**SECURITIES AND EXCHANGECOMMISSION**

 

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**ý****      QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THE**

**          SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2001**

 

**OR**

 

**o****      TRANSITION REPORTPURSUANT TO SECTION 13 OR**

**          15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Commission File Number 0-19772**

 

**HF FINANCIAL CORP.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                               |   | **46-0418532**       |
|--------------------------------------------|--------|----------------------|
| (State  or other jurisdiction of           |   | (I.R.S.  Employer    |
| incorporation  or organization)            |   | Identification  No.) |
|                                       |   |                 |
| **225 South Main Avenue, Sioux Falls, SD** |   | **57104**            |
| (Address  of principal executive office)   |   | (ZIP  Code)          |

 

**(605)   333-7556**

(Registrant'stelephone number, including area code)

 

**NotApplicable**

(Formername, former address and former fiscal year, if changed since last report)

 

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

 

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

 

             As of November 7, 2001 there were3,689,510 issued and outstanding shares of the Registrant’s Common Stock, with$.01 par value.

 

HF FINANCIAL CORP.

 

FORM 10-Q

INDEX

 
|       |                                                                                           |   |
|------------|------------------------------------------------------------------------------------------------|--------|
| PART  I.   | Financial  Information                                                                         |   |
|       |                                                                                           |   |
| Item 1.    | Financial Statements (Unaudited):                                                              |   |
|       |                                                                                           |   |
|       | Consolidated  Statements of Financial Condition As of September 30, 2001 and June 30, 2001     |   |
|       |                                                                                           |   |
|       | Consolidated  Statements of Income for the Three Months Ended September 30, 2001 and 2000      |   |
|       |                                                                                           |   |
|       | Consolidated  Statement of Stockholders' Equity for the Three Months Ended September 30,  2001 |   |
|       |                                                                                           |   |
|       | Consolidated  Statements of Cash Flows for the Three Months Ended September 30, 2001 and  2000 |   |
|       |                                                                                           |   |
|       | 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                                    |   |
|       |                                                                                           |   |
| 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 |

 

Item1.

 

HF FINANCIALCORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars inThousands)

 
|                                                                                                                                                                |   |                   |                  |              |                  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|-----------------------|-------------------|-----------------------|
| ASSETS                                                                                                                                                              |   |                   |                  |              |                  |
|                                                                                                                                                                |   | **September 30, 2001** | ** **            | **June 30, 2001** |                  |
|                                                                                                                                                                |   | **(Unaudited)**        |                  |              |                  |
| Cash and cash  equivalents                                                                                                                                          |   | $                      | 101,787               |              | $                     | 84,913 |   |
| Securities  available for sale                                                                                                                                      |   | 43,887                 |                  | 49,969            |                  |
| Mortgage-backed  securities available for sale                                                                                                                      |   | 41,614                 |                  | 43,750            |                  |
| Loans and  leases receivable                                                                                                                                        |   | 523,429                |                  | 563,836           |                  |
| Loans held  for sale                                                                                                                                                |   | 8,211                  |                  | 7,270             |                  |
| Accrued  interest receivable                                                                                                                                        |   | 5,114                  |                  | 5,412             |                  |
| Office  properties and equipment, net of accumulated depreciation                                                                                              |   | 13,444                 |                  | 13,756            |                  |
| Foreclosed  real estate and other properties                                                                                                                        |   | 1,743                  |                  | 1,608             |                  |
| Prepaid  expenses and other assets                                                                                                                                  |   | 3,360                  |                  | 2,720             |                  |
| Mortgage  servicing rights                                                                                                                                          |   | 3,126                  |                  | 2,775             |                  |
| Deferred  income taxes                                                                                                                                              |   | 1,851                  |                  | 2,230             |                  |
| Cost in  excess of net assets acquired                                                                                                                              |   | 5,638                  |                  | 5,763             |                  |
|                                                                                                                                                                |   | $                      | 753,204               |              | $                     | 784,002 |   |
|                                                                                                                                                                |   |                   |                  |              |                  |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                |   |                   |                  |              |                  |
| Liabilities                                                                                                                                                         |   |                   |                  |              |                  |
| Deposits                                                                                                                                                            |   | $                      | 578,216               |              | $                     | 601,207 |   |
| Advances from  Federal Home Loan Bank and other borrowings                                                                                                     |   | 97,051                 |                  | 108,376           |                  |
| Advances by  borrowers for taxes and insurance                                                                                                                      |   | 10,078                 |                  | 7,337             |                  |
| Accrued  interest payable                                                                                                                                           |   | 7,069                  |                  | 7,901             |                  |
| Other  liabilities                                                                                                                                                  |   | 6,656                  |                  | 6,656             |                  |
| Total  liabilities                                                                                                                                                  |   | 699,070                |                  | 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, 4,798,994 and 4,786,005  shares issued at September 30, 2001 and June 30, 2001, respectively |   | 48                     |        | 48                |        |
| Additional  paid-in capital                                                                                                                                         |   | 15,508                 |                  | 15,378            |                  |
| Retained  earnings, substantially restricted                                                                                                                        |   | 53,747                 |                  | 52,886            |                  |
| Accumulated  other comprehensive income                                                                                                                             |   | 956                    |                  | 338               |                  |
| Less cost of  treasury stock, 1,105,209 shares                                                                                                                      |   | (16,125                | )                     | (16,125           | )                     |
|                                                                                                                                                                |   | 54,134                 |                  | 52,525            |                  |
|                                                                                                                                                                |   | $                      | 753,204               |              | $                     | 784,002 |   |

                                                                                                                                                                                                                                   

See Notes toConsolidated Financial Statements.                                                                                                                                             

 

HF FINANCIAL CORP.AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars inThousands, Except Per Share Data)

(Unaudited)

 
|                                                                     |   | **Three Months Ended September 30,** |   |
|--------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                     |   | **2001**                             |   | **2000** |   |
| Interest and  dividend income:                                           |   |                                 |   |   |   |
| Loans and  leases receivable                                             |   | $                                    | 11,905 |   | $ | 12,923 |   |
| Mortgage-backed  securities                                              |   | 695                                  |   | 903 |   |
| Investment  securities and interest-bearing deposits                     |   | 1,107                                |   | 934 |   |
|                                                                     |   | 13,707                               |   | 14,760 |   |
| Interest  expense:                                                       |   |                                 |   |   |   |
| Deposits                                                                 |   | 6,274                                |   | 6,867 |   |
| Advances from  Federal Home Loan Bank and other borrowings          |   | 1,503                                |   | 1,754 |   |
|                                                                     |   | 7,777                                |   | 8,621 |   |
| Net interest  income                                                     |   | 5,930                                |   | 6,139 |   |
| Provision for  losses on loans and leases                                |   | 1,062                                |   | 778 |   |
| Net interest  income after provision for losses on loans and leases |   | 4,868                                |   | 5,361 |   |
|                                                                     |   |                                 |   |   |   |
| Noninterest  income:                                                     |   |                                 |   |   |   |
| Fees on  deposits                                                        |   | 961                                  |   | 874 |   |
| Loan  servicing income                                                   |   | 626                                  |   | 362 |   |
| Gain on sale  of loans, net                                              |   | 484                                  |   | 151 |   |
| Credit card  fee income                                                  |   | 393                                  |   | 998 |   |
| Commission  and insurance income                                         |   | 303                                  |   | 364 |   |
| Loan fees and  service charges                                           |   | 272                                  |   | 208 |   |
| Other                                                                    |   | 954                                  |   | 245 |   |
|                                                                     |   | 3,993                                |   | 3,202 |   |
| Noninterest  expense:                                                    |   |                                 |   |   |   |
| Compensation  and employee benefits                                      |   | 3,900                                |   | 3,476 |   |
| Other general  and administrative expenses                               |   | 1,417                                |   | 1,239 |   |
| Occupancy and  equipment                                                 |   | 893                                  |   | 847 |   |
| Credit card  processing expense                                          |   | 377                                  |   | 743 |   |
| Amortization  of intangible assets                                       |   | 125                                  |   | 97 |   |
| Federal  insurance premiums                                              |   | 25                                   |   | 65 |   |
| Other                                                                    |   | 72                                   |   | 28 |   |
|                                                                     |   | 6,809                                |   | 6,495 |   |
| Income before  income taxes                                              |   | 2,052                                |   | 2,068 |   |
| Income tax  expense                                                      |   | 785                                  |   | 808 |   |
| Net income                                                               |   | $                                    | 1,267  |   | $ | 1,260 |   |
|                                                                     |   |                                 |   |   |   |
| Earnings per  share:                                                     |   |                                 |   |   |   |
| Basic                                                                    |   | $                                    | 0.34   |   | $ | 0.34 |   |
| Diluted                                                                  |   | $                                    | 0.34   |   | $ | 0.34 |   |

 

SeeNotes to Consolidated Financial Statements.

HFFINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENT OF STOCKHOLDERS' EQUITY

ThreeMonths Ended September 30, 2001

(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                                                                             |   | -  - - -         |   | -  - - -                             |   | 1,267                       |   | -  - - -                                               |   | -  - - -                 |   | 1,267     |   |
| Net change in  unrealized gain on securities available for sale, net of deferred taxes |   | -  - - -         |   | -  - - -                             |   | -  - - -                    |   | 618                                                    |   | -  - - -                 |   | 618       |   |
| Comprehensive income                                                                   |   | -  - - -         |   | -  - - -                             |   | 1,267                       |   | 618                                                    |   | -  - - -                 |   | 1,885     |   |
| 7,560 shares issued  under Director Restricted Stock Plan                              |   | -  - - -         |   | 104                                  |   | -  - - -                    |   | -  - - -                                               |   | -  - - -                 |   | 104       |   |
| Exercise of stock  options for 5,429 shares                                            |   | -  - - -         |   | 26                                   |   | -  - - -                    |   | -  - - -                                               |   | -  - - -                 |   | 26        |   |
| Cash dividends paid  ($0.11 per share) on common stock                                 |   | -  - - -         |   | -  - - -                             |   | (406                        | )      | -  - - -                                               |   | -  - - -                 |   | (406      | )      |
| Balance, September 30,  2001                                                           |   | $                | 48     |                                 | $      | 15,508                      |   | $                                                      | 53,747 |                     | $      | 956       |   | $ | (16,125 | ) | $ | 54,134 |   |

 

 

See Notes to Consolidated Financial Statements

 

HF FINANCIALCORP. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Dollars inThousands)

(Unaudited)  

 
|                                                                                                |   | **Three Months Ended September 30,** |           |
|-----------------------------------------------------------------------------------------------------|--------|--------------------------------------|----------------|
|                                                                                                |   | **2001**                             |           | **2000** |   |
| CASH FLOWS  FROM OPERATING ACTIVITIES                                                               |   |                                 |           |   |   |
| Net income                                                                                          |   | $                                    | 1,267          |   | $ | 1,260 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:             |   |                                 |           |   |   |
| Provision for  losses on loans and leases                                                           |   | 1,062                                |           | 778 |   |
| Depreciation                                                                                        |   | 408                                  |           | 457 |   |
| Amortization  of premiums and discounts on securities available for   sale, net                |   | (1                                   | )              | (9 | ) |
| Amortization  of intangible assets                                                                  |   | 125                                  |           | 97 |   |
| Amortization  of mortgage servicing rights                                                          |   | 72                                   |           | 69 |   |
| Noncash  issuance of common stock                                                                   |   | 104                                  |           | 100 |   |
| (Decrease) in  deferred loan fees                                                                   |   | (360                                 | )              | (36 | ) |
| Loans  originated for resale                                                                        |   | (54,421                              | )              | (15,880 | ) |
| Proceeds from  the sale of loans                                                                    |   | 53,964                               |           | 17,292 |   |
| (Gain) on  sale of loans, net                                                                       |   | (484                                 | )              | (151 | ) |
| Mortgage  servicing rights capitalized                                                              |   | (275                                 | )              | (30 | ) |
| Losses and  provision for losses on sales of foreclosed real estate and other  properties, net |   | 21                                   |      | (1 | ) |
| Loss on  disposal of office properties and equipment, net                                      |   | 9                                    |      | (11 | ) |
| (Increase)  decrease in accrued interest receivable                                                 |   | 298                                  |           | (551 | ) |
| (Increase) in  prepaid expenses and other assets                                                    |   | (640                                 | )              | (94 | ) |
| (Increase) in  deferred income taxes                                                                |   | - - - -                              |           | (41 | ) |
| Increase  (decrease) in accrued interest payable and other liabilities                              |   | (832                                 | )              | 366 |   |
| Net cash  provided by operating activities                                                          |   | $                                    | 317            |   | $ | 3,615 |   |
|                                                                                                |   |                                 |           |   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES                                                               |   |                                 |           |   |   |
| Loans and  leases purchased                                                                         |   | (5,710                               | )              | (11,037 | ) |
| Loans and  leases originated and held                                                               |   | (34,745                              | )              | (48,798 | ) |
| Principal  collected on loans and leases                                                            |   | 79,775                               |           | 45,781 |   |
| Mortgage-backed  securities available for sale:                                                     |   |                                 |           |   |   |
| Purchases                                                                                           |   | (2,027                               | )              | - - - - |   |
| Repayments                                                                                          |   | 4,848                                |           | 2,102 |   |
| Securities  available for sale:                                                                     |   |                                 |           |   |   |
| Sales and  maturities                                                                               |   | 18,395                               |           | 275 |   |
| Purchases                                                                                           |   | (12,000                              | )              | - - - - |   |
| Proceeds from  sale of office properties and equipment                                              |   | - - - -                              |           | 17 |   |
| Purchase of  office properties and equipment                                                        |   | (105                                 | )              | (398 | ) |
| Purchase of  mortgage servicing rights                                                              |   | (148                                 | )              | (138 | ) |
| Purchase of  intangible assets                                                                      |   | - - - -                              |           | (724 | ) |
| Proceeds from  sale of foreclosed real estate and other properties, net                        |   | 229                                  |           | 295 |   |
| Net cash  provided by (used in) investing activities                                                |   | $                                    | 48,512         |   | $ | (12,625 | ) |

 

See Notes toConsolidated Financial Statements.
|                                                                   |   | **Three Months Ended September 30,** |    |
|------------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                   |   | **2001**                             |    | **2000** |   |
|                                                                   |   |                                 |    |   |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES                                  |   |                                 |    |   |   |
| Net  (decrease) in deposit accounts                                    |   | $                                    | (22,991 | ) | $ | (23,191 | ) |
| Proceeds of  advances from Federal Home Loan Bank and other borrowings |   | 900                                  |    | 179,581 |   |
| Payments on  advances from Federal Home Loan Bank and other borrowings |   | (12,225                              | )       | (163,519 | ) |
| Increase in  advances by borrowers for taxes and insurance        |   | 2,741                                |    | 3,630 |   |
| Proceeds from  issuance of common stock                                |   | 26                                   |    | 7 |   |
| Cash  dividends paid                                                   |   | (406                                 | )       | (386 | ) |
| Net  cash (used in) financing activities                               |   | $                                    | (31,955 | ) | $ | (3,878 | ) |
|                                                                   |   |                                 |    |   |   |
| Increase  (decrease) in cash and cash equivalents                      |   | $                                    | 16,874  |   | $ | (12,888 | ) |
|                                                                   |   |                                 |    |   |   |
| Cash and Cash  Equivalents                                             |   |                                 |    |   |   |
| Beginning                                                              |   | 84,913                               |    | 26,417 |   |
| Ending                                                                 |   | $                                    | 101,787 |   | $ | 13,529 |   |

 

See Notes toConsolidated Financial Statements.

HF FINANCIAL CORP. ANDSUBSIDIARIES

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

ForThe Three Months Ended September 30, 2001 and 2000

(Dollarsin Thousands)

(Unaudited)

NOTE 1.          SELECTED ACCOUNTING POLICIES

 

*Basis of presentation:*

 

             The foregoing consolidated financial statements areunaudited.  However, in the opinion ofmanagement, all adjustments (which consist of normal recurring accruals)necessary for a fair presentation of the consolidated financial statements havebeen included.  Results for any interimperiod are not necessarily indicative of results to be expected for theyear.  The interim consolidatedfinancial statements include the accounts of HF Financial Corp. (the"Company"), its subsidiaries, HomeFirst Mortgage Corp. (the “MortgageCorp.”), HF Card Services L.L.C. (HF Card Services) and Home Federal Bank(formerly known as Home Federal Savings Bank), (the "Bank") and theBank’s subsidiaries.  During the quarterended September 30, 2001, Mid America Capital Services, Inc. (Mid AmericaLeasing) was transferred from a subsidiary of the Mortgage Corp. to asubsidiary of the Bank with no effect on the accompanying consolidatedfinancial statements.

 

NOTE 2.          REGULATORY CAPITAL

 

The following table setsforth the Bank’s compliance with its capital requirements at September 30,2001:

 
|                    |   | **Amount** |   | **Percent** |   |
|-------------------------|--------|------------|--------|-------------|--------|
| Tier  I (core) capital: |   |       |   |        |   |
| Required                |   | $          | 29,803 |        | 4.00   | % |
| Actual                  |   | 45,982     |   | 6.17        |   |
| Excess                  |   | 16,179     |   | 2.17        |   |
| Risk-based  capital     |   |       |   |        |   |
| Required                |   | $          | 40,954 |        | 8.00   | % |
| Actual                  |   | 52,384     |   | 10.23       |   |
| Excess                  |   | 11,430     |   | 2.23        |   |
|                    |   |       |   |        |   |

NOTE 3.          EARNINGS PER SHARE

 

             Basic earnings per share iscomputed by dividing income available to common stockholders (the numerator) bythe 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 September 30, 2001 and 2000 was 3,693,785 and3,676,139, respectively.

 

             Dilutive earnings per share is similar to thecomputation of basic earnings per share except that the denominator isincreased to include the number of additional common shares that would havebeen outstanding if the dilutive options outstanding had been exercised. Theweighted average number of common and dilutive potential common sharesoutstanding for the three month period ended September 30, 2001 and 2000 was3,781,211 and 3,723,082, respectively.

NOTE 4.          SEGMENT INFORMATION

 

             The management approach is used as the conceptual basisfor identifying reportable segments and is based on the way that managementorganizes the segments within the Company for making operating decisions, allocatingresources and monitoring performance.

 

             The Company’s reportable segments are banking, creditcard and other.  The “banking” segmentis conducted through the Bank, and the “credit card” segment is conductedthrough, HF Card Services.  The “other”segment is composed of smaller nonreportable segments, the Company andinter-segment eliminations.

 

 
| **Three Months Ended September 30,  2001** |
|--------------------------------------------|
|                                       |   |   |   |   |   |   |   |   |   |
|                                       |   | **Banking** |   | **Credit Card** |   | **Other** |   | **Total** |   |
|                                       |   | **(Dollars in Thousands)** |   |
|                                       |   |   |   |   |   |   |   |   |   |
| Net interest  income                       |   | $ | 5,822 |   | $ | (2 | ) | $ | 110 |   | $ | 5,930 |   |
| Provision for  losses on loans and leases  |   | (523 | ) | (539 | ) | - - - - |   | (1,062 | ) |
| Noninterest  income                        |   | 2,644 |   | 1,090 |   | 259 |   | 3,993 |   |
| Noninterest  expense                       |   | (5,981 | ) | (453 | ) | (375 | ) | (6,809 | ) |
| Income before  income taxes                |   | $ | 1,962 |   | $ | 96 |   | $ | (6 | ) | $ | 2,052 |   |
|                                       |   |   |   |   |   |   |   |   |   |
| Total assets                               |   | $ | 747,015 |   | $ | 4,873 |   | $ | 1,316 |   | $ | 753,204 |   |
|                                       |   |   |   |   |   |   |   |   |   |
|                                       |   |   |   |   |   |   |   |   |   |
|                                       |   |   |   |   |   |   |   |   |   |
| **Three Months Ended September 30, 2000**  |
|                                       |   |   |   |   |   |   |   |   |   |
|                                       |   | **Banking** |   | **Credit Card** |   | **Other** |   | **Total** |   |
|                                       |   | **(Dollars in Thousands)** |   |
|                                       |   |   |   |   |   |   |   |   |   |
| Net interest  income                       |   | $ | 5,826 |   | $ | 62 |   | $ | 251 |   | $ | 6,139 |   |
| Provision for  losses on loans and leases  |   | (412 | ) | (349 | ) | (17 | ) | (778 | ) |
| Noninterest  income                        |   | 1,890 |   | 967 |   | 345 |   | 3,202 |   |
| Noninterest  expense                       |   | (5,179 | ) | (799 | ) | (517 | ) | (6,495 | ) |
| Income (loss)  before income taxes         |   | $ | 2,125 |   | $ | (119 | ) | $ | 62 |   | $ | 2,068 |   |
|                                       |   |   |   |   |   |   |   |   |   |
| Total assets                               |   | $ | 703,808 |   | $ | 7,176 |   | $ | 12,409 |   | $ | 723,393 |   |

 

Item 2.

**MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL**

**CONDITIONAND RESULTS OF OPERATIONS**

 

**General**

 

             The Company was incorporated under the laws of the Stateof Delaware in November 1991 for the purpose of owning all of the outstandingstock of the Bank issued in the mutual to stock conversion of the Bank.  The Company acquired all of the outstandingstock of the Bank on April 8, 1992.  InMay 1996, the Company formed  HF CardServices and became the owner of 51% of this entity. The Company became theowner of 100% of HF Card Services effective as of July 1998.  The activities of the Company itself have nosignificant impact on the results of operations on a consolidated basis.  Unless otherwise indicated, all activitiesdiscussed herein relate to the Company, and its direct and indirectsubsidiaries, including without limitation, the Bank, HF Card Services and theMortgage Corp.

 

             HF Card Services was established to provide secured,partially-secured and unsecured credit cards nationwide.  The target market for HF Card Services wassubprime credit customers who have either an insufficient credit history or anegative credit history and are unable to obtain a credit card from moretraditional card issuers.  The Companyceased credit card applications in March 1999.

 

              The Company's net income isprimarily 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 adifferent basis, than its interest-earning assets.  To better insulate itself from such risk, the Company has, overthe last few years, attempted to increase both numerically and on a percentagebasis its holding 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**

 

ThisForm 10-Q and other reports issued by the Company, including reports filed withthe Securities and Exchange Commission, may contain "forward-looking"statements that deal with future results, expectations, plans orperformance.  In addition, the Company'smanagement may make such statements orally to the media, securities analysts,investors or others. Forward-looking statements deal with matters that do notrelate strictly to historical facts. These forward-looking statements might include one or more of thefollowing:

 

•      Projections of income, revenues, earningsper share, dividends, capital expenditures, capital structure or otherfinancial items.

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

•      Forecasts of future economic performance.

•      Descriptions of assumptions underlying orrelating 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 conditionalverbs such as "will," "would," "should,""could" or "may."

 

TheCompany's future 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-looking statementsto reflect circumstances or events that occur after the date theforward-looking statements are made.

 

**FinancialCondition Data**

 

            At September 30, 2001, the Companyhad total assets of $753.2 million, a decrease of $30.8 million from the levelat June 30, 2001.  The decrease inassets was due primarily to a decrease in loans and leases receivable of $40.4million, a decrease in securities available for sale of $6.1 million and adecrease in mortgage-backed securities of $2.1 million offset by an increase incash and cash equivalents of $16.9 million. The decrease in liabilities was due primarily to a decrease in depositsof $23.0 million and advances from Federal Home Loan Bank (“FHLB”) and otherborrowings of $11.3 million, which was partially offset by the increase inadvances by borrowers for taxes and insurance of $2.7 million from the levelsat June 30, 2001.  In addition,stockholders’ equity increased from $52.5 million at June 30, 2001 to $54.1million at September 30, 2001, primarily due to net income of $1.3 million andthe increase in net unrealized gain on securities available for sale of$618,000 which was partially offset by the payment of cash dividends of$406,000.

 

             The decrease in loans and leases receivable of $40.4million was due primarily to sales, amortization and prepayments of principalexceeding purchases and originations. Included in the proceeds from the sale of loans was $23.1 millionresulting from the sale of a pool of one- to four-family, 15 and 30 yearfixed-rate loans during the quarter ended September 30, 2001.

 

             The decrease in securities available for sale of $6.1million was primarily the result of maturities and calls of $18.4 millionexceeding purchases of $12.0 million.

 

Thedecrease in mortgage-backed securities of $2.1 million was primarily the resultof maturities, calls, amortization and repayments of principal of $4.8 millionexceeding purchases of $2.0 million.

 

The$23.0 million decrease in deposits was primarily due to a decrease in savingsaccounts of $17.9 million and certificates of deposit of $10.5 million offsetby an increase in demand accounts of $3.9 million and money market accounts of$1.5 million.

 

Advancesfrom the FHLB and other borrowings decreased $11.3 million for the three monthperiod ended September 30, 2001 primarily due to the paydown of $12.2 millionin advances and other borrowings which was offset by additional draws on otherborrowings of $900,000.

 

The$2.7 million increase in advances by borrowers for taxes and insurance was due primarilyto the receipt of escrow payments in excess of amounts paid out.  The major escrow payments are primarily paidsemiannually in April and October.

 

**Analysisof Net Interest Income**

 

             Net interest income represents the difference betweenincome on interest-earning assets and expense on interest-bearingliabilities.  Net interest incomedepends upon the volume of interest-earning assets and interest-bearingliabilities and the interest rates earned or paid on them.

 

*             AverageBalances, 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 months ended September 30, 2001 and 2000 includefees which are considered adjustments to yield.

 

 
|                                           |   | **THREE MONTHS ENDED SEPTEMBER 30,**    |    |
|------------------------------------------------|--------|-----------------------------------------|---------|
|                                           |   | **2001**                                |    | **2000** |   |
|                                           |   | **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)               |   | $                                       | 571,412 |   | $ | 11,905 |   | 8.27 | % | $ | 562,119 |   | $ | 12,923 |   | 9.12 | % |
| Mortgage-backed  securities                    |   | 42,961                                  |    | 695 |   | 6.42 | % | 53,859 |   | 903 |   | 6.65 | % |
| Other  investment securities (2)               |   | 100,311                                 |    | 1,042 |   | 4.12 | % | 55,817 |   | 825 |   | 5.86 | % |
| FHLB stock                                     |   | 6,332                                   |    | 65 |   | 4.07 | % | 6,130 |   | 109 |   | 7.05 | % |
|                                           |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                 |   | $                                       | 721,016 |   | $ | 13,707 |   | 7.54 | % | $ | 677,925 |   | $ | 14,760 |   | 8.64 | % |
| Noninterest-earning  assets                    |   | 44,523                                  |    |   |   |   |   | 36,849 |   |   |   |   |   |
| Total assets                                   |   | $                                       | 765,539 |   |   |   |   |   | $ | 714,774 |   |   |   |   |   |
|                                           |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                 |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                      |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Checking and  money market                     |   | $                                       | 217,884 |   | $ | 1,369 |   | 2.49 | % | $ | 183,914 |   | $ | 1,824 |   | 3.93 | % |
| Savings                                        |   | 41,050                                  |    | 254 |   | 2.45 | % | 44,719 |   | 457 |   | 4.05 | % |
| Certificates  of deposit                       |   | 318,267                                 |    | 4,651 |   | 5.80 | % | 301,750 |   | 4,586 |   | 6.03 | % |
| Total  deposits                                |   | $                                       | 577,201 |   | $ | 6,274 |   | 4.31 | % | $ | 530,383 |   | $ | 6,867 |   | 5.14 | % |
| FHLB advances  and other borrowings            |   | 110,790                                 |    | 1,503 |   | 5.38 | % | 114,633 |   | 1,754 |   | 6.07 | % |
|                                           |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities            |   | $                                       | 687,991 |   | $ | 7,777 |   | 4.48 | % | $ | 645,016 |   | $ | 8,621 |   | 5.30 | % |
| Other  liabilities                             |   | 24,037                                  |    |   |   |   |   | 21,776 |   |   |   |   |   |
| Total  liabilities                             |   | $                                       | 712,028 |   |   |   |   |   | $ | 666,792 |   |   |   |   |   |
| Equity                                         |   | 53,511                                  |    |   |   |   |   | 47,982 |   |   |   |   |   |
| Total  liabilities and equity                  |   | $                                       | 765,539 |   |   |   |   |   | $ | 714,774 |   |   |   |   |   |
|                                           |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Net interest  income; interest rate spread (4) |   |                                    |    | $ | 5,930 |   | 3.06 | % |   |   | $ | 6,139 |   | 3.34 | % |
|                                           |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Net interest  margin (3) (4)                   |   |                                    |    |   |   | 3.26 | % |   |   |   |   | 3.59 | % |

 

----

(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.

(3)  Netinterest margin is net interest income divided by average interest-earningassets.

(4) Percentages for the three months ended September 30, 2001 and September30, 2000 have been annualized.

 

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

 

             The following schedule presents the dollar amount ofchanges in interest income and interest expense for major components ofinterest-earning assets and interest-bearing liabilities.  It distinguishes between the increases anddecreases due to fluctuating outstanding balances that are due to the levelsand volatility of interest rates.  Foreach category of interest-earning assets and interest-bearing liabilities,information is provided on changes attributable to (i) changes in volume (i.e.,changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,changes in rate multiplied by new volume). For purposes of this table, changes attributable to both rate andvolume, which cannot be segregated, have been allocated proportionately to thechange due to volume and the change due to rate.

 
|                                |   | **Three Months Ended September  30,** |   |
|-------------------------------------|--------|---------------------------------------|--------|
|                                |   | **2001 vs 2000**                      |   |
|                                |   | **Increase**                          |   |   |   |   |   |
|                                |   | **(Decrease)**                        |   | **(Decrease)** |   | **Total** |   |
|                                |   | **Due to**                            |   | **Due to** |   | **Increase** |   |
|                                |   | **Volume**                            |   | **Rate** |   | **(Decrease)** |   |
|                                |   | **(Dollars in Thousands)**            |   |
|                                |   |                                  |   |   |   |   |   |
| Interest-earning  assets:           |   |                                  |   |   |   |   |   |
| Loans and leases  receivable (1)    |   | $                                     | 214    |   | $ | (1,232 | ) | $ | (1,018 | ) |
| Mortgage-backed  securities         |   | (183                                  | )      | (25 | ) | (208 | ) |
| Other investment  securities (2)    |   | 658                                   |   | (441 | ) | 217 |   |
| FHLB stock                          |   | 4                                     |   | (48 | ) | (44 | ) |
| Total interest-earning  assets      |   | $                                     | 693    |   | $ | (1,746 | ) | $ | (1,053 | ) |
|                                |   |                                  |   |   |   |   |   |
| Interest-bearing  liabilities:      |   |                                  |   |   |   |   |   |
| Deposits:                           |   |                                  |   |   |   |   |   |
| Checking and money  market          |   | $                                     | 337    |   | $ | (792 | ) | $ | (455 | ) |
| Savings                             |   | (37                                   | )      | (166 | ) | (203 | ) |
| Certificates of deposit             |   | 251                                   |   | (186 | ) | 65 |   |
| Total deposits                      |   | 551                                   |   | (1,144 | ) | (593 | ) |
| FHLB advances and other  borrowings |   | (59                                   | )      | (192 | ) | (251 | ) |
| Total interest-bearing  liabilities |   | $                                     | 492    |   | $ | (1,336 | ) | $ | (844 | ) |
| Net interest income  (decrease)     |   |                                  |   |   |   | $ | (209 | )  |

 

----

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

(2) Includes primarily U.S. Governmentand agency securities and FHLB daily time.

**AssetQuality**

 

             In accordance with the Company’sinternal classification of assets policy, management evaluates the loan andlease portfolio on a monthly basis to identify loss potential and determine theadequacy of the allowance for loan and lease losses.  The following table sets forth the amounts and categories of theCompany’s nonperforming assets for the periods indicated.

 
|                                                                         | **Nonperforming Assets As Of** |    |
|------------------------------------------------------------------------------|--------------------------------|---------|
|                                                                         | **September 30,**              |    | **June 30,** |   |
|                                                                         | **2001**                       |    | **2001** |   |
|                                                                         | **(Dollars in Thousands)**     |    |
|                                                                         |                           |    |   |   |
|                                                                         |                           |    |   |   |
| Nonaccruing  loans and leases:                                               |                           |    |   |   |
| One- to  four-family                                                         | $                              | 950     |   | $ | 723 |   |
| Commercial                                                                   | 348                            |    | 385 |   |
| Multi-family                                                                 | 304                            |    | - - - - |   |
| Commercial  business                                                         | 3,465                          |    | 3,223 |   |
| Equipment  finance leases                                                    | - - - -                        |    | - - - - |   |
| Consumer                                                                     | 563                            |    | 518 |   |
| Agriculture                                                                  | 150                            |    | 373 |   |
| Credit cards                                                                 | - - - -                        |    | - - - - |   |
| Mobile homes                                                                 | 66                             |    | 88 |   |
| Total                                                                        | $                              | 5,846   |   | $ | 5,310 |   |
|                                                                         |                           |    |   |   |
| Accruing  loans and leases delinquent more than 90 days:                     |                           |    |   |   |
| One- to  four-family                                                         | $                              | - - - - |   | $ | - - - - |   |
| Commercial                                                                   | 60                             |    | - - - - |   |
| Multi-family                                                                 | - - - -                        |    | 304 |   |
| Commercial  business                                                         | 80                             |    | - - - - |   |
| Equipment  finance leases                                                    | - - - -                        |    | - - - - |   |
| Consumer                                                                     | - - - -                        |    | - - - - |   |
| Agriculture                                                                  | - - - -                        |    | 23 |   |
| Credit cards                                                                 | 330                            |    | 283 |   |
| Mobile homes                                                                 | - - - -                        |    | - - - - |   |
| Total                                                                        | $                              | 470     |   | $ | 610 |   |
|                                                                         |                           |    |   |   |
| Foreclosed  assets: (2)                                                      |                           |    |   |   |
| One- to  four-family                                                         | $                              | 306     |   | $ | 203 |   |
| Commercial                                                                   | - - - -                        |    | - - - - |   |
| Multi-family                                                                 | - - - -                        |    | - - - - |   |
| Commercial  business                                                         | - - - -                        |    | - - - - |   |
| Equipment  finance leases                                                    | - - - -                        |    | - - - - |   |
| Consumer                                                                     | 138                            |    | 105 |   |
| Agriculture                                                                  | - - - -                        |    | - - - - |   |
| Credit cards                                                                 | - - - -                        |    | - - - - |   |
| Mobile homes                                                                 | 1                              |    | 2 |   |
| Total                                                                        | $                              | 445     |   | $ | 310 |   |
|                                                                         |                           |    |   |   |
| Total  nonperforming assets                                                  | $                              | 6,761   |   | $ | 6,230 |   |
|                                                                         |                           |    |   |   |
| Ratio of  nonperforming assets to total assets                               | 0.90                           | %       | 0.79 | % |
|                                                                         |                           |    |   |   |
| Ratio of  nonperforming loans and leases to total loans and leases  (1) | 1.17                           | %       | 1.02 | % |
|                                                                         |                           |

 

----

(1) Nonperforming loans and leases include both nonaccruing and accruingloans and leases delinquent more than 90 days.

(2)  Totalforeclosed assets does not include land held for development.

 

             Loansare generally classified as nonaccrual when there are reasonable doubts as tothe collectibility of principal and/or interest and/or when payment becomes 90days past 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.

 

             Nonperforming assets increased to $6.8 million atSeptember 30, 2001 from $6.2 million at June 30, 2001, an increase of$531,000.  In addition, the ratio ofnonperforming assets to total assets, which is one indicator of credit riskexposure, increased slightly to 0.90% at September 30, 2001 as compared to0.79% at June 30, 2001.

 

             Nonaccruing loans and leases increased to $5.8 millionat September 30, 2001 from $5.3 million at June 30, 2001, an increase of$536,000.  Included in nonaccruing loansat September 30, 2001 were nineteen loans totaling $950,000 secured by one- tofour-family real estate, one loan in the amount of $304,000 secured bymulti-family real estate, three loans in the amount of $348,000 secured by commercialreal estate, seventeen loans totaling $3.4 million secured by commercialbusiness, five mobile home loans totaling $66,000, forty-six consumer loanstotaling $563,000 and one agriculture loan totaling $150,000.  For the three months ended September 30,2001, an additional $109,000 of interest income would have been recognized onloans accounted for on a nonaccrual basis had such loans been current inaccordance with their original terms.

 

             At September 30, 2001, the Bank had approximately $12.0million of other loans of concern that management has determined need to beclosely monitored because of possible credit problems of the borrowers or thecash flows of the secured properties. These loans were considered in determining the adequacy of the allowancefor possible loan losses.  The allowancefor possible loan losses is established based on management's evaluation of therisks inherent in the loan portfolio and changes in the nature and volume ofloan activity.  Such evaluation, whichincludes a review of all loans for which full collectability may not bereasonably assured, considers the estimated fair market value of the underlyingcollateral, economic conditions, historical loan loss experience and otherfactors that warrant recognition in providing for an adequate loan lossallowance.  Although the Company'smanagement believes that the September 30, 2001 recorded allowance for loan andlease losses was adequate to provide for potential losses on the related loansand leases, there can be no assurance that the allowance existing at September30, 2001 will be adequate in the future.

             The following table sets forth information with respectto activity in the Company’s allowance for loan and lease losses during theperiods indicated.
|                                                                                                          |   | **Three Months Ended**     |      |
|---------------------------------------------------------------------------------------------------------------|--------|----------------------------|-----------|
|                                                                                                          |   | **9/30/2001**              |      | **9/30/2000** |   |
|                                                                                                          |   | **(Dollars in Thousands)** |      |
|                                                                                                          |   |                       |      |   |   |
| Balance at  beginning of period                                                                               |   | $                          | 6,544     |   | $ | 8,475 |   |
| Charge-offs:                                                                                                  |   |                       |      |   |   |
| One- to  four-family                                                                                          |   | (12                        | )         | (5 | ) |
| Commercial                                                                                                    |   | (50                        | )         | - - - - |   |
| Commercial  business                                                                                          |   | (134                       | )         | - - - - |   |
| Equipment  finance leases                                                                                     |   | (18                        | )         | (5 | ) |
| Consumer                                                                                                      |   | (327                       | )         | (282 | ) |
| Agriculture                                                                                                   |   | (58                        | )         | - - - - |   |
| Credit cards                                                                                                  |   | (550                       | )         | (1,150 | ) |
| Mobile homes                                                                                                  |   | (10                        | )         | (19 | ) |
| Total  charge-offs                                                                                            |   | $                          | (1,159    | ) | $ | (1,461 | ) |
|                                                                                                          |   |                       |      |   |   |
| Recoveries:                                                                                                   |   |                       |      |   |   |
| Commercial                                                                                                    |   | $                          | 2         |   | $ | - - - - |   |
| Equipment  finance leases                                                                                     |   | 26                         |      | - - - - |   |
| Consumer                                                                                                      |   | 86                         |      | 63 |   |
| Credit cards                                                                                                  |   | 37                         |      | 45 |   |
| Mobile homes                                                                                                  |   | 1                          |      | 1 |   |
| Total  recoveries                                                                                             |   | $                          | 152       |   | $ | 109 |   |
|                                                                                                          |   |                       |      |   |   |
| Net  (charge-offs)                                                                                            |   | $                          | (1,007    | ) | $ | (1,352 | ) |
|                                                                                                          |   |                       |      |   |   |
| Additions  charged to operations                                                                              |   | 1,062                      |      | 778 |   |
| Additions  from acquisition                                                                              |   | - - - -                    |      | 97 |   |
|                                                                                                          |   |                       |      |   |   |
| Balance at  end of period                                                                                     |   | $                          | 6,599     |   | $ | 7,998 |   |
|                                                                                                          |   |                       |      |   |   |
| Ratio of net  (charge-offs) during the period to average loans and leases outstanding  during the period |   | (0.18                      | )%        | (0.24 | )% |
|                                                                                                          |   |                       |      |   |   |
| Ratio of  allowance for loan and lease losses to total loans and leases at end of  period                |   | 1.23                       |    % | 1.40 |    % |
|                                                                                                          |   |                       |      |   |   |
| Ratio of  allowance for loan and lease losses to nonperforming loans and leases at  end of period (1)    |   | 104.48                     |    % | 286.36 |    % |

 

----

(1) Nonperforming loans and leases include both nonaccruing and accruing loansand leases delinquent

more than 90 days.

The distribution of theCompany’s allowance for loan and lease losses at the dates indicated issummarized as follows:

 
|                                         |   | **At  September 30, 2001** |   | **At June 30, 2001**       |       |
|----------------------------------------------|--------|----------------------------|--------|----------------------------|------------|
|                                         |   |                       |   | **Percent of**             |       |   |   | **Percent of** |   |
|                                         |   |                       |   | **Loans in**               |       |   |   | **Loans in** |   |
|                                         |   |                       |   | **Each**                   | ** ** |   | ** ** | **Each** |   |
|                                         |   |                       |   | **Category to**            | ** ** |   | ** ** | **Category to** |   |
|                                         |   | **Amount**                 |   | **Total Loans**            | ** ** | **Amount** | ** ** | **Total Loans** |   |
|                                         |   |                       |   |                       |       |   |   |   |   |
|                                         |   |                       |   | **(Dollars in Thousands)** |       |   |   |
|                                         |   |                       |   |                       |       |   |   |   |   |
| One- to  four-family (1)                     |   | $                          | 960    |                       | 17.17      | % | $ | 1,196 |   | 21.48 | % |
|                                         |   |                       |   |                       |       |   |   |   |   |
| Commercial  and multi-family real estate (1) |   | 1,295                      |   | 23.15                      | %          | 1,402 |   | 25.19 | % |
|                                         |   |                       |   |                       |       |   |   |   |   |
| Commercial  business                    |   | 1,111                      |   | 19.85                      | %          | 932 |   | 16.74 | % |
|                                         |   |                       |   |                       |       |   |   |   |   |
| Equipment finance leases                     |   | 121                        |   | 2.16                       | %          | 101 |   | 1.81 | % |
|                                         |   |                       |   |                       |       |   |   |   |   |
| Consumer (2)                                 |   | 1,667                      |   | 29.81                      | %          | 1,523 |   | 27.36 | % |
|                                         |   |                       |   |                       |       |   |   |   |   |
| Agricultural                                 |   | 347                        |   | 6.20                       | %          | 317 |   | 5.70 | % |
|                                         |   |                       |   |                       |       |   |   |   |   |
| Credit cards                                 |   | 1,062                      |   | 1.02                       | %          | 1,036 |   | 1.05 | % |
|                                         |   |                       |   |                       |       |   |   |   |   |
| Mobile homes                                 |   | 36                         |   | 0.64                       | %          | 37 |   | 0.67 | % |
|                                         |   |                       |   |                       |       |   |   |   |   |
| Total                                        |   | $                          | 6,599  |                       | 100.00     | % | $ | 6,544 |   | 100.00 | % |

 

----

(1) Includes construction loans.(2) Excludes allowance for loan losses relating to mobile home loans and creditcard loans.

 

             The allowance for loan and lease losses was $6.6 millionat September 30, 2001 as compared to $6.5 million at June 30, 2001.    The ratio of the allowance for loan andlease losses to total loans and leases was 1.23% at September 30, 2001 and1.13% at June 30, 2001.  The Company’smanagement has considered nonperforming assets and other assets of concern inestablishing the allowance.  The Companycontinues to monitor its allowance for possible loan and lease losses and makefuture additions or reductions in light of the level of loans and leases in itsportfolio and as economic conditions dictate.

 

             The current level of the allowancefor loan and lease losses is a result of management's assessment of the riskswithin the portfolio based on the information revealed in credit reportingprocesses. The Company utilizes a risk-rating system on all commercialbusiness, agricultural, construction and multi-family and commercial realestate 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. As of September 30, 2001, $1.1million of the $6.6 million allowance for loan and lease losses was reservedfor the credit card loan portfolio. Regulators have reviewed the Company'smethodology for determining allowance requirements on the Company’s loan andlease portfolio and have made no recommendations for increases in theallowances during the three month period ended September, 2001 and year endedJune 30, 2001.

 

**Comparisonof the Three Months Ended September 30, 2001 and September 30, 2000**

 

*General*. The Company's net income increased $7,000 for the three months endedSeptember 30, 2001 as compared to the three months ended September 30,2000.  As discussed in more detailbelow, this increase was due primarily to an increase in noninterest income of$791,000 and a decrease in income tax expense of $23,000 offset by a decreasein net interest income of $209,000, an increase in provision for losses onloans and leases of $284,000 and an increase in noninterest expense of $314,000.

 

             *Interest Income.*  Interest income decreased $1.1 million from $14.8 million for thethree months ended September 30, 2000 to $13.7 million for the three monthsended September 30, 2001.  The $43.1million increase of average interest-earning assets resulted in a $693,000increase in interest income. This increase was offset by the average yield oninterest-earning assets decreasing from 8.64% to 7.54% for the three monthsended September 30, 2000 and September 30, 2001, respectively, which resultedin a $1.7 million decrease in interest income.

 

             *Interest Expense.*  Interest expense decreased $844,000 from$8.6 million for the three months ended September 30, 2000 to $7.8 million forthe three months ended September 30, 2001. A $1.3 million decrease in interest expense was the result of thedecrease in the average rate paid on interest-bearing liabilities from 5.30% to4.48% for the three months ended September 30, 2000 and September 30, 2001,respectively.  In addition, the averagebalance of interest-bearing liabilities increased $43.0 million at September30, 2001 as compared to the same period in the prior fiscal year.

 

             *Net Interest Income.* The Company's netinterest income for the three months ended September 30, 2001 decreased$209,000 as compared to the same period in fiscal 2001.  The decrease in net interest income reflectsa reduction in the net interest spread on average earning assets to 3.06% forthe three months ended September 30, 2001 from 3.34%.

 

Duringthe three months ended September 30, 2001, the Company had a net decrease inaverage balances of commercial loans. However, the Company anticipates activityin this type of lending to increase in future years, subject to marketdemand.  In addition, the Company sellsthe majority of conventional single-family residential real estate loanoriginations into the secondary market. Net interest income is expected to trend upward as a result of thislending activity as interest rate yields are generally higher on these types ofloans compared to the yield provided by conventional single-family residentialreal estate loans.  This lendingactivity is considered to carry a higher level of risk due to the nature of thecollateral and the size of the individual loans.  As such, the Company anticipates continued increases in itsallowance for loan losses.

 

             *Provision for Losses on Loans.*During thethree months ended September 30, 2001, the Company recorded a provision forlosses on loans of $1.1 million as compared to $778,000 for the three monthsended September 30, 2000, an increase of $284,000.  See "Asset Quality" for further discussion.

 

*             NoninterestIncome.*  Noninterest incomewas $4.0 million for the three months ended September 30, 2001 as compared to$3.2 million for the three months ended September 30, 2000, a increase of$791,000.

 

             The decrease in credit card fee income of $605,000 forthe three months ended September 30, 2001 as compared to the same period infiscal 2001 is primarily due to a decrease in fees received on unsecured creditcards. This is a result of the credit card portfolio decreasing from $8.7million at September 30, 2000 as compared to $5.5 million at September 30,2001. The fee income represents interchange fees, annual/monthly fees, latefees and other miscellaneous fees. This credit card program was initiated infiscal 1997. The Company ceased credit card applications in March 1999.  This decreased the level of these fees.  Interest income on credit card loans isincluded in interest income on loans.

 

             The increases in loan servicing income of $264,000 andnet gain on sale of loans of $333,000 for the three months ended September 30,2001 from the same period in the prior fiscal year were primarily due to thesale of $23.1 million of one- to four-family, 15 and 30 year fixed-rate loansduring the quarter ended September 30, 2001.

 

             Other noninterest income increased $709,000 compared tothe same period in the prior fiscal year primarily due to a one-time payment of$700,000 received in full settlement of an insurance claim for recovery ofprior losses.

 

*NoninterestExpense.*  Noninterest expenseincreased $314,000 as compared to the same period in the prior fiscal yearprimarily due to increases in compensation and employee benefits of $424,000,other general and administrative expenses of $178,000 and occupancy andequipment of $46,000 (increases primarily related to four new banking centersopened since September of 2000) offset by a decrease in credit card processingexpenses of $366,000.

 

              *Income tax expense.*  The Company's income tax expense for thethree months ended September 30, 2001 was $785,000 as compared to $808,000 forthe three months ended September 30, 2000, a decrease of $23,000. This decreasewas primarily due to a decrease in the Company’s effective tax rate from 39.1%at September 30, 2000 to 38.3% at September 30, 2001 due to changes inpermanent tax differences.

 

**Liquidity and Capital Resources**

 

             The Bank’s primary sources of funds are deposits, FHLBadvances, amortization and prepayments of loan principal (includingmortgage-backed securities) and, to a lesser extent, sales of mortgage loans,sales and/or maturities of securities, mortgage-backed securities, andshort-term investments.  While scheduledloan payments and maturing securities are relatively predictable, deposit flowsand loan prepayments are more influenced by interest rates, general economicconditions and competition. The Bank attempts to price its deposits to meet itsasset/liability objectives consistent with local market conditions.  Excess balances are invested in overnightfunds.

 

             Liquidity management is both a daily and long-termresponsibility of management.  The Bankadjusts its investments in liquid assets based upon management's assessment of(i) expected loan demand, (ii) projected loan sales, (iii) expected depositflows, (iv) yields available on interest-bearing deposits, and (v) theobjectives of its asset/liability management program. Excess liquidity isinvested generally in interest-bearing overnight deposits and other short-termgovernment and agency obligations. During the three months ended September 30, 2001, the Bank generatedfunds internally that allowed it to pay down FHLB advances and decreaseborrowings with the FHLB by $8.3 million. See “Financial Condition Data” for further discussion.

 

             The Bank anticipates that it will have sufficient fundsavailable to meet current loan commitments. At September 30, 2001, the Bank had outstanding commitments to originateor purchase loans of $36.9 million and to sell loans of $26.9 million.  At September 30, 2001, the Bank hadoutstanding commitments to purchase securities of $3.0 million.  There were no commitments to sell securitiesavailable for sale.

 

             Although deposits are the Bank’s primary source offunds, the Bank’s policy has been to utilize borrowings where the funds can beinvested in either loans or securities at a positive rate of return or to usethe funds for short term liquidity purposes. See “Financial Condition Data” for further analysis.

 

TheCompany currently has in effect a stock buy back program in which up to 10% ofthe common stock of the Company outstanding on April 22, 2001 may be acquiredthrough April 30, 2002.  No shares ofcommon stock have been purchased pursuant to this current program.  Pursuant to a series of stock buy backprograms initiated by the Company since 1996, the Company has purchased anaggregate of 1,105,209 shares of common stock through September 30, 2001.

 

             Savings institutions insured by theFederal Deposit Insurance Corporation are required by the FinancialInstitutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")to meet three regulatory capital requirements. If a requirement is not met, regulatory authorities may take legal oradministrative actions, including restrictions on growth or operations or, inextreme cases, seizure.  Institutionsnot in compliance may apply for an exemption from the requirements and submit arecapitalization plan.  Under thesecapital requirements, at September 30, 2001, the Bank met all current capitalrequirements.

 

             The Office of Thrift Supervision (“OTS”) has adopted acore capital requirement for savings institutions comparable to the requirementfor national banks.  The OTS corecapital requirement is 4% of total adjusted assets.  The Bank had core capital of 6.17% at September 30, 2001.

 

             Pursuant to the Federal Deposit Insurance CorporationInsurance Act (“FDICIA”), the federal banking agencies, including the OTS, havealso proposed regulations authorizing the agencies to require a depositoryinstitution to maintain additional total capital to account for concentrationof credit risk and the risk of non-traditional activities.  No assurance can be given as to the finalform of any such regulation.

**Impactof Inflation and Changing Prices**

 

             The Consolidated Financial Statements and Notes theretopresented herein have been prepared in accordance with accounting principlesgenerally accepted in the United States of America, which require themeasurement of financial position and operating results in terms of historicaldollars without considering the change in the relative purchasing power ofmoney over time due to inflation.  Theimpact of inflation is reflected in the increased cost of the Bank'soperations. Unlike most industrial companies, nearly all the assets andliabilities of the Bank are monetary in nature.  As a result, interest rates have a greater impact on the Bank'sperformance than do the effects of general levels of inflation.  Interest rates do not necessarily move inthe same direction or to the same extent as the prices of goods and services.

 

**Recent Accounting Pronouncements**

 

             In July, 2001, theFinancial Accounting Standards Board (FASB) issued two statements – Statement141, *Business Combinations,*andStatement 142, *Goodwill and Other IntangibleAssets,*which will impact the Company’s accounting for its reportedgoodwill.  The provisions of FASBStatement 141 apply to all business combinations initiated after June 30, 2001and all business combinations accounted for by the purchase method for whichthe date of acquisition is July 1, 2001, or later.  The provisions of FASB Statement 142 will be implemented by theCompany for the first quarter of its fiscal year 2003 financial statements.  The Company has not yet completed its fullassessment of the effects of these new pronouncements on its financialstatements and is uncertain as to the impact.

 

Item3.

 

**Quantitative and Qualitative Disclosures about Market Risk**

 

Interestrate risk 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 of March31, 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) was estimated inthe OTS model to be 9.71%.  Thepost-shock NPV ratio (worst case scenario being an increase of 200 bp in marketinterest rates) was estimated to be 9.07%, a decline of 64bp.  As of June 30, 2001, the most recent reportavailable, the post-shock NPV ratio (worst case scenario being a decrease of200 bp in market interest rates) was estimated to be 9.57%, a decrease of 49bpfrom the pre-shock NPV ratio estimate of 10.06%.

 

Inmanaging market risk and the asset/liability mix, the Bank has placed itsemphasis on developing a portfolio in which, to the extent practicable, assetsand liabilities 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.

 

 

HF FINANCIAL CORP.

 

FORM 10-Q
| PART  II.  OTHER INFORMATION |
|-----------------------------------|
|                              |
| Item 1.                           | Legal  Proceedings | None |
|                              |   |   |
|                              |   |   |
| Item 2.                           | Changes  in Securities | None |
|                              |   |   |
|                              |   |   |
| Item 3.                           | Defaults  upon Senior Securities | None |
|                              |   |   |
|                              |   |   |
| Item 4.                           | Submission  of Matters to a Vote of Security Holders | None |
|                              |   |   |
|                              |   |   |
| Item 5.                           | Other  Information | None |
|                              |   |   |
|                              |   |   |
| Item 6.                           | Exhibits  and Reports on Form 8-K | None |
|                              |

 

Noother information is required to be filed under Part II of the form.

HF FINANCIAL CORP.

 

FORM 10-Q

SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

 
|   |                    |   |               |                                                                                             |
|--------|-------------------------|--------|--------------------|--------------------------------------------------------------------------------------------------|
|   |                    |   | HF  Financial Corp |
|   |                    |   | (Registrant)       |
|   |                    |   |               |
| Date:  | November  8,  2001 |   | by                 | /s/ Curtis L. Hage                                                                               |
|   |                    |   |               | Curtis  L. Hage, Chairman, President                                                             |
|   |                    |   |               | And  Chief Executive Officer                                                                     |
|   |                    |   |               | (Duly  Authorized Officer)                                                                       |
|   |                    |   |               |                                                                                             |
| Date:  | November  8,  2001 |   | by                 | /s/ Cristie M. Lawson                                                                            |
|   |                    |   |               | Cristie  M. Lawson, Vice President And Controller

(Principal  Financial and Accounting Officer) |
|        |                         |        |                    |                                                                                                  |  |