**SECURITIESAND EXCHANGE COMMISSION**

 

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 

**ý            QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2002**

 

**OR**

 

**o****                           TRANSITIONREPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**CommissionFile Number 0-19772**

 

**HF FINANCIAL CORP.**

(Exact name of registrant as specified in its charter)

 

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

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled  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 suchreports), and (2) has been subject to such filing requirements for the past 90days.  Yes  ý  No  o

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock, asof the latest practicable date.

 

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

 

 

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HF FINANCIAL CORP.

 

FORM 10-Q

INDEX

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

 

----

 

Item 1.

 

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands)

 
|                                                                                                                                                  |   | **March 31, 2002** |    | **June 30, 2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------|--------|
|                                                                                                                                                  |   | **(Unaudited)**    |    |              |   |
| ASSETS                                                                                                                                                |   |               |    |              |   |
| Cash and cash equivalents                                                                                                                             |   | $                  | 17,227  |              | $      | 84,913 |   |
| Securities available for sale                                                                                                                         |   | 39,797             |    | 49,969            |   |
| Mortgage-backed securities available for  sale                                                                                                        |   | 57,019             |    | 43,750            |   |
| Loans and leases receivable                                                                                                                           |   | 528,638            |    | 563,836           |   |
| Loans held for sale                                                                                                                                   |   | 9,530              |    | 7,270             |   |
| Accrued interest receivable                                                                                                                           |   | 4,497              |    | 5,412             |   |
| Office properties and equipment, net of  accumulated depreciation                                                                                     |   | 13,720             |    | 13,756            |   |
| Foreclosed real estate and other properties                                                                                                           |   | 1,804              |    | 1,608             |   |
| Prepaid expenses and other assets                                                                                                                     |   | 7,975              |    | 2,720             |   |
| Mortgage servicing rights                                                                                                                             |   | 3,351              |    | 2,775             |   |
| Deferred income taxes                                                                                                                                 |   | 2,272              |    | 2,230             |   |
| Cost in excess of net assets acquired                                                                                                                 |   | 5,388              |    | 5,763             |   |
|                                                                                                                                                  |   | $                  | 691,218 |              | $      | 784,002 |   |
|                                                                                                                                                  |   |               |    |              |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                            |   |               |    |              |   |
| Liabilities                                                                                                                                           |   |               |    |              |   |
| Deposits                                                                                                                                              |   | $                  | 537,506 |              | $      | 601,207 |   |
| Advances from Federal Home Loan Bank and  other borrowings                                                                                            |   | 74,687             |    | 108,376           |   |
| Company obligated mandatorily redeemable  preferred securities of subsidiary trust that solely holds subordinated  debentures                         |   | 10,000             |    | —            |   |
| Advances by borrowers for taxes and  insurance                                                                                                        |   | 9,496              |    | 7,337             |   |
| Accrued interest payable                                                                                                                              |   | 4,211              |    | 7,901             |   |
| Other liabilities                                                                                                                                     |   | 5,549              |    | 6,656             |   |
| Total liabilities                                                                                                                                     |   | 641,449            |    | 731,477           |   |
|                                                                                                                                                  |   |               |    |              |   |
| Stockholders’ Equity                                                                                                                             |   |               |    |              |   |
| Preferred stock, $.01 par value, 500,000  shares authorized, none outstanding                                                                         |   | —             |    | —            |   |
| Series A Junior Participating Preferred  Stock, $1.00 stated value, 50,000 shares authorized, none outstanding                                        |   | —             |    | —            |   |
| Common stock, $.01 par value, 10,000,000  shares authorized, 4,806,837 and 4,786,005 shares issued at March 31, 2002  and June 30, 2001, respectively |   | 48                 |    | 48                |   |
| Additional paid-in capital                                                                                                                            |   | 15,545             |    | 15,378            |   |
| Retained earnings, substantially restricted                                                                                                           |   | 55,073             |    | 52,886            |   |
| Accumulated other comprehensive income                                                                                                                |   | 271                |    | 338               |   |
| Less cost of treasury stock, 1,519,030 and  1,105,209 shares at March 31, 2002 and June 30, 2001, respectively                                        |   | (21,168            | )       | (16,125           | )      |
|                                                                                                                                                  |   | 49,769             |    | 52,525            |   |
|                                                                                                                                                  |   | $                  | 691,218 |              | $      | 784,002 |   |

 

See Notes toConsolidated Financial Statements.

 

1

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HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF INCOME

(Dollars in Thousands, Except Per Share Data)

(Unaudited)

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

 

See Notes toConsolidated Financial Statements.

 

2

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HFFINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY

NineMonths Ended March 31, 2002

(DollarsIn Thousands, Except Per Share Data)

(Unaudited)

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

 

See Notes toConsolidated Financial Statements.

 

3

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HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

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

 

See Notes toConsolidated Financial Statements.

 

4

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HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Dollars in Thousands)

(Unaudited)

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

 

See Notes toConsolidated Financial Statements.

 

5

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HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Dollars in Thousands)

(Unaudited)

NOTE 1.                                                   SELECTEDACCOUNTING POLICIES

 

*Basis of presentation:*

 

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

 

NOTE 2.                                                   REGULATORYCAPITAL

 

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

 

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

 

NOTE 3.                                                   EARNINGSPER SHARE

 

Basic earningsper share is computed by dividing income available to common stockholders (thenumerator) by the weighted-average number of common shares outstanding  (the denominator) during the period.  Shares issued during the period and sharesreacquired during the period are weighted for the portion of the period thatthey were outstanding. The weighted average number of common shares outstandingfor the three month period ended March 31, 2002 and 2001 was 3,325,629 and3,680,733, respectively.  The weightedaverage number of common shares outstanding for the nine month period endedMarch 31, 2002 and 2001 were 3,568,424 and 3,678,314, respectively.

 

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

 

6

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NOTE 4.                                                   SEGMENTINFORMATION

 

The managementapproach is used as the conceptual basis for identifying reportable segmentsand is based on the way that management organizes the segments within theCompany for making operating decisions, allocating resources and monitoringperformance.

 

The Company’sreportable segments are banking, credit card and other.  The “banking” segment is conducted throughthe Bank, and the “credit card” segment is conducted through, HF CardServices.  The “other” segment iscomposed of smaller nonreportable segments, the Company and inter-segmenteliminations.

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

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

 

7

----

 

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

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

 

 

NOTE 5.                                                   COMPANYOBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTHOLDING SOLELY SUBORDINATED DEBENTURES

 

On November 28, 2001, theCompany issued 10,000 shares totaling $10.0 million of Company ObligatedMandatorily Redeemable Preferred Securities of HF Financial Capital TrustI.  The Trust exists for the solepurpose of issuing trust preferred securities and investing the proceeds insubordinated debentures of the Company. These subordinated debentures constitute the sole asset of theTrust.  The securities provide forcumulative cash distributions calculated at a rate based on six-month LIBORplus 3.75% adjusted semi-annually.  TheCompany may, at one or more times, defer interest payments on the capitalsecurities for up to 10 consecutive semi-annual periods, but not beyondDecember 8, 2031.  At the end of thedeferral period, all accumulated and unpaid distributions will be paid.  The capital securities will be redeemed onDecember 8, 2031; however, the Company has the option to shorten the maturitydate to a date not earlier than December 8, 2006.  Holders of the capital securities have no voting rights, areunsecured, and rank junior in priority of the payment to all of the Company’s indebtednessand senior to the Company’s capital stock.

 

8

----

 

Item 2.

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL**

**CONDITIONAND RESULTS OF OPERATIONS**

 

**General**

 

The Companywas incorporated under the laws of the State of Delaware in November 1991 forthe purpose of owning all of the outstanding stock of the Bank issued in themutual to stock conversion of the Bank. The Company acquired all of the outstanding stock of the Bank on April8, 1992.  In May 1996, the Companyformed  HF Card Services and became theowner of 51% of this entity. The Company became the owner of 100% of HF CardServices effective as of July 1998.  InNovember 2001, the Company formed HF Capital Trust I and became the owner of100% of this entity (see Note 5).  Theactivities of the Company itself have no significant impact on the results ofoperations on a consolidated basis. Unless otherwise indicated, all activities discussed herein relate tothe Company, and its direct and indirect subsidiaries.

 

HF CardServices was established to provide secured, partially-secured and unsecuredcredit cards nationwide.  The targetmarket for HF Card Services was subprime credit customers who have either aninsufficient credit history or a negative credit history and are unable toobtain a credit card from more traditional card issuers.  The Company ceased credit card applicationsin March 1999.

 

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

 

**Forward-LookingStatements**

 

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

 

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

•                                   Descriptionsof plans or objectives of management for future operations, products orservices.

•                                   Forecastsof future economic performance.

•                                   Descriptionsof assumptions underlying or relating to such matters.

 

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

 

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

 

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

 

9

----

 

**FinancialCondition Data**

 

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

 

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

 

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

 

The increasein mortgage-backed securities of $13.3 million was primarily the result ofpurchases of $32.2 million exceeding maturities, sales, calls, amortization andrepayments of principal of $18.9 million.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

10

----

 

**Analysis of Net Interest Income**

 

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

 

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

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

 

----

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

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

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

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

 

11

----

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

 

----

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

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

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

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

 

12

----

 

**Rate/Volume Analysis of Net Interest Income**

 

The followingschedule presents the dollar amount of changes in interest income and interestexpense for major components of interest-earning assets and interest-bearingliabilities.  It distinguishes betweenthe increases and decreases due to fluctuating outstanding balances that aredue to the levels and volatility of interest rates.  For each category of interest-earning assets and interest-bearingliabilities, information is provided on changes attributable to (i) changes involume (i.e., changes in volume multiplied by old rate) and (ii) changes inrate (i.e., changes in rate multiplied by new volume).  For purposes of this table, changesattributable to both rate and volume, which cannot be segregated, have beenallocated proportionately to the change due to volume and the change due torate.

 
|                                                                                                                         |   | **Three  Months Ended March 31,**      |   | **Nine  Months Ended March 31,** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|----------------------------------|--------|
|                                                                                                                         |   | **2002 vs  2001**                      |   | **2002  vs 2001**                |   |
|                                                                                                                         |   | **Increase  (Decrease)  Due toVolume** |   | **(Decrease)  Due toRate**       |   | **Total  Increase(Decrease)** |   | **Increase  (Decrease)  Due toVolume** |   | **(Decrease)  Due toRate** |   | **Total  Increase(Decrease)** |   |
|                                                                                                                         |   |                                   |   |                             |   | **(Dollars in Thousands)** |   |   |   |   |   |
| Interest-earning assets:                                                                                                     |   |                                   |   |                             |   |   |   |   |   |   |   |   |   |
| Loans and leases receivable (1)                                                                                              |   | $                                      | (585   | )                                | $      | (2146 | ) | $ | (2731 | ) | $ | (1315 | ) | $ | (4653 | ) | $ | (5968 | ) |
| Mortgage-backed securities                                                                                                   |   | (140                                   | )      | (118                             | )      | (258 | ) | (564 | ) | (165 | ) | (729 | ) |
| Other investment securities (2)                                                                                              |   | (291                                   | )      | (400                             | )      | (691 | ) | 711 |   | (1536 | ) | (825 | ) |
| FHLB stock                                                                                                                   |   | —                                 |   | (66                              | )      | (66 | ) | 3 |   | (107 | ) | (104 | ) |
|                                                                                                                         |   |                                   |   |                             |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                                                                                                |   | $                                      | (1016  | )                                | $      | (2730 | ) | $ | (3746 | ) | $ | (1165 | ) | $ | (6461 | ) | $ | (7626 | ) |
|                                                                                                                         |   |                                   |   |                             |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                                                                                |   |                                   |   |                             |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                                                                    |   |                                   |   |                             |   |   |   |   |   |   |   |   |   |
| Checking and money market                                                                                                    |   | $                                      | 295    |                             | $      | (1486 | ) | $ | (1191 | ) | $ | 1196 |   | $ | (3896 | ) | $ | (2700 | ) |
| Savings                                                                                                                      |   | (7                                     | )      | (272                             | )      | (279 | ) | (52 | ) | (672 | ) | (724 | ) |
| Certificates of deposit                                                                                                      |   | (945                                   | )      | (1287                            | )      | (2232 | ) | (1133 | ) | (2060 | ) | (3193 | ) |
| Total deposits                                                                                                               |   | (657                                   | )      | (3045                            | )      | (3702 | ) | 11 |   | (6628 | ) | (6617 | ) |
| FHLB advances and other borrowings                                                                                           |   | (440                                   | )      | (282                             | )      | (722 | ) | (1071 | ) | (435 | ) | (1506 | ) |
| Company obligated mandatorily redeemable preferred securities of  subsidiary trust that solely holds subordinated debentures |   | —                                 |   | 215                              |   | 215 |   | — |   | 216 |   | 216 |   |
|                                                                                                                         |   |                                   |   |                             |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities                                                                                           |   | $                                      | (1097  | )                                | $      | (3112 | ) | $ | (4209 | ) | $ | (1060 | ) | $ | (6847 | ) | $ | (7907 | ) |
|                                                                                                                         |   |                                   |   |                             |   |   |   |   |   |   |   |   |   |
| Net interest income                                                                                                          |   |                                   |   |                             |   | $ | 463 |   |   |   |   |   | $ | 281 |   |

 

----

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

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

 

13

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**Asset Quality**

 

In accordancewith the Company’s internal classification of assets policy, managementevaluates the loan and lease portfolio on a monthly basis to identify losspotential and determine the adequacy of the allowance for loan and leaselosses.  The following table sets forththe amounts and categories of the Company’s nonperforming assets for theperiods indicated.

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

 

----

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

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

 

Loans aregenerally classified as nonaccrual when there are reasonable doubts as to thecollectibility of principal and/or interest and/or when payment becomes 90 dayspast due, except loans which are well secured and in the process ofcollection.  Interest collections onnonaccrual loans, for which the ultimate collectability of principal isuncertain, are applied as principal reductions.  Credit card loans remain in accrual status until 120 days, whenaccrued interest income on the loan is taken out of income.

 

Nonperformingassets increased to $10.2 million at March 31, 2002 from $6.2 million at June30, 2001, an increase of $4.0 million. In addition, the ratio of nonperforming assets to total assets, which isone indicator of credit risk exposure, increased to 1.47% at March 31, 2002 ascompared to 0.79% at June 30, 2001.

 

14

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Nonaccruingloans and leases increased to $8.8 million at March 31, 2002 from $5.3 millionat June 30, 2001, an increase of $3.5 million. Included in nonaccruing loans at March 31, 2002 were nine loans totaling$456,000 secured by one- to four-family real estate, one loan in the amount of$292,000 secured by multi-family real estate, six commercial real estate loanstotaling $3.7 million, twenty loans totaling $3.1 million secured by commercialbusiness, three mobile home loans totaling $47,000, forty-five consumer loanstotaling $690,000 and five agriculture loans totaling $533,000.  For the three and nine months ended March31, 2002, an additional $62,000 and $231,000 of interest income, respectively,would have been recognized on loans accounted for on a nonaccrual basis hadsuch loans been current in accordance with their original terms.

 

At March 31,2002, the Bank had approximately $10.4 million of other loans of concern thatmanagement has determined need to be closely monitored because of possiblecredit problems of the borrowers or the cash flows of the securedproperties.  These loans were consideredin determining the adequacy of the allowance for probable loan losses.  The allowance for probable loan losses isestablished based on management’s evaluation of the risks inherent in the loanportfolio and changes in the nature and volume of loan activity.  Such evaluation, which includes a review ofall loans for which full collectability may not be reasonably assured,considers the estimated fair market value of the underlying collateral,economic conditions, historical loan loss experience and other factors thatwarrant recognition in providing for an adequate loan loss allowance.  Although the Company’s management believesthat the March 31, 2002 recorded allowance for loan and lease losses wasadequate to provide for potential losses on the related loans and leases, therecan be no assurance that the allowance existing at March 31, 2002 will beadequate in the future.

 

15

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The following tablesets forth information with respect to activity in the Company’s allowance forloan and lease losses during the periods indicated.

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

 

----

(1) Nonperformingloans and leases include both nonaccruing and accruing loans and leasesdelinquent more than 90 days.

 

16

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The allowancefor loan and lease losses was $6.3 million at March 31, 2002 as compared to$6.5 million at June 30, 2001.  Theratio of the allowance for loan and lease losses to total loans and leases was1.16% at March 31, 2002 and 1.13% at June 30, 2001.  The Company’s management has considered nonperforming assets andother assets of concern in establishing the allowance.  The Company continues to monitor itsallowance for probable loan and lease losses and make future additions orreductions in light of the level of loans and leases in its portfolio and aseconomic conditions dictate.

 

The currentlevel of the allowance for loan and lease losses is a result of management’sassessment of the risks within the portfolio based on the information revealedin credit reporting processes. The Company utilizes a risk-rating system on allcommercial business, agricultural, construction and multi-family and commercialreal estate loans, including purchased loans. A monthly credit review is performed on all types of loans to establishthe necessary reserve based on the estimated risk within the portfolio. Thisassessment of risk takes into account the composition of the loan portfolio,historical loss experience for each loan category, previous loan experience,concentrations of credit, current economic conditions and other factors that inmanagement’s judgment deserve recognition.

 

**Comparison of theThree Months Ended March 31, 2002 and March 31, 2001**

 

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

 

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

 

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

 

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

 

During thethree months ended March 31, 2002, the Company increased its average balancesof commercial and consumer loans. The Company anticipates activity in this typeof lending to continue in future years, subject to market demand.  In addition, the Company sells the majorityof conventional single-family residential real estate loan originations intothe secondary market.  Net interestincome is expected to trend upward as a result of this lending activity asinterest rate yields are generally higher on these types of loans compared tothe yield provided by conventional single-family residential real estateloans.  This lending activity isconsidered to carry a higher level of risk due to the nature of the collateraland the size of the individual loans. As such, the Company anticipates continued increases in its allowancefor loan losses.

 

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

 

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

 

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

 

17

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

 

*Noninterest Expense.*  Noninterest expense increased $337,000 as comparedto the same period in the prior fiscal year primarily due to increases incompensation and employee benefits of $685,000 and other general andadministrative expenses of $298,000 (increases primarily related to three newbanking centers) offset by decreases in occupancy and equipment of $335,000 andcredit card processing expenses of $242,000.

 

The Company expects the cost for property andcasualty coverage will be increasing at its next renewal date due to theterrorists attacks of September 11, 2001. The Company has been informed by its property and casualty insurancecarrier that  due to terrorist attacksof September 11, 2001, and the resulting unavailability of reinsurance in themarket,  insurance contracts will beamended with exclusionary language that will clearly define what is consideredwar and terrorist activity and excludes coverage for certain war and terroristactions.  Management believes that theseexclusions could have an impact on the Company’s financial performance shouldan event such as the events of September 11, 2001 take place in the Company’strade territory.

 

*Income tax expense.*  The Company’s income tax expense for thethree months ended March 31, 2002 was $667,000 as compared to $709,000 for thethree months ended March 31, 2001, a decrease of $42,000. This decrease wasprimarily due to a decrease in the Company’s effective tax rate from 39.45% to37.56% for the three months ended March 31, 2001 and March 31, 2002,respectively, due to changes in permanent tax differences.

 

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

 

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

 

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

 

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

 

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

 

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

 

18

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real estate loans.  This lending activity is considered to carrya higher level of risk due to the nature of the collateral and the size of theindividual loans.  As such, the Companyanticipates continued increases in its allowance for loan losses.

 

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

 

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

 

The decreasein credit card fee income of $1.2 for the nine months ended March 31, 2002 ascompared to the same period in fiscal 2001 is primarily due to a decrease infees received on unsecured credit cards. This is a result of the credit cardportfolio decreasing from $6.6 million at March 31, 2001 as compared to $4.1million at March 31, 2002. The fee income represents interchange fees, annual/monthlyfees, late fees and other miscellaneous fees. This credit card program wasinitiated in fiscal 1997. The Company ceased credit card applications in March1999, which decreased the level of these fees. Interest income on credit card loans is included in interest income onloans.

 

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

 

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

 

*Noninterest Expense.*  Noninterest expense increased $1.0 millionas compared to the same period in the prior fiscal year primarily due toincreases in compensation and employee benefits of $1.6 million, other generaland administrative expenses of $673,000 and other noninterest expense of$62,000 (increases primarily related to six new banking centers, one branch acquisition, increased activity inmortgage and commercial lending and the purchase of a leasing company) offsetby decreases in credit card processing expenses of $974,000 and occupancy andequipment of $301,000. Credit card processing expenses represent costs forcollecting loans and servicing credit cards for the unsecured credit cardprogram.

 

The Company expects the cost for property and casualty coverage will beincreasing at its next renewal date due to the terrorists attacks of September11, 2001.  The Company has been informedby its property and casualty insurance carrier that  due to terrorist attacks of September 11, 2001, and the resultingunavailability of reinsurance in the market, insurance contracts will be amended with exclusionary language that willclearly define what is considered war and terrorist activity and excludescoverage for certain war and terrorist actions.  Management believes that these exclusions could have an impact onthe Company’s financial performance should an event such as the events of September 11, 2001 take place inthe Company’s trade territory.

 

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

 

**Liquidity and Capital Resources**

 

The Bank’sprimary sources of funds are deposits, FHLB advances and prepayments of loanprincipal and, to a lesser extent, sales of mortgage loans, sales and/ormaturities of securities, mortgage-backed securities, and short-terminvestments.  While scheduled loanpayments and maturing securities are relatively predictable, deposit flows andloan prepayments are more influenced by interest rates, general economic conditionsand competition. The Bank attempts to price its deposits to meet itsasset/liability objectives consistent with local market conditions.  Excess balances are invested in overnightfunds.

 

Liquiditymanagement is both a daily and long-term responsibility of management.  The Bank adjusts its investments in liquidassets based upon management’s assessment of (i) expected loan demand, (ii)projected loan sales, (iii) expected deposit flows, (iv) yields available oninterest-bearing deposits, and (v) the objectives of its asset/liability managementprogram. Excess liquidity is invested generally in interest-bearing overnightdeposits and other short-term government and 

 

19

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

 

The Bankanticipates that it will have sufficient funds available to meet current loancommitments.  At March 31, 2002, theBank had outstanding commitments to originate or purchase mortagage andcommercial loans of $28.0 million and to sell mortgage and commercial loans of$14.7 million.  At March 31, 2002, theBank had no outstanding commitments to purchase or sell securities availablefor sale.

 

Althoughdeposits are the Bank’s primary source of funds, the Bank’s policy has been toutilize borrowings where the funds can be invested in either loans orsecurities at a positive rate of return or to use the funds for short termliquidity purposes.  See “FinancialCondition Data” for further analysis.

 

The Companycurrently has in effect a stock buy back program in which up to 10% of thecommon stock of the Company outstanding on April 22, 2001 may be acquiredthrough April 30, 2002.  A total of73,400 shares of common stock were purchased pursuant to this program duringthe nine months ended March 31, 2002. In addition, the Company repurchased a block of 340,421 shares of itscommon stock in a private transaction completed on February 13, 2002.  The Company approved a new stock buy backprogram in which up to 10% of the common stock of the Company outstanding onMay 1, 2002 may be acquired through April 30, 2003.  No shares of common stock have been purchased pursuant to the newprogram.

 

On November28, 2001, the Company issued 10,000 shares totaling $10.0 million of CompanyObligated Mandatorily Redeemable Preferred Securities of HF Financial CapitalTrust I.  The Trust exists for the solepurpose of issuing trust preferred securities and investing the proceeds insubordinated debentures of the Company. These subordinated debentures constitute the sole asset of theTrust.  The securities provide forcumulative cash distributions calculated at a rate based on six-month LIBORplus 3.75% adjusted semi-annually.  TheCompany may, at one or more times, defer interest payments on the capitalsecurities for up to 10 consecutive semi-annual periods, but not beyondDecember 8, 2031.  At the end of thedeferral period, all accumulated and unpaid distributions will be paid.  The capital securities will be redeemed onDecember 8, 2031; however, the Company has the option to shorten the maturitydate to a date not earlier than December 8, 2006.  Holders of the capital securities have no voting rights, areunsecured, and rank junior in priority of the payment to all of the Company’sindebtedness and senior to the Company’s capital stock.

 

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

 

The Office ofThrift Supervision (“OTS”) has adopted a core capital requirement for savingsinstitutions comparable to the requirement for national banks.  The OTS core capital requirement is 4% oftotal adjusted assets.  The Bank hadcore capital of 7.27% at March 31, 2002.

 

Pursuant tothe Federal Deposit Insurance Corporation Insurance Act (“FDICIA”), the federalbanking agencies, including the OTS, have also proposed regulations authorizingthe agencies to require a depository institution to maintain additional totalcapital to account for concentration of credit risk and the risk ofnon-traditional activities.  Noassurance can be given as to the final form of any such regulation.

 

**Impact of Inflationand Changing Prices**

 

TheConsolidated Financial Statements and Notes thereto presented herein have beenprepared in accordance with accounting principles generally accepted in theUnited States of America, which require the measurement of financial positionand operating results in terms of historical dollars without considering thechange in the relative purchasing power of money over time due toinflation.  The impact of inflation isreflected in the increased cost of the Bank’s operations. Unlike most industrialcompanies, nearly all the assets and liabilities of the Bank are monetary innature.  As a result, interest rateshave a greater impact on the Bank’s performance than do the effects of generallevels of inflation.  Interest rates donot necessarily move in the same direction or to the same extent as the pricesof goods and services.

 

20

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**Recent Accounting Pronouncements**

 

In July, 2001, the Financial Accounting Standards Board (FASB) issuedtwo statements — Statement 141, *BusinessCombinations,*and Statement 142, *Goodwilland Other Intangible Assets,*which will impact the Company’saccounting for its reported goodwill. The provisions of FASB Statement 141 apply to all business combinationsinitiated after June 30, 2001 and all business combinations accounted for bythe purchase method for which the date of acquisition is July 1, 2001, orlater.  The provisions of FASB Statement142 will be implemented by the Company for the first quarter of its fiscal year2003 financial statements.  The Companyhas not yet completed its full assessment of the effects of these newpronouncements on its financial statements and is uncertain as to the impact.

 

Item 3.

 

**Quantitative and Qualitative Disclosuresabout Market Risk**

 

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

 

Thecomposition of the Bank’s balance sheet results in maturity mismatches betweeninterest-earning assets and interest-bearing liabilities.  The scheduled maturities of the Bank’s fixedrate interest-earning assets are longer than the scheduled maturities of itsfixed rate interest-bearing liabilities. This mismatch exposes the Bank to interest rate risk.  In a rising rate scenario, as measured bythe OTS interest rate risk exposure simulation model, the estimated market orportfolio value (“PV”) of the Bank’s assets would decline in value to a greaterdegree than the change in the PV of the Bank’s liabilities, thereby reducingnet portfolio value (“NPV”), the estimated market value of its shareholders’equity.

 

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

 

In managing marketrisk and the asset/liability mix, the Bank has placed its emphasis ondeveloping a portfolio in which, to the extent practicable, assets andliabilities reprice within similar periods. The effect of this policy willgenerally be to reduce the Bank’s sensitivity to interest rate changes.  The goal of this policy is to provide arelatively consistent level of net interest income in varying interest ratecycles and to minimize the potential for significant fluctuations from periodto period.

 

Item 5.

 

**Other Information**

 

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

 

21

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HF FINANCIAL CORP.

 

FORM 10-Q

PART II. OTHER INFORMATION

 

Item 1.    LegalProceedings

 

None

 

Item 2.    Changes in Securities

 

None

 

Item 3.    Defaults upon Senior Securities

 

None

 

Item 4.    Submission of Matters to a Vote ofSecurity Holders

 

None

 

Item 5.    OtherInformation

 

None

 

Item 6.    Exhibits and Reports on Form 8-K

 

None

 

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

 

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HF FINANCIAL CORP.

 

FORM 10-Q

SIGNATURES

 

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

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

 

23

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