months Ended December 31,
                                                   -----------------------------
                                                         1997           1996
                                                         ----           ----
                                                        (Dollars In Thousands)
Allowance for Loan Losses:
--------------------------

<S>                                                     <C>            <C>   
Balance at June 30                                       $4,780         $3,068

   Allowance acquired from PSSB                             ---          2,963

    Loan chargeoffs:

          Residential real estate                         (402)          (345)

          Multifamily real estate                         (121)            ---

          Commercial real estate                          (313)           (69)

          Construction                                      ---           (16)

          Land/Lots                                       (265)          (119)

          Consumer                                         (98)            ---

          Commercial business                               ---            ---
                                                       --------       --------
     Total chargeoffs                                   (1,199)          (549)
     Loan recoveries                                        ---             20
     Provision for estimated loan losses                    400            208
                                                       --------       --------
Balance at December 31                                   $3,981        $ 5,710
                                                         ======        =======
</TABLE>

<TABLE>
<CAPTION>
                                                   December 31,       June 30,
                                                   ------------       --------
                                                           1997           1997
                                                           ----           ----
<S>                                                     <C>             <C>   
Allowance for estimated loan losses as a percent of
     nonperforming loans                                179.01%         91.63%

Allowance for estimated loan losses as a percent of
     gross loans receivable net of loans in process       0.67%          0.97%

</TABLE>


                                     45

<PAGE> 46

<TABLE>
<CAPTION>
                                                   Six Months Ended December 31,
                                                   -----------------------------

                                                         1997           1996
                                                         ----           ----

                                                       (Dollars In Thousands)

Valuation Allowances : Real Estate Foreclosure
----------------------------------------------

<S>                                                    <C>              <C>   
Balance at June 30                                     $  1,020         $  381

   Allowance acquired from PSSB                               0            491

   Net chargeoffs                                          (758)           (53)

   Provision to increase valuation allowances               560             60
                                                      ---------         ------

Balance at December 31                                 $    822         $  879

Valuation Allowances : Real Estate-Development
----------------------------------------------

Balance at June 30                                         $577         $1,536

   Net chargeoffs                                          (577)        (1,008)

   Provision to increase valuation allowances                 0             49
                                                        -------         ------

Balance at December 31                                  $     0         $  577

Total Valuation Allowances For Real Estate              $   822         $1,456
                                                        =======         ======
</TABLE>


      Loan   charge-offs   during  the  second   quarter  of  fiscal  1998  were
concentrated  in credits  obtained in conjunction  with the acquisition of PSSB,
with a particular  concentration  in loans secured by land and  commercial  real
estate.  While the Company  continues to originate new land and commercial  real
estate loans, the terms and underwriting for such new credits are  significantly
more conservative than those historically extended by PSSB.



                                     46

<PAGE> 47



      The ratio of  allowance  for  estimated  loan losses to  nonaccrual  loans
increased  from 91.63% at June 30, 1997 to 179.01% at December 31, 1997 due to a
decline in  nonaccrual  loans from $5.2  million to $2.2  million.  The ratio of
allowance for estimated losses to gross loans receivable net of loans in process
declined  from 0.97% at June 30,  1997 to 0.67% at  December  31,  1997 due to a
combination of a lower nominal  reserve  balance and an expanded loan portfolio.
The lower ratio  (0.67%) at December 31, 1997 is supported by the  reductions in
classified assets and nonaccrual loans  experienced by the Company,  the general
recovery in real estate values in the Company's primary market areas, and by the
high  concentration of residential  mortgages in the current loan portfolio.  At
December 31, 1997,  75.9% of the Bank's gross loan  portfolio  was  comprised of
residential  real  estate  loans,  while 97.3% of the gross loan  portfolio  was
composed of loans secured by real estate.

      A $290,000  chargeoff against the Company's  valuation  allowance for real
estate held for  investment  was recorded in the quarter ended December 31, 1997
in conjunction with the sale of the "MAYBERRY ESTATES" project. With the sale of
the Mayberry  Estates  parcel,  the Company  exited the real estate  development
business  completely,  freeing both human and capital resources for redeployment
into other areas of the Company's business presenting opportunities for improved
financial returns.

      The Company's inventory of foreclosed  properties and repossessed consumer
assets at December 31, 1997 is  summarized in the  following  table.  During the
three and six months ended  December 31, 1997, the Company  recognized  $134,000
and $560,000, respectively, in post acquisition writedowns primarily in order to
speed the  liquidation of the remaining  problem assets  acquired in conjunction
with the PSSB purchase.

     Real Estate Acquired By Foreclosure and Repossessed Consumer Assets

<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               $1,540          $37     $1,503      29.1%

Multifamily more than 4 Units             69            0         69       1.3%

Commercial / Industrial                1,523           55      1,468      28.4%

Land / Developed Lots                  2,857          730      2,127      41.2%

Repossessed Consumer Assets                0            0          0       0.0%
                                      ------       ------     ------     ------

   Total                              $5,989       $  822     $5,167     100.0%

</TABLE>

      The Bank accounts for real estate owned through foreclosure at fair market
value upon acquisition, and management believes that adequate valuation reserves
have been  established  based upon current  market  conditions.  At December 31,
1997,  approximately  $2.3 million in foreclosed real estate was in escrow under
contract for sale. However, management can offer no assurances regarding whether
and when such escrows will close.


                                     47

<PAGE> 48



Comparison Of Operating Results For The Three Months And Six Months Ended
-------------------------------------------------------------------------
 December 31, 1997 and December 31, 1996
----------------------------------------


General
-------

      The Company  reported  net earnings of $727,000 for the three months ended
December 31,  1997,  compared to $702,000 in earnings for the three months ended
December  31,  1996.  Basic  earnings  per share were $0.12 for the three months
ended  December 31, 1997 and $0.11 per share for the three months ended December
31, 1996;  while diluted  earnings per share were $0.11 for both  quarters.  The
consistency in these quarterly net income figures,  however,  fails to highlight
the  significant  changes in the sources of revenue and expense  between the two
periods.  These changes are detailed in the following  paragraphs.  In addition,
the $727,000 in net income for the most recent  quarter  represents a sequential
improvement  from the  $502,000 in earnings  reported  for the first  quarter of
fiscal 1998.

      The Company reported net earnings of $1.2 million for the six months ended
December 31, 1997,  compared to net earnings of $1.2 million for the same period
the  prior  fiscal  year,  excluding  the  prior  year  impact  of the one  time
assessment to  recapitalize  the SAIF.  Including the non recurring  assessment,
earnings for the six months ended December 31, 1996 were a loss of $1.6 million.

      When  reviewing  results for the six months ended  December 31 for current
and prior  fiscal  years,  it is  important  to note that the prior year  period
included slightly more than one quarter's impact of the PSSB acquisition. Due to
the timing of the PSSB  purchase  and the growth  experienced  by the Company in
recent quarters,  the Company maintained a significantly  larger average balance
sheet  during the six months  ended  December  31,  1997 than in the prior year,
somewhat offset by the impact of the additional  costs associated with operating
a larger financial institution.

Net Interest Income
-------------------

      Net interest income  declined  slightly from $6.2 million during the three
months ended  December  31, 1996 to $6.1  million  during the three months ended
December 31,  1997.  This decline  coincided  with a reduction in the  Company's
average spread on total assets from 2.47% during the prior year quarter to 2.26%
during the most recent three months. Net interest income during the three months
ended  December  31, 1997 was  unfavorably  impacted by the  multiple  financial
impacts  stemming from a relatively flat and low Treasury yield curve and by the
Company's  sale of long  term,  fixed  rate,  relatively  high  yielding  Agency
debentures in conjunction  with its interest rate risk management  program.  The
unfavorable  impacts  from the  relatively  flat and low  Treasury  yield  curve
included:



                                     48

<PAGE> 49



o     an increase in prepayment  rates on loans and securities,  with a majority
      of the security and purchased  loan  positions  maintained at a premium to
      par,  including the portfolio of loans added in conjunction  with the PSSB
      acquisition and recorded under purchase accounting

o     diminished  customer demand for new adjustable rate  originations in favor
      of fixed rate products, resulting in both constrained volume and curtailed
      pricing margins

o     less net  interest  income  resulting  from the  Company's  net  liability
      sensitive position due to the relatively small rate differentials  present
      in the Treasury yield curve

      The average  spread on total  assets  during the second  quarter of fiscal
1998 was also  constrained by the  maintenance of several short term  investment
positions which generated  additional  nominal net interest income,  but reduced
the average spread on total assets.  In addition,  a significant  portion of the
Company's  balance sheet growth during recent months has occurred at incremental
spreads below the Company's average spread due to constrained interest rate risk
exposure and the continued focus upon assets  presenting  relatively high credit
quality, and therefore lower yields.

      The Company's ratio of average interest earning assets to average interest
bearing liabilities  improved from 1.07 during the second quarter of fiscal 1997
to  1.09  during  the  most  recent  quarter  due  to  the  Company's  continued
amortization  of  intangible  assets,  the  growth  in demand  deposits,  and an
increase in capital.

      Net interest  income for the six months ended  December 31, 1997 was $12.2
million,  up 13.3% from $10.8  million  during the first two  quarters of fiscal
1997. This increase stemmed from the impact of the PSSB  acquisition  throughout
the  entire  six  month  period  during  the  current  fiscal  year and from the
Company's  internally  generated balance sheet growth.  Average interest earning
assets  increased from $865.9 million during the first six months of fiscal 1997
to $1,001.0 million during the same period in fiscal 1998. The Company's average
spread on total assets declined from 2.36% during the first six months of fiscal
1997 to 2.31%  during the first six months of fiscal  1998,  in part  because of
those factors  described  above which impacted  average  spreads during the most
recent quarter.

      During the six months ended  December 31,  1997,  the Company  implemented
revised transit courier  schedules and modified its transit  settlement in order
to minimize  lost float on checks  deposited  by  customers.  In  addition,  the
Company has recently  expanded its cash management  activities to improve yields
obtained on daily available cash balances. The full impact of these improvements
will be reflected in the  Company's  financial  results  commencing in the third
quarter of fiscal 1998.




                                     49

<PAGE> 50



Interest Income
---------------

      Interest income increased 4.8% from $17.9 million during the quarter ended
December 31, 1996 to $18.8  million  during the three months ended  December 31,
1997, as increased interest on loans and mortgage backed securities was somewhat
offset by a decline in interest and dividends on investment securities. Interest
income for the six months  ended  December 31, 1997 totaled  $37.0  million,  up
14.6%  from the $32.3  million  reported  for the same  period  during the prior
fiscal year,  with the  acquisition of PSSB  significantly  contributing  to the
increase.

      Interest  income on loans  increased  from $9.1  million  during the three
months  ended  December  31,  1996 to $10.6  million  during the  quarter  ended
December  31,  1997  due  to an  expansion  in  the  average  balance  of  loans
outstanding  during the  quarter  from  $444.0  million to $554.2  million.  The
favorable  effect of this increase in average loan balances was somewhat  offset
by a decline in the average  rate earned on loans,  from 8.18% during the fiscal
1997 period to 7.68% during the fiscal 1998 period. This decline in average rate
stemmed in part from an increased  concentration in residential  adjustable rate
loans,  which typically  present interest rates below those available from fixed
rate mortgages,  unsecured loans, and loans secured by other types of collateral
(e.g. income property).  During the most recent quarter, the Company's portfolio
of  commercial and industrial real  estate loans  declined from 10.5% to 8.9% of
the gross loan portfolio.

      For the six months  ended  December  31,  1997,  interest  income on loans
totaled $20.5 million,  up 45.3% from the same period the prior year. Similar to
the results for the most recent quarter,  a significant  rise in average balance
more than offset a decline in the average rate earned.

      Interest  income on  mortgage  backed  securities  rose from $4.4  million
during the  quarter  ended  December  31, 1996 to $4.9  million  during the most
recent quarter,  as an increase in average balance from $244.1 million to $303.2
million more than offset a decline in average rate from 7.14% to 6.42%. Over the
past two years,  the  Company has sold a  substantial  portion of its long term,
fixed rate mortgage backed  securities  portfolio,  with new purchases  focusing
upon adjustable rate and low duration fixed rate mortgage backed securities.

      For the six months ended  December 31, 1997,  interest on mortgage  backed
securities  totaled  $9.5  million,  up 5.2% from $9.0  million  during the same
period during the prior year, as the effect of increases in average volumes more
than offset a decline in average rate.  During the past six months,  the Company
has experienced an increase in prepayments on its portfolio of GNMA2  adjustable
rate mortgage  backed  securities,  which totaled $160.6 million in par value at
December 31, 1997.  Because the Company owns the securities at a premium to par,
the accelerated amortization lowers the effective yield on the portfolio.




                                     50

<PAGE> 51



      Interest  income  on  investment  securities  for the three  months  ended
December  31,  1997 was $3.2  million,  down from $4.5  million  during the same
quarter the prior year.  Similarly,  interest  income on  investment  securities
during the six months ended  December 31, 1997  decreased  23.5% versus the same
period during the prior year.  Over the past year, a number of long term,  fixed
rate investment  securities  have been called,  while the Company has sold other
long term,  fixed rate  investment  securities as part of its interest rate risk
management  program.  Somewhat  offsetting  these  factors,  in fiscal 1998, the
Company has  maintained,  on average,  a more fully  invested  position,  with a
smaller portion of the balance sheet  maintained in federal funds sold and short
term repurchase agreements.

Interest Expense
----------------

      Interest  expense  rose 8.4% from $11.7  million  during the three  months
ended  December  31, 1996 to $12.7  million  during the same period for the most
recent fiscal year, as increases in interest  expense on deposits and borrowings
more than  offset a decline in net  hedging  expense.  For the six months  ended
December 31, 1997,  interest expense  increased 15.2% versus the same period the
prior year, in large part due to the greater impact of the PSSB acquisition upon
current fiscal year to date financial results.

      Interest  expense on  deposits  increased  from $10.0  million  during the
quarter ended December 31, 1996 to $10.4 million during the most recent quarter,
as the average volume of interest  bearing  deposits rose from $812.6 million to
$822.6 million,  while the average  interest rate paid rose from 4.92% to 5.04%.
During the most recent quarter,  the Company has had to respond to credit unions
and  originators  of sub-prime  loans  aggressively  marketing  relatively  high
certificate  of deposits  rates in  selected  markets.  Including  the effect of
increased demand deposit balances,  however, the Company's average total cost of
deposits  declined  from 4.83% on  September  30, 1997 to 4.76% at December  31,
1997.

      For the six months ended December 31, 1997,  interest  expense on deposits
rose to $20.8 million from $18.1 million during the same period the prior fiscal
year. The average balance of interest  bearing deposits rose from $736.3 million
during the first six months of fiscal 1997 to $820.7  million during the similar
period in the current  fiscal  year,  while the average  rate rose from 4.92% to
5.06%.

      Interest  expense on borrowings rose from $915,000 during the three months
ended December 31, 1996 to $1.8 million during the most recent  quarter,  as the
average  balance of borrowings  increased from $70.0 million to $121.3  million,
while the average  rate rose from 5.23% to 6.04%.  During the 1998 fiscal  year,
the Company has increased its use of both short term  borrowings  (to fund short
term security  positions)  and longer term  borrowings  (to fund loan  portfolio
growth) as a means of generating increased net interest income.




                                     51

<PAGE> 52



      For the six months ended December 31, 1997, interest expense on borrowings
totaled  $3.1  million,  versus  $1.8  million  during the same period the prior
fiscal year.  Consistent with the results for the most recent  quarter,  average
balances  rose from $70.0  million to $103.4  million,  while the  average  rate
increased from 5.23% to 5.94%.

      Net interest expense on hedging transactions declined from $777,000 during
the three  months  ended  December  31, 1996 to $462,000  during the most recent
quarter. For the six months ended December 31, 1997, interest expense on hedging
transactions  declined to $948,000,  versus $1.6 million  during the same period
the prior  year.  As  detailed  under  "Summary Of  Interest  Rate  Swaps",  the
conclusions of the amortization  periods for the deferred losses associated with
terminated interest rate swaps have been accretive to the Company's reported net
interest income in recent periods.


Provision For Estimated Loan Losses
-----------------------------------

      The provision for estimated loan losses  increased from $29,000 during the
quarter ended December 31, 1996 to $300,000 during the most recent  quarter,  as
the Company  significantly  expanded  its loan  portfolio  during the past three
months and charged income for general reserves associated with that loan growth.
For the six months ended  December 31, 1997,  the provision  for estimated  loan
losses totaled $400,000,  up from $208,000 during the first six months of fiscal
1997.

      The  Company's  ratio  of  loan  loss  reserves  to  non-performing  loans
increased  to 179.01% at  December  31, 1997 from 91.63% at the end of the prior
fiscal  year,  as a  reduction  in  the  nominal  reserve  balance  due  to  net
charge-offs  exceeding  provision expense was more than offset by the decline in
non-performing loans.


Other Income And Expense
------------------------

      Other income  and expense declined  from  $502,000 in  income  during  the
quarter  ended  December 31, 1996 to $13,000  in  income  during the most recent
quarter, as:

o     the  prior fiscal year  period included $658,000 more in gains on the sale
      of securities

o     net gains on loans held for sale  increased from $10,000 in fiscal 1997 to
      $44,000 in fiscal  1998,  as the Company  expanded  its  mortgage  banking
      operation,  including  the  addition  of a new fixed  rate  conduit at the
      conclusion of the second quarter of fiscal 1998

o     net loss from real estate operations  increased from $135,000 to $198,000,
      as  the  Company's   management   continued  to  aggressively  pursue  the
      liquidation of troubled assets acquired through the PSSB purchase

o     deposit  related  fees  increased  50.5%,  from  $412,000  to  $620,000 in
      conjunction with a


                                     52

<PAGE> 53



      revised  fee  schedule,  the  growth  in the Company's transaction account
      base, and enhanced management scrutiny of fee waivers

      Other  income  and  expense  for the six months  ended  December  31, 1997
totaled  $327,000 in expense,  versus income of $922,000  during the same period
the prior year. The factors  impacting the financial results for the most recent
quarter were also applicable to the six month period, augmented by a significant
increase in  intangible  asset  amortization  during the six month period ending
December  31, 1997.  The rise in this  non-cash  charge  stemmed from a full six
months'  amortization  in fiscal 1998 of the  intangible  asset arising from the
PSSB acquisition , versus only three months' amortization in fiscal 1997.

General and Administrative Expenses
---------------------------------

      General and administrative expenses decreased from $5.5 million during the
quarter ended December 31, 1996 to $4.6 million during the most recent  quarter,
primarily due to:

o     a  $533,000 savings  in salaries and employee benefits  resulting from the
      refinancing of the  Company's loan to the ESOP

o     a $323,000 decline in FDIC insurance and other  assessments  stemming from
      reduced FDIC insurance premium rates following the recapitalization of the
      SAIF

      For the six months ended  December 31,  1997,  general and  administrative
expenses  totaled $9.4 million,  down from $14.3 million for the same period the
prior year.  The $14.3  million  figure  included a $4.8  million non  recurring
assessment  to  recapitalize  the  SAIF.  Excluding  this  charge,  general  and
administrative  expenses  during the six months ended  December 31, 1996 totaled
$9.5 million.  General and  administrative  expenses for the six month period in
the current  fiscal year include the impact of the PSSB  acquisition  throughout
the period,  while prior year to date figures include only about three months of
the operating costs  associated with four  additional full service  branches,  a
significantly  increased deposit  portfolio,  and an expanded lending territory.
General and  administrative  expenses  during the six months ended  December 31,
1996 included  certain  non-recurring  costs  associated with the integration of
PSSB,   including  check  printing   expenses  and  various  costs  for  outside
professionals.

      The  ratio of  general  and  administrative  expenses  to  average  assets
declined from 2.18% during the quarter  ended  December 31, 1996 to 1.69% during
the most  recent  three  months.  This  improvement  was also  reflected  in the
Company's efficiency ratio, which declined from 83.47% for the second quarter of
fiscal  1997 to 77.64%  for the same  period in fiscal  1998.  Over the past six
months,  the  Company  has  implemented  a series  of  initiatives  targeted  at
improving its productivity while still providing the caliber of customer service
which  differentiates  community banks from large money center or super regional
institutions, including:



                                     53

<PAGE> 54




o     the  aforementioned  refinance of the loan to the ESOP,  which will reduce
      operating  expenses in calendar 1998 by approximately  $350,000 based upon
      the Company's recent stock price

o     a significantly  more favorable check printing contract was negotiated and
      the Company  revised its selection of check  printing  services to further
      reduce periodic expense

o     the  Company's  health  benefits  program  was  modified  to reduce annual
      operating expense by approximately $75,000 per year

o     two of the Company's four vehicles were sold

o     the Company realized the first ongoing cost reduction from the decision to
      terminate its defined benefit and  supplemental  retirement  pension plans
      during the quarter ended June 30, 1997

o     several  vendors  were  replaced  with  more  cost effective organizations
      providing equal or better support to the Company

o     the  Company  commenced  more   aggressively   managing  its  real  estate
      resources,  resulting in three lease revisions which will save the firm in
      excess of $40,000 per year

o     correspondent bank services were restructured to provide ongoing operating
      expense savings

o     a new safe deposit box inventory and billing system was  implemented  that
      will both reduce  future  operating  costs and increase the  generation of
      non-interest income

o     flexible spending accounts were introduced January 1, 1998,  enhancing the
      Company's employee benefits while saving the Company payroll tax expense

      Management is continuing to pursue multiple avenues for further  improving
the Company's efficiency ratio, with several initiatives slated for introduction
during  the third  quarter  of  fiscal  1998.  These  initiatives  address  both
bolstering  revenues  from client  services  and  reducing  operating  expenses,
particularly those associated with administrative  functions. On the other hand,
the Company is experiencing  some increases in operating costs stemming from its
development  of a more  robust  sales  organization  and an  expanded  array  of
products  and  services.  There  can be no  assurance  regarding  the  range  of
additional initiatives which might be implemented,  nor concerning the degree of
success to be realized from such initiatives.





                                     54

<PAGE> 55



Income Taxes
------------

      Income tax expense  increased  slightly in the quarter ended  December 31,
1997  versus  the same  quarter  the prior year due to an  expansion  in pre-tax
income.  Fiscal 1998 year to date income tax expense totaled $871,000,  versus a
benefit of $1.1 million  during the six months ended  December 31, 1997,  due to
changes in the Company's pre-tax income. The Company's nominal tax rate remained
substantially unchanged between current and prior fiscal year.






















                                     55

<PAGE> 56



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

      a) The Company's  Annual Meeting of  Stockholders  was held on October 28,
1997.

      b) Not applicable.

      c) At such meeting the Company's stockholders approved the following:

      1. The election of the following  individuals as Directors for the term of
      three years each.

<TABLE>
<CAPTION>
                                    For               Withheld
                                    ---               --------
            <S>                     <C>               <C>   
            J. Robert Eichinger     4,687,889         35,268
            Harold L. Fuller        4,688,664         34,493
            Richard S. Cupp         4,688,194         34,963
</TABLE>


      2.  The  ratification  of  the  Amended  and  Restated  HF  Bancorp,  Inc.
      Stock-Based  Incentive  Plan and the amendment to the plan to increase the
      aggregate  number of shares of common stock  authorized for issuance under
      such Plan by 150,000.

<TABLE>
<CAPTION>

            For         Against           Abstain           Not Voted
            ---         -------           -------           ---------
            <S>         <C>               <C>               <C>   
            4,462,721   136,551           40,055            83,830
</TABLE>

      3. The  appointment of  Deloitte & Touche, L.L.P., as independent auditors
      of the Company for the fiscal year ending June 30, 1998.
<TABLE>
<CAPTION>

            For                     Against                 Abstain
            ---                     -------                 -------
            <S>                     <C>                     <C>   
            4,689,954               14,990                  18,213

</TABLE>


                                     56

<PAGE> 57



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


------------------------------------
*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.






                                     57

<PAGE> 58












                                 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: February 3, 1998                          By: /s/ Richard S. Cupp
                                                   --------------------
                                                Richard S. Cupp
                                                President
                                                Chief Executive Officer



Date: February 3, 1998                          By: /s/ Mark R. Andino
                                                   -------------------
                                                Mark R. Andino
                                                Vice President
                                                Treasurer













                                     58