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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C.  20549**

**FORM 10-K**
| **ý** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|------------|--------------------------------------------------------------------------------------------|

**For the fiscalyear ended June 30, 2001**

**OR**
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------------|

**For the transition period from ________________________ to_______________________________**

**Commission filenumber 0-19972**

| **HF FINANCIAL CORP.**                                  |
|---------------------------------------------------------|
|                                                         |
| (Exact name of  registrant as specified in its charter) |

 

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

 

Registrant'stelephone number, including area code:                                    **(605) 333-7556**                                  

Securities Registered Pursuant to Section 12(b) of theAct:

**None**

Securities Registered Pursuant to Section 12(g) of theAct:

**Common Stock, parvalue $.01 per share******(Title of class)

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports)and (2) has been subject to such requirements for the past 90 days.                                                                                YESý  NO o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant'sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

As of September 17, 2001 therewere 3,693,785 issued and outstanding shares of the Registrant's Common Stock.

The aggregate market value of thevoting stock held by non-affiliates of the registrant, computed by reference tothe average of the bid and asked price of such stock as of September 17, 2001was $45.8 million (The exclusion from such amount of the market value of theshares owned by any person shall not be deemed an admission by the registrantthat such person is an affiliate of the Registrant.)

**DOCUMENTSINCORPORATED BY REFERENCE**

Part III of Form 10-K - Portionsof the Proxy Statement for 2001 Annual Meeting of Stockholders.

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**PART I**

**Item 1.  Business**

**The Company**

HF Financial Corp. (the"Company"), a bank holding company, was formed in November 1991, forthe purpose of owning all of the outstanding stock of Home Federal Savings Bank("Home Federal" or the "Bank") issued in the mutual tostock conversion of Home Federal (the "Conversion").  The Company acquired all of the outstandingstock of the Bank on April 8, 1992.  InOctober 1994, the Company acquired and began operating a mortgage subsidiary asHomeFirst Mortgage Corp. (“Mortgage Corp.”). In May, 1996, the Company formed a Limited Liability Company named HFCard Services L.L.C. (“HF Card Services”) and became the owner of 51% of thisentity.  The Company became the owner of100% of HF Card Services effective as of July 1998.  At June 30, 2001, the Company had total assets of$784.0 million and consolidated stockholders’ equity of $52.5 million (or 6.7%of assets).

The Company is incorporated underthe laws of the State of Delaware and generally is authorized to engage in anyactivity that is permitted by the Delaware General Corporation Law.  The activities of the Company itself have nosignificant impact on the results of operations on a consolidated basis.  Unless otherwise indicated, all mattersdiscussed herein relate to the Company, and its direct and indirectsubsidiaries, including without limitation, the Bank, Mortgage Corp. and HFCard Services.

The executive offices of theCompany, the Bank, the Mortgage Corp. and HF Card Services are located at 225South Main Avenue, Sioux Falls, South Dakota 57104.  The Company's telephone number at that address is (605) 333-7556.

**The Bank**

Home Federal is a federallychartered stock savings bank headquartered in Sioux Falls, South Dakota.  Its deposits are insured up to applicablelimits by the Savings Association Insurance Fund ("SAIF"),administered by the Federal Deposit Insurance Corporation("FDIC").  Originallychartered in 1929, Home Federal serves 22 communities in eastern South Dakota andsouthwestern Minnesota through its network of 31 banking centers (including 1banking center in southwestern Minnesota) and 1 internet branch which islocated at www.homefederal.com. Effective July 1, 2001, the Bank began operating under the name Home FederalBank.

The Bank attracts deposits fromthe general public and uses such deposits, together with borrowings and otherfunds, to originate one- to four-family residential, consumer, multi-family,commercial real estate, construction, agricultural and commercial businessloans.  The Bank's consumer loanportfolio includes, among other things, automobile loans, home equity loans,credit card loans, loans secured by deposit accounts, student loans and mobilehome loans.

The Bank also purchasesmortgage-backed securities and invests in U.S. Government and agencyobligations and other permissible investments. Home Federal does not rely on any brokered deposits and does not holdany non–investment grade bonds (i.e., "junk bonds").  The Bank receives loan servicing income onloans serviced for others and commission income from credit-life.  The Bank, through its wholly-ownedsubsidiaries, offers annuities, health, life, hazard and other insuranceproducts and appraisal services.

**Mortgage Corp.**

HomeFirst Mortgage Corp. was amortgage banking operation that originated one- to four-family residentialloans which were sold into the secondary market and to the Bank.  The Mortgage Corp. had no activity duringfiscal year 2000.

The Mortgage Corp. resumedactivity in August 2000 through the acquisition of Mid America CapitalServices, Inc. (Mid America Leasing), a wholly owned company, which specializesin equipment leasing.  Mid AmericaLeasing’s operations consist of leasing activities, primarily the leasing ofoffice furniture and equipment, automotive maintenance equipment and computerequipment.  The leases are generallyclassified as direct financing leases. This acquisition expands the Company’s servicing options for commercialand municipal customers.
**HF Card Services**

HF Card Services was establishedto provide secured, partially-secured and unsecured credit cards nationwide tosub-prime credit customers who have either an insufficient credit history or anegative credit history and are unable to obtain a credit card from moretraditional credit card issuers.  TheCompany ceased processing subprime credit card applications in March 1999.

**Other Subsidiaries**

Home Federal, through itswholly-owned subsidiaries, Hometown Insurors, Inc. and Mid–AmericaService Corporation, offers mortgage life, hazard and other insurance productsand appraisal services. See "Subsidiary Activities."  In addition, Home Federal's subsidiary, PMD,Inc., engages in the business of buying, selling and managing repossessed realestate properties of Home Federal.  PMD,Inc. had no activity during fiscal year 2001.

**Segments**

The Company’s reportable segmentsare banking, credit card and other.  The“banking” segment is conducted through the Bank and the “credit card” segmentis conducted through HF Card Services. The “other” segment is composed of smaller nonreportable segments, theCompany and inter-segment eliminations. See Note 16 of "Notes to Consolidated Financial Statements”.

**Market Area**

Based on total assets at June 30,2001, Home Federal is the largest thrift institution headquartered in SouthDakota.  During its 72-year existence,among its other lending activities, Home Federal served its customers locatedin eastern and central South Dakota, including the cities of Sioux Falls,Brandon, Pierre, Winner, Freeman, Dell Rapids, Hartford, Canton, Parker,Lennox, Mitchell, Aberdeen, Mobridge, Brookings, Redfield, Dakota Dunes,Colman, Crooks, Chester, Watertown and Yankton and the communities surroundingsuch communities through its network of 31 banking centers and 1 internetbranch.  During August 2000, the Bankexpanded its market area to include a branch in Marshall, Minnesota.  The Bank's immediate market area features avariety of agri-business, banking, financial services, health care and lightmanufacturing firms.

HF Card Services and Mid AmericaLeasing provide services to customers nationwide.

**Lending Activities**

*General*.  The Bank originates fixed-rate one- to four-family mortgageloans.  The Bank also originatesadjustable-rate mortgage ("ARM") loans and short-term loans forretention in its portfolio in order to increase the percentage of loans in itsportfolio with more frequent repricing or shorter maturities, and in some caseshigher yields, than fixed-rate mortgage loans. The Bank has continued to originate fixed–rate mortgage loans inresponse to customer demand.  While theBank sold fixed-rate loans with maturities of 15 years or greater andconventional ARM loans into the secondary market, during fiscal 2001 the Banksold the majority of the loans with servicing released.

While the Bank primarily focusesits lending activities on the origination of loans secured by first mortgageson owner–occupied one– to four–family residences as well asconsumer loans, the Bank also originates multi–family residential andcommercial real estate, construction, agricultural and commercial businessloans in its primary market area.  TheBank originates residential and non-owner occupied construction loans that arepresold to borrowers or held for sale by local builders and, on few occasions,makes land acquisition and development loans. The Bank's one– to four–family loans are primarily securedby homes located in its market area in South Dakota.  See the Loan and Lease Portfolio Composition tables immediatelyfollowing this section for further detail.**One– to Four–FamilyResidential Mortgage Lending. *Residentialloan originations of this type are generated by the Bank's marketing efforts,its present customers, walk–in customers and referrals from real estatebrokers and builders.  The Bank hasfocused its lending efforts primarily on the origination of loans secured byfirst mortgages on owner-occupied, one- to four-family residences.

TheBank has emphasized the origination of conventional ARM loans for retention inits portfolio and fixed-rate conforming loans suitable for sale in thesecondary market.  However, duringfiscal 2001, the Bank sold conventional ARM loans into the secondary market.  The Bank generally follows the practice ofselling fixed rate conventional mortgage loans with maturities of 15 years orgreater.  The Bank's one- to four-familyresidential mortgage originations are primarily in its market area.

TheBank currently makes 15- and 30-year fixed- and adjustable-rate one- tofour-family residential mortgage loans in amounts up to 95% of the appraisedvalue of the collateral property provided that private mortgage insurance isobtained in an amount sufficient to reduce the Bank's exposure at or below the80% level.  The Bank currently offers anARM loan which has a fixed rate for the initial three years and converts to aone-year ARM loan for the remainder of the life of the loan.  The Bank also offers a one–year ARMloan with a rate below the Bank's then current fixed-rate loan for a comparable15- or 30-year term loan.  These loansprovide for an annual cap and a lifetime cap at a set percent over thefully-indexed rate.  As a consequence ofusing caps, the interest rates on these loans are not as rate sensitive as isthe Bank's cost of funds.  The initialrate used for the loan is usually below the fully-indexed rate and isdetermined by the Bank in accordance with market and competitive factors.

Inaddition, the Bank offers a 30-year balloon loan which has a fixed–ratefor the first five or seven years of the loan term.  At the end of the five- or seven-year period, the loan convertsto a 23- or 25-year fixed-rate loan at the then current market rate providedthat the borrower qualifies at the new rate. If the borrower fails to qualify at the new rate, the loan becomespayable in full.  These loans areunderwritten to conform to the Federal Home Loan Mortgage Corporation's("FHLMC") secondary market standards.

TheBank also offers fixed–rate 15- through 30-year mortgage loans thatconform to secondary market standards (i.e., Federal National Mortgage Bank("FNMA"), Government National Mortgage Bank ("GNMA") andFHLMC standards).  Interest ratescharged on these fixed–rate loans are competitively priced on a dailybasis according to market conditions. Residential loans generally do not include prepayment penalties.  Most of these loans with maturities of 30years are held for sale or sold in the secondary market.  While the Bank has generally retainedservicing rights on such loans whenever possible, during fiscal 2001 the Banksold the majority of its loans with servicing released.

TheBank also originates fixed–rate one– to four–family mortgageloans through the South Dakota Housing Development Authority("SDHDA") program.  Theseloans generally have terms not to exceed 30 years and are either insured by theFHA/VA or private mortgage insuror or must have no more than a 80% loan tovalue ratio.  The Bank receives anorigination fee of one percent of the loan amount from the borrower and aservicing fee generally three-eighths of one percent from the SDHDA for theseservices.  The Bank is the largestservicer of loans for the SDHDA.  AtJune 30, 2001, the Bank serviced $421.3 million of mortgage loans for theSDHDA.  See Note 5 of “Notes toConsolidated Financial Statements.”

Inunderwriting one- to four-family residential real estate loans, Home Federalevaluates both the borrower's willingness and ability to make monthly paymentsand the value of the property securing the loan.  These criteria are also applied to loans purchased.  Property securing real estate loans made byHome Federal is appraised by an appraiser employed by Mid-America Service Corporation,Home Federal's wholly-owned subsidiary or by independent appraisers selected byHome Federal.  Home Federal requiresborrowers to obtain title, fire and casualty insurance in an amount not lessthan the amount of the loan.  Realestate loans originated by the Bank contain a "due-on-sale" clauseallowing the Bank to declare the unpaid principal balance due and payable uponthe sale of the collateral property.

*Multi-Family andCommercial Real Estate Lending. *The Bankengages in multi–family and commercial real estate lending primarily inSouth Dakota and the adjoining mid–western states.  These lending activities may includeexisting property or new construction development or purchased loans.
Loanssecured by multi-family and commercial real estate properties are generallylarger and involve a greater degree of credit risk than one- to four-familyresidential mortgage loans. Because payments on loans secured by multi-familyand commercial real estate properties are often dependent on the successfuloperation or management of the properties, repayment of such loans may be subjectto adverse conditions in the real estate market or the economy.  If the cash flow from the project is reduced(for example, if leases are not obtained or renewed), the borrower's ability torepay the loan may be impaired.

TheBank presently originates adjustable–rate, short-term balloon payment,fixed-rate multi-family and commercial real estate loans.  The Bank's multi-family and commercial realestate loan portfolio is secured primarily by apartment buildings and, to a lesserextent, churches, motels, office buildings, strip shopping centers and nursinghomes.  The terms of such loans arenegotiated on a case by case basis. Commercial real estate loans generally have terms that do not exceed 25years.  The Bank has a variety of rateadjustment features, call provisions and other terms in its multi-family andcommercial real estate loan portfolio. Generally, the loans are made in amounts up to 80% of the appraisedvalue of the collateral property and with debt service coverage ratios of 115%or higher.  The debt service coverage isthe ratio of net cash from operations before payment of debt service.  However, these percentages may varydepending on the type of security and the guarantor.  Such loans provide for a negotiated margin over a designatedindex which is generally the one- to five-year Treasury Bill Rate.  Fixed-rate loans are generally made whenadvances from the Federal Home Loan Bank (“FHLB”) of Des Moines can be used tofund the loan.  The Bank analyzes thefinancial condition of the borrower, the borrower's credit history, theborrower's prior record for producing sufficient income from similar loans,references and the reliability and predictability of the net income generatedby the property securing the loan.  TheBank generally requires personal guarantees of borrowers.  Depending on the circumstances of thesecurity of the loan or the relationship with the borrower, the Bank may decideto sell participations in the loan.  Thesale of participation interests in a loan are necessitated by the amount of theloan or the Loans to One Borrower requirements which would require the sale ofthe loan.  In return for servicing theseloans for the participants, the Bank generally receives a fee of one-fourth tothree-eighths of one percent.  Also, incomeis received at loan closing from loan fees and discount points.  Appraisals on properties securing multi–familyand commercial real estate loans originated by the Bank are performed byindependent appraisers selected by Home Federal and reviewed by Bank employees.

TheFinancial Institutions Reform, Recovery, and Enforcement Act of 1989("FIRREA") includes a provision that limits the Bank's non–residentialreal estate lending (i.e., commercial real estate lending, other than lendingon certain multi–family residences) to no more than four times its totalcapital.  This maximum limitation, whichat June 30, 2001 was $205.3 million, has not materially limited the Bank'slending practices.  See "Regulation- Regulatory Capital Requirements."

UnderFIRREA, the maximum amount which Home Federal may lend to any one borrower is15% of Home Federal's unimpaired capital and surplus or $7.9 million at June30, 2001.  Loans in an amount equal toan additional 10% of unimpaired capital and surplus may be made to the sameborrower if such loans are fully secured by readily marketable collateral.  See "Regulation" for a discussionof the Loans to One Borrower rule.  OnJune 30, 2001, the Bank had one borrower that exceeded the Loans to OneBorrower requirements, however, the Bank had prior Office of Thrift Supervision(“OTS”) approval for this specific borrower. Also on this date, the Bank had loans in excess of $1.0 million to 64borrowers or groups of affiliated borrowers.

*Construction andDevelopment Lending. *The Bank makesconstruction loans to individuals for the construction of their residences aswell as to builders and, to a lesser extent, developers for the construction ofone- to four-family residences and condominiums and the development of one–to four–family lots in the Bank's primary market area.

Constructionloans to individuals for their residences are structured to be converted topermanent loans at the end of the construction phase, which typically runs 6 to12 months.  These construction loanshave rates and terms which match the one- to four-family permanent loansoffered by the Bank.  Residentialconstruction loans are generally underwritten pursuant to the same guidelinesused for originating permanent residential loans.

TheBank also makes loans to developers for the purpose of developing one- tofour-family lots.  These loans typicallyhave terms of one year and carry interest rates which float monthly based on anational designated index such as the prime rate.  Loan commitment and partial release fees are charged.  These loans generally provide for thepayment of interest and loan fees from loan proceeds.  The principal balance of these loans is typically paid down as lotsare sold.  At June 30, 2001, the Bankhad $12.6 million of development loans.
Builderconstruction and development loans are obtained principally through continuedbusiness from developers and builders who have previously borrowed from theBank as well as broker referrals and direct solicitations of developers andbuilders.  The application processincludes a submission to the Bank of accurate plans, specifications and costsof the project to be constructed or developed. These items are used as a basis to determine the appraised value of thesubject property.  Loans are based on thelesser of current appraised value and/or the cost of construction (land plusbuilding).

TheBank makes loans for the construction of multi-family residentialproperties.  Such loans are generallymade at adjustable rates which adjust periodically based on the Treasury Bill.At June 30, 2001, all of the Bank's construction loans were performing inaccordance with their terms.

Constructionloans are generally originated with a maximum loan-to-value ratio of 80% andland development loans are generally originated with a maximum loan-to-valueratio of 60%, based upon an independent appraisal.  Because of the uncertainties inherent in estimating developmentand construction costs and the market for the project upon completion, it isrelatively difficult to evaluate accurately the total loan funds required tocomplete a project, the related loan–to–value ratios and thelikelihood of ultimate success of the project. Construction and development loans to borrowers other than owneroccupants also involve many of the same risks discussed above regarding multi–familyand commercial real estate loans and tend to be more sensitive to generaleconomic conditions than many other types of loans.

Priorto making a commitment to fund a construction loan, the Bank requires anappraisal of the property, or for larger projects, both an appraisal and astudy of the feasibility of the proposed project.  The Bank's construction loan policy provides for the inspectionof properties by independent in–house and outside inspectors at thecommencement of construction and prior to disbursement of funds during the termof the construction loan.

*Consumer Lending.*  Management considers its consumer loanproducts to be an important component of its lending strategy.  Specifically, consumer loans generally haveshorter terms to maturity and carry higher rates of interest than do one-tofour-family residential mortgage loans. In addition, management believes that the offering of consumer loanproducts helps to expand and create stronger ties to its existing customerbase, by increasing the number of customer relationships and providing cross–marketingopportunities.  For these reasons, HomeFederal has continued to focus on the origination of consumer loans.

HomeFederal currently purchases automobile conditional sales contracts fromselected dealers within its market area as well as originating automobile loansdirectly.

Loanssecured by second mortgages, together with loans secured by all prior liens,are limited to 100% or less of the appraised value of the property securing theloan and generally have maximum terms that do not exceed seven to ten years.

Thestudent loans originated by Home Federal are guaranteed as to principal andinterest by the South Dakota Education Assistance Corporation.  Upon the student nearing graduation, HomeFederal sells such student loans with servicing rights released.

Consumerloan terms vary according to the type of collateral, length of contract andcreditworthiness of the borrower.  HomeFederal offers both open– and closed–end credit.  Overdraft lending is extended through linesof credit that are tied to a negotiated order of withdrawal ("NOW")account.  The credit lines generallybear interest at 18% and are generally limited to no more than $2,000.  Loans secured by deposit accounts at theBank are currently originated for up to 90% of the account balance (althoughhistorically the Bank has loaned up to 100% of the account balance), with ahold placed on the account restricting the withdrawal of the accountbalance.  The interest rate on suchloans is typically equal to 2% above the contract rate.
Theunderwriting standards employed by the Bank for consumer loans, includingmobile home loans, include an application, a determination of the applicant'spayment history on other debts, and an assessment of the ability to meetexisting obligations and payments on the proposed loan.  Although creditworthiness of the applicantis a primary consideration, the underwriting process also includes a comparisonof the value of the security, if any, in relation to the proposed loan amount.

Consumerloans may entail greater credit risk than do residential mortgage loans,particularly in the case of consumer loans which are unsecured or are securedby rapidly depreciable assets, such as mobile homes, automobiles or boats.  In such cases, any repossessed collateralfor a defaulted consumer loan may not provide an adequate source of repaymentof the outstanding loan balance as a result of the greater likelihood ofdamage, loss or depreciation.  Inaddition, consumer loan collections are dependent on the borrower's continuingfinancial stability, and thus are more likely to be affected by adversepersonal circumstances. Furthermore, the application of various federal andstate laws, including bankruptcy and insolvency laws, may limit the amountwhich can be recovered on such loans.

*Credit CardLending.*  During fiscal year 1991, the Bank beganoffering VISA/Mastercard card credit card services on an agency basis to itscustomers. The Bank does not retain or have any credit liability related to thecredit which is extended in connection with such cards.  The Bank is paid a fee for each card issuedand receives a fee for each transaction completed on these cards.  During fiscal 1996, the Company made astrategic decision to enter the credit card business more directly and tooka51% majority position in a newly formed subsidiary, HF Card Services.  The Company became the owner of 100% of HFCard Services effective as of July 1998. The target market for credit cards in this line of business wassub-prime credit customers who have either an insufficient credit history or anegative credit history and were unable to obtain a credit card from moretraditional card issuers. Credit card processing is being provided byindependent third parties.  The Companyhad approximately $6.1 million in credit card loans at June 30, 2001.  The Company ceased processing subprimecredit card applications in March 1999.

*Commercial BusinessLending. *In order toserve the needs of the local business community and improve the interest ratesensitivity and yield of its assets, the Bank originates commercial loans tolocal businesses.  See"Management's Discussion and Analysis of Financial Condition and Results ofOperations – Asset/Liability and Risk Management.”    Home Federal's commercial business lendingactivities encompass loans with a variety of purposes and security, includingloans to finance accounts receivable, inventory, equipment and business expansionwithin the Bank's market area. Generally all of Home Federal's commercial business loans have been toborrowers in its primary lending areas. The Bank originates commercial business loans directly and throughprograms sponsored by the Small Business Administration ("SBA") ofwhich a portion of such loans are also guaranteed in part by the SBA.  The Bank generally originates commercialbusiness loans for its portfolio and retains the servicing with respect to suchloans.  In the future, Home Federal anticipatescontinued expansion of its commercial business lending, subject to marketconditions.  Interest rates oncommercial business loans adjust or float with a designated national index plusa specified margin.

Unlikeresidential mortgage loans, which generally are made on the basis of theborrower's ability to make repayment from his or her employment and otherincome, and which are secured by real property whose value tends to be moreeasily ascertainable, commercial business loans typically are made on the basisof the borrower's ability to make repayment from the cash flow of theborrower's business.  As a result, theavailability of funds for the repayment of commercial business loans may besubstantially dependent on the success of the business itself (which, in turn,is likely to be dependent upon the general economic environment).  The Bank's commercial business loans aresometimes, but not always, secured by business assets, such as accountsreceivable, equipment and inventory. However, the collateral securing the loans may depreciate over time, maybe difficult to appraise and may fluctuate in value based on the success of thebusiness.  Whenever possible, all of theBank's commercial business loans include personal guarantees.  In addition, on major loans, the loanofficer will perform an annual on site visit, obtain financial statements andperform a financial review of the loan.

*Agricultural Loans.* In order to serve the needs of the local business community and improvethe interest rate sensitivity and yield of its assets, the Bank established anagricultural lending department in fiscal year 1996.  The Bank employed experienced lenders to establish thisdepartment and to ensure a high quality portfolio.  The agricultural division offers loans to its consumers such as:(1) operating loans which are used to fund operating expenses which typicallyhave a one year term and are indexed to the national prime rate; (2) term loanson machinery, equipment and breeding stock that may have a term up to sevenyears and require annual payments; (3) agricultural farmland term loans whichare used to fund land purchases or refinances; and (4) specialized livestockloans to fund facilities and equipment for confinement enterprises; (5) ethanolplant development.  These loanstypically will have personal guarantees, a first lien on the real estate,interest rates adjustable to the national prime rate, and annual, quarterly ormonthly payments.  All loans are securedby the operating assets of the borrower.

Loancustomers are required to supply current financial statements, tax returns forthe past three to five years, and cash flow projections which are updated on anannual basis.  In addition, on majorloans, the loan officer will perform an annual farm visit, obtain financialstatements and perform a financial review of the loan.
Loan and Lease Portfolio Composition.  The following table sets forth informationconcerning the composition of the Company’s loan and lease portfolio in dollaramounts and in percentages (before deductions for loans in process, deferredfees and discounts and allowance for losses) as of the dates indicated.
 At  June 30,    2001 2000 1999 1998 1997        Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent             (Dollars  In Thousands) Real Estate Loans:                     One- to four-family$124,951 21.48%  $134,014 23.23%  $138,238 26.35%  $131,062 29.13%  $165,573 36.50% Multi-family44,378 7.63 44,793 7.76 47,283 9.01 54,560 12.12 59,971 13.22  Commercial73,720 12.67 68,556 11.88 59,061 11.26 38,002 8.44 34,252 7.55  Agricultural12,753 2.20 11,669 2.02 8,714 1.66 5,035 1.12 2,186 0.48  Construction and  development28,419 4.89 35,511 6.16 19,696 3.76 12,804 2.85 5,315 1.17             Total real estate loans284,221 48.87 294,543 51.05 272,992 52.04 241,463 53.66 267,297 58.92                                 Other Loans and Leases:                    Consumer Loans:                     Mobile home3,920 0.67 5,676 0.98 8,115 1.55 11,152 2.48 15,571 3.43  Automobiles78,082 13.42 81,092 14.06 74,255 14.16 66,044 14.67 66,483 14.66  Deposit account1,917 0.33 2,360 0.41 2,117 0.40 2,167 0.48 2,299 0.51  Student6,831 1.17 7,146 1.24 6,996 1.33 6,986 1.55 6,409 1.41  Junior liens61,397 10.56 56,243 9.75 46,556 8.87 41,599 9.24 38,736 8.54  Credit cards6,088 1.05 9,592 1.66 18,062 3.44 12,335 2.74 2,310 0.51  Other (1)10,939 1.88 11,570 2.01 12,304 2.35 15,944 3.54 20,934 4.61             Total consumer loans169,174 29.08 173,679 30.11 168,405 32.10 156,227 34.70 152,742 33.67                                 Commercial business97,362 16.74 87,137 15.10 62,315 11.88 41,068 9.13 27,534 6.07            Equipment finance leases10,509 1.81 — 0.00 — 0.00 — 0.00 — 0.00            Agricultural20,370 3.50 21,597 3.74 20,896 3.98 11,292 2.51 6,075 1.34                                  Total other loans and  leases297,415 51.13 282,413 48.95 251,616 47.96 208,587 46.34 186,351 41.08                                  Total gross loans and  leases581,636 100.00%576,956 100.00%524,608 100.00%450,050 100.00%453,648 100.00%                                Less:                     Loans in process(3,853)  (17,374)  (7,487)  (5,199)  (4,272)   Deferred fees and discounts(133)  (356)  (1,073)  (1,514)  (1,348)   Allowance for losses(6,544)  (8,475)  (11,991)  (7,199)  (4,526)                                         Total loans and leases  receivable, net$571,106   $550,751   $504,057   $436,138   $443,502                   
(1)Includes primarily second mortgage loans.
The following table shows the composition of theCompany's loan and lease portfolio by fixed- and adjustable-rate at the datesindicated.

 
 At  June 30,    2001 2000 1999 1998 1997        Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent               (Dollars  In Thousands) Fixed-Rate Loans and  Leases:                     Real Estate:                      One- to four-family$78,350 13.47%  $84,478 14.64%  $95,228 18.15%  $69,679 15.48%  $72,198 15.92% Multi-family, commercial  & construction39,752 6.83 36,552 6.34 30,954 5.90 19,729 4.38 18,463 4.07   Agricultural3,433 0.59 2,843 0.49 1,506 0.29 155 0.04 324 0.07               Total real estate loans121,535 20.89 123,873 21.47 127,688 24.34 89,563 19.90 90,985 20.06                                    Consumer (including mobile  home loans)125,955 21.66 130,770 22.67 121,814 23.22 116,409 25.87 124,054 27.35  Agricultural6,007 1.03 7,632 1.32 4,896 0.93 827 0.18 969 0.21  Equipment finance leases10,509 1.81 — 0.00 — 0.00 — 0.00 — 0.00  Commercial business25,983 4.47 25,474 4.41 16,675 3.18 9,323 2.07 8,516 1.88               Total fixed-rate loans and  leases289,989 49.86 287,749 49.87 271,073 51.67 216,122 48.02 224,524 49.50                                    Adjustable-Rate Loans:                     Real estate:                      One- to four-family46,601 8.01 49,536 8.58 43,010 8.20 61,383 13.64 93,375 20.58   Multi-family, commercial  & construction106,765 18.36 112,308 19.47 95,086 18.13 85,637 19.03 81,075 17.87   Agricultural9,320 1.60 9,558 1.66 7,209 1.37 4,878 1.08 1,862 0.41               Total real estate loans162,686 27.97 171,402 29.71 145,305 27.70 151,898 33.75 176,312 38.86                                    Consumer (including mobile  home loans)43,219 7.43 42,909 7.44 46,591 8.88 39,818 8.85 28,688 6.32  Agricultural14,363 2.47 13,233 2.29 15,999 3.05 10,467 2.33 5,106 1.13  Commercial business71,379 12.27 61,663 10.69 45,640 8.70 31,745 7.05 19,018 4.19               Total adjustable-rate loans291,647 50.14 289,207 50.13 253,535 48.33 233,928 51.98 229,124 50.50                                     Total loans and leases581,636 100.00%576,956 100.00%524,608 100.00%450,050 100.00%453,648 100.00%                                   Less:                      Loans in process(3,853)  (17,374)  (7,487)  (5,199)  (4,272)    Deferred fees and discounts(133)  (356)  (1,073)  (1,514)  (1,348)    Allowance for loan losses(6,544)  (8,475)  (11,991)  (7,199)  (4,526)                                           Total loans and leases  receivable, net$571,106   $550,751   $504,057   $436,138   $443,502                    
 

The following scheduleillustrates the scheduled principal contractual repayments of the Bank's loanportfolio at June 30, 2001.  Mortgageswhich have adjustable or renegotiable interest rates are shown as maturing inthe period during which the contract is due. The schedule does not reflect the effects of possible prepayments orenforcement of due-on-sale clauses.
 Real Estate Non-Real Estate    Due  during years ending June 30,One- to  Four- Family Multi-  Family Agricultural Commercial  (2) Consumer Credit Cards Agricultural Commercial  Business (3) Total            (Dollars  in Thousands) 2002 (1)$3,436 $2,640 $1,151 $15,078 $40,435 $6,088 $13,627 $54,967 $137,422 20033,692 2,871 1,253 16,378 41,046 — 1,914 10,024 77,178 20043,971 3,122 1,363 17,791 40,038 — 2,073 12,286 80,644 2005 and 20068,866 7,087 3,099 25,844 32,496 — 2,347 27,217 106,956 2007 to 201128,742 23,783 5,887 26,769 9,071 — 284 3,145 97,681 2012 and following76,244 4,875 — 279 — — 125 232 81,755           Total$124,951 $44,378 $12,753 $102,139 $163,086 $6,088 $20,370 $107,871 $581,636           
(1)   Includes demand loans, loans having no statedmaturity and overdraft loans.(2)   Includesconstruction loans.(3)   Includesequipment finance leases.

Thetotal amount of loans due after June 30, 2002 which have predetermined interestrates is $237.6 million, while the total amount of loans due after such datewhich have floating or adjustable interest rates is $206.6 million.

Scheduledcontractual principal repayments of loans do not reflect the actual life ofsuch assets.  The average life of loansis substantially less than their average contractual terms because ofprepayments.  In addition, due-on-saleclauses on loans generally give the Bank the right to declare a conventionalloan immediately due and payable in the event, among other things, that theborrower sells the real property subject to the mortgage and the loan is notrepaid.  The average life of mortgageloans tends to increase, however, when current mortgage loan rates aresubstantially higher than rates on existing mortgage loans and, conversely,decrease when rates on existing mortgages are substantially higher than currentmortgage loan rates.
**Nonperforming Assetsand Classified Loans**

*NonperformingAssets. *See “Asset Quality” underManagement’s Discussion and Analysis for discussion.

*ClassifiedAssets. *Federal regulations providefor the classification of loans and other assets such as debt and equitysecurities considered by the OTS to be of lesser quality as"substandard," "doubtful" or "loss." An asset isconsidered "substandard" if it is inadequately protected by the currentnet worth and paying capacity of the obligor or of the collateral pledged, ifany.  "Substandard" assetsinclude those characterized by the "distinct possibility" that thesavings association will sustain "some loss" if the deficiencies arenot corrected.  Assets classified as"doubtful" have all of the weaknesses inherent in those classified"substandard," with the added characteristic that the weaknessespresent make "collection or liquidation in full," on the basis ofcurrently existing facts, conditions, and values, "highly questionable andimprobable.”  Assets classified as"loss" are those considered "uncollectible" and of suchlittle value that their continuance as assets without the establishment of aspecific loss reserve is not warranted. Assets which do not currently expose the thrift institution tosufficient risk to warrant classification in one of the aforementionedcategories, but possess weaknesses, are required to be designated "SpecialMention" by management.

Whenthe Bank classifies problem assets as either substandard or doubtful, it mayestablish general allowances for loan losses in amounts deemed prudent bymanagement.  General allowancesrepresent loss allowances which have been established to recognize the inherentrisk associated with lending activities, but which, unlike specific allowances,have not been allocated to particular problem assets.  When a thrift institution classifies problem assets as"loss, " it is required either to establish a specific allowance forlosses equal to 100% of that portion of the asset so classified or to charge–offsuch amount.  An institution'sdetermination as to the classification of its assets and the amount of itsvaluation allowances is subject to review by the association's Regional Directorat the regional OTS office, who may order the establishment of additionalgeneral or specific loss allowances.

Inconnection with the filing of its periodic reports with the OTS and inaccordance with its classification of assets policy, the Bank regularly reviewsproblem loans in its portfolio to determine whether any loans requireclassification in accordance with applicable regulations.  On the basis of management's monthly reviewof its assets, at June 30, 2001, the Bank had criticized $13.5million of its assets (categorized as special mention – including certain loansdiscussed herein) and the Bank had classified $14.7 million as substandard(including certain loans discussed herein), and approximately $3.6 million asdoubtful.  Classified assets at June 30,2001 consisted of $5.3 million of nonaccrual loans, $610,000 accruing loansdelinquent more than 90 days and $12.3 million of other loans of concern.  See “Asset Quality” under Management’sDiscussion and Analysis for further discussion.

*Allowance for Loanand Lease Losses.* See “Asset Quality” under Management’s Discussionand Analysis for discussion.

**Mortgage-BackedSecurities**

TheBank maintains a substantial portfolio of mortgage-backed securities which itholds for investment and liquidity purposes. Such mortgage-backed securities can serve as collateral for borrowingsand, through repayments and sales, as a source of liquidity.  During fiscal year 2001, the Bank had $1.7million of maturities and repayments of $12.6 million.  The Bank had $3.1 million of purchases ofmortgage-backed securities during fiscal year 2001.  For information regarding the carrying and market values of theBank’s mortgage-backed securities portfolio, see Note 3 of "Notes toConsolidated Financial Statements.” Under the Bank's risk-based capital requirement, mortgage-backedsecurities have a risk weight of 20% (or 0% in the case of GNMA securities) incontrast to the 50% risk weight carried by residential loans.  See "Regulation."  In order to reduce its risk-based capitalrequirement, the Bank may consider securitizing a portion of its fixed-ratemortgage loan portfolio.  However,securitizing mortgage loans may result in a reduction in yield.
Thefollowing table sets forth the contractual maturities (without any prepaymentassumptions) of the Bank's mortgage-backed securities at June 30, 2001, atamortized cost.

 
 DUE  IN    6  Monthsor Less 6  Monthsto 1 Year 1  to 3Years 3  to 5Years 5  to 10Years Over  10Years Total  atJune 30, 2001          (Dollars in Thousands) Fixed-Rate:              Federal Home Loan Mortgage Corporation$— $— $1,423 $3,391 $1,402 $3,064 $9,280 Federal National Mortgage Association— — 1,396 1,932 — — 3,328 Government National Mortgage Association— — --- — — 26,318 26,318 Other triple A rated mortage-backed securities— — — — — 758 758         Total Fixed-Rate--- --- 2,819 5,323 1,402 30,140 39,684                        Variable-Rate:              Government National Mortgage Association— — — — — 167 167 Real Estate Mortgage Investment Conduit— — — — — 3,367 3,367 Federal Home Loan Mortgage Corporation— — — — — 265 265         Total Variable-Rate— — — — — 3,799 3,799                        Total$— $— $2,819 $5,323 $1,402 $33,939 $43,483         
Basedon historical experience, Home Federal believes that its mortgage-backedsecurities will be prepaid significantly in advance of the date of maturity asreflected in the table above.  Forinformation regarding prepayment assumptions, see "Management's Discussionand Analysis of Financial Condition and Results of Operations andAsset/Liability and Risk Management.”
**InvestmentActivities**

HomeFederal is required under OTS regulation to maintain minimum levels of investments that qualify as liquid assets.  Liquidity may increase or decrease dependingupon the availability of funds and comparative yields on investments inrelation to the return on loans. Historically, the Bank has maintained its liquid assets above theminimum requirements imposed by the OTS regulations and at a level believed bymanagement adequate to meet requirements of normal daily activities, repaymentof maturing debt and potential deposit outflows.  As of June 30, 2001, the Bank's liquidity ratio (liquidassets as a percentage of net withdrawable savings deposits and currentborrowings) was 14.3%. See "Regulation – Liquidity."

Federallychartered savings institutions have the authority to invest in various types ofliquid assets, including United States Treasury obligations, securities ofvarious federal agencies, certain certificates of deposit of insured banks andsavings institutions, certain bankers’ acceptances, repurchase agreements andfederal funds.  Subject to variousrestrictions, federally chartered savings institutions may also invest theirassets in commercial paper, investment grade corporate debt securities andmutual funds whose assets conform to the investments that a federally charteredsavings institution is otherwise authorized to make directly.

Generally,the investment policy of the Bank is to invest funds among various categoriesof investments and maturities based upon the Bank's asset/liability managementpolicies, investment quality and marketability, liquidity needs and performanceobjectives.

AtJune 30, 2001, the Company had $60.0 million in interest–bearingdeposits, and the amortized cost of investments in mortgage-backed securitiestotaled $43.4 million, or 5.5% of its total assets. As of such date, the Bankalso had a $6.3 million investment in the stock of the FHLB of Des Moines inorder to satisfy the FHLB of Des Moines' requirement for membership.  It is the Bank's general policy to purchaseinvestment securities which are U.S. Government securities and federal agencyobligations and other issues rated investment grade.
The following table sets forth the composition of theCompany's investment portfolio, excluding mortgage-backed securities, at thedates indicated.

 
 June 30,    2001 2000 1999      Amortized  Cost % ofTotal Amortized  Cost % ofTotal Amortized  Cost % of  Total         (Dollar  in Thousands)              Interest-bearing deposits$60,000 54.70%  $5,000 7.47%  $2,000 3.13%       Investment securities:             U.S. government obligations— 0.00 — 0.00 4,099 6.41  Federal agency obligations18,236 16.62 23,961 35.81 28,465 44.56  Federal Home Loan Bank debt securities21,708 19.79 28,728 42.93 20,748 32.48  FNMA common stock8 0.01 8 0.01 8 0.01  Federal Agricultural Mortgage common stock7 0.01 7 0.01 7 0.01  Tax exempt bonds3,400 3.10 3,086 4.61 3,297 5.16         Subtotal43,359 39.53 55,790 83.37 56,624 88.63                     FHLB stock6,332 5.77 6,130 9.16 5,263 8.24                      Total investment portfolio$109,691 100.00%$66,920 100.00%$63,887 100.00%                    Average remaining life or term to repricing on  investment securities, excluding FHLB stock, FNMA common stock and Federal  Agricultural Mortgage common stock  0.69  years   2.83  years   1.13  years 
 

             The composition and maturities ofthe investment securities portfolio, excluding equity securities andmortgage-backed securities, are indicated in the following table.
 At  June 30, 2001    Less  than 1  YearAmortized  Cost 1  to 5YearsAmortized  Cost 5  to 10YearsAmortized  Cost Over  10  YearsAmortized  Cost Total  InvestmentSecurities            Amortized  Cost Fair Value         (Dollars in Thousands)              Federal agency obligations$5,250 $23,712 $10,982 $— $39,944 $40,162 Tax exempt bonds387 2,598 195 220 3,400 3,457        Total investment securities$5,637 $26,310 $11,177 $220 $43,344 $43,619                     Weighted average yield5.86%5.81%6.07%6.50%5.89%          
TheCompany's investment securities portfolio at June 30, 2001 did not containsecurities in excess of 10% of the Company's stockholders’ equity, excludingthose issued by the United States Government or its agencies.  The Company's investment securitiesportfolio also did not contain non–investment grade or other corporatedebt securities (i.e., "junk bonds").  In addition, the Company does not invest in derivatives asdefined by the Financial Accounting Standards Board.

HomeFederal's investment security portfolio is managed in accordance with a writteninvestment policy adopted by the Board of Directors.  Investments may be made by the Bank’s officers within specifiedlimits and approved in advance by the Board of Directors for transactions overthese limits.  At the present time, theBank does not have any investments that are held for trading purposes.  At June 30, 2001, the Company has $50.0million of securities available for sale, including FHLB stock of $6.3million.  See Note 3 of "Notes toConsolidated Financial Statements.”

**Sources of Funds**

*General. *The Bank's primary sourcesof funds are deposits, amortization and repayments of loan principal (includingmortgage–backed securities), and, to a lesser extent, sales of mortgageloans, sales or maturities of investment securities, mortgage-backedsecurities, and short term investments.

Borrowings,presently all from the FHLB of Des Moines, may be used on a short–termbasis to compensate for seasonal reductions in deposits or deposit inflows atless than projected levels, and may be used on a longer–term basis tosupport expanded lending activities. The Bank in recent years has not relied on outside borrowings other thanFHLB borrowings.  The availability offunds from loan sales is influenced by general interest rates.  See Note 8 of the “Notes to ConsolidatedFinancial Statements” for further detail of the Company’s borrowings.

*Deposits. *The Bank offers a varietyof deposit accounts having a wide range of interest rates and terms.  The Bank's deposits consist of statementsavings accounts, NOW and checking accounts, money market and certificateaccounts ranging in terms from 30 days to five years.  The Bank's deposit products also include IRA certificates andKeogh plan retirement certificates.  TheBank only solicits deposits from its market area and does not use brokers toobtain deposits.  The Bank reliesprimarily on competitive pricing policies, advertising, and customer service toattract and retain these deposits.

Theflow of deposits is influenced significantly by general economic conditions,changes in money market and prevailing interest rates and competition.

Thevariety of deposit accounts offered by the Bank has allowed it to becompetitive in obtaining funds and to respond with flexibility to changes inconsumer demand.  In recent years, theBank has become more susceptible to short–term fluctuations in depositflows as customers have become more interest rate conscious.  The Bank manages the pricing of its depositsin keeping with its asset/liability management and profitabilityobjectives.  Based on its experience,the Bank believes that its statement savings, money market, NOW and checkingaccounts are stable sources of deposits. However, the ability of the Bank to attract and maintain certificates ofdeposit, and the rates paid on these deposits, has been and will continue to besignificantly affected by market conditions.
Thefollowing table sets forth the dollar amount of deposits in the various typesof deposit accounts offered by the Company as of the dates indicated.

 
 At June  30,    2001 2000 1999      Amount Percent ofTotal Amount Percent ofTotal Amount Percent  ofTotal         (Dollars  in Thousands) Transaction Accounts:            Savings accounts weighted average rates of 2.81%,  4.33% and 3.58% at June 30, 2001, 2000 and 1999$49,852 8.29%$54,492 9.99%$68,173 13.35%NOW accounts weighted average rates of 1.39%, 1.95%  and 1.71% at June 30, 2001, 2000 and 199933,165 5.52 31,838 5.84 29,327 5.74 Noninterest bearing accounts55,003 9.15 46,255 8.48 44,542 8.72 Money market accounts weighted average rates of  3.63%, 5.50% and 4.21% at June 30, 2001, 2000 and 1999139,467 23.20 113,334 20.77 78,961 15.46                     Total transaction accounts277,487 46.16 245,919 45.08 221,003 43.27                     Certificates of Deposit:                          0.00 - 3.99%5,077 0.85 2 0.00 88 0.02  4.00 - 4.99%58,086 9.66 11,115 2.04 91,472 17.91  5.00 - 5.99%85,687 14.25 145,834 26.73 133,061 26.05  6.00 - 6.99%121,228 20.16 135,453 24.83 59,981 11.74  7.00 - 7.99%53,642 8.92 6,971 1.28 4,789 0.94  8.00 - 8.99%— 0.00 86 0.02 336 0.07  9.00% and greater— 0.00 117 0.02 — 0.00                     Total certificates of deposit323,720 53.84 299,578 54.92 289,727 56.73        Total deposits$601,207 100.00%$545,497 100.00%$510,730 100.00%       
 

Thefollowing table sets forth the amount of the Company's certificates of depositand other deposits by time remaining until maturity as of June 30, 2001.

 
 Maturity    3  Months  or Less 3  to 6  Months 6  to 12  Months Over  12 Months Total        (Dollars  in Thousands)            Certificates of  deposit less than $100,000$43,263 $64,107 $71,506 $78,046 $256,922            Certificates of  deposit of $100,000 or more9,458 12,465 10,526 15,180 47,629            Public funds(1)9,824 4,551 2,916 1,878 19,169                  Total certificates of  deposit $62,545 $81,123 $84,948 $95,104 $323,720       
(1)         Includes certificates of deposit of$100,000 or more from governmental and other public entities.

TheBank solicits certificates of deposit of $100,000 or greater ("jumbocertificates") from various state, county and local government units whichcarry rates which are negotiated at the time of deposit.  See Note 7 of "Notes toConsolidated Financial Statements.” Deposits at June 30, 2001 and 2000 include $37.1 million and $45.2million, respectively of deposits from one local governmental entity, themajority of which are demand accounts.

*Borrowings.*  Although deposits are the Bank's primarysource of funds, the Bank's policy has been to utilize borrowings when they area less costly source of funds or can be invested at a positive rate of return.

The Bank’s borrowings consist primarily of advances fromthe FHLB of Des Moines upon the security of its capital stock of the FHLB ofDes Moines and certain of its mortgage loans and mortgage–backedsecurities.  Such advances can be madepursuant to several different credit programs, each of which has its owninterest rate and range of maturities. At June 30, 2001, the Bank's FHLB advances totaled $100.7 million,representing 13.8% of total liabilities. See Note 8 of  “Notes toConsolidated Financial Statements” for further detail of the Company’sborrowings.
Thefollowing table sets forth the maximum month-end balances and average balancesof FHLB advances and other borrowings at the dates indicated.

 
 Years Ended June 30,    2001 2000 1999      (Dollars  in Thousands) Maximum Balance:      FHLB advances$118,631 $120,624 $90,260 Other borrowings10,623 1,762 1,535        Average Balance:      FHLB advances$105,207 $107,574 $77,078 Other borrowings7,234 1,739 1,292 
 

Thefollowing table sets forth certain information as to the Bank's FHLB advancesand other borrowings of the Company at the dates indicated.

 
 June 30,    2001 2000 1999      (Dollars in Thousands)        FHLB advances$100,714 $111,528 $80,078 Other borrowings7,662 1,492 1,535     Total borrowings$108,376 $113,020 $81,613            Weighted average  interest rate of FHLB advances5.69%5.74%5.30%
 

**SubsidiaryActivities**

As afederally chartered thrift institution, Home Federal is permitted by OTSregulations to invest up to 2% of its assets, or $15.7 million at June 30,2001, in the stock of, or loans to, service corporation subsidiaries.  As of such date, the net book value of HomeFederal's investment in and loans to its service corporations was approximately$344,000.  Home Federal may invest anadditional 1% of its assets in service corporations where such additional fundsare used for inner–city or community development purposes.  In addition to investments in servicecorporations, federal associations are permitted to invest an unlimited amountin operating subsidiaries engaged solely in activities which a federalassociation may engage in directly.

HomeFederal has three subsidiary corporations, Hometown Insurors, Inc.("Hometown"), Mid–America Service Corporation ("Mid–America")and PMD, Inc. ("PMD").

Hometown,located in Sioux Falls, South Dakota, provides a full line of insuranceproducts to customers of Home Federal and members of the general public in HomeFederal's market area.  Insuranceproducts offered by Hometown include annuities and life, health, homeowners,and auto insurance and, to a lesser extent, certain commercial-relatedinsurance products.  Home Federal had aninvestment in Hometown of $206,000 at June 30, 2001.  Hometown had a loss before tax of $187,000for the 2001 fiscal year.  During fiscalyear 2001, Home Federal infused capital of $225,000 into Hometown.

Mid-Americais an appraisal company located in Sioux Falls, South Dakota, that providesresidential appraisal services to Home Federal and other lenders in the Bank'smarket area.  At June 30, 2001, the Bankhad a $137,000 investment in Mid–America.  Mid–America had income before tax of $26,000 for the 2001fiscal year.

PMD,located in Sioux Falls, South Dakota, is engaged in the business of buying,selling and managing repossessed real estate properties.  At June 30, 2001, the Bank had a $1,000investment in PMD.  PMD had no activityduring fiscal year 2001.
InMay, 1996 the Company formed a Limited Liability Company named HF Card ServicesL.L.C. (“HF Card Services”) and became the owner of 51% of the membershipinterest of this entity.  The Companybecame the owner of 100% of HF Card Services effective as of July 1998.  HF Card Services was established to providesecured, partially-secured and unsecured credit cards nationwide.  At June 30, 2001, the Company had a negativeinvestment in HF Card Services of $7.6 million.  HF Card Services had a net loss before taxes of $675,000 for the2001 fiscal year.  Based upon lack ofperformance, the Company ceased processing subprime credit card applications inMarch 1999.

HomeFirstMortgage Corp. is a South Dakota Corporation which had an office in Omaha,Nebraska.  The Mortgage Corp. was amortgage banking operation that originated one- to four- family residentialloans which were sold into the secondary market.  At June 30, 2001, the Company had a $3.0 million investment inthe Mortgage Corp.  The Mortgage Corp.had  income before tax of $81,000 forfiscal 2001 and  no activity duringfiscal 2000.

The Mortgage Corp. resumedactivity in August 2000 through the acquisition of Mid America Leasing., acompany specializing in equipment finance leasing.  This acquisition expands the Company’s servicing options forcommercial and municipal customers.  TheMortgage Corp. had in investment in Mid America Leasing of $2.3 million.  Mid America Leasing had income before tax of$177,000 for the 2001 fiscal year.

**Competition**

HomeFederal faces strong competition, both in originating real estate and otherloans and in attracting deposits. Competition in originating real estate loanscomes primarily from other commercial banks, credit unions and mortgage bankersmaking loans secured by real estate located in the Bank's market areas.Commercial banks and finance companies provide vigorous competition in consumerlending.  The Bank competes for realestate and other loans principally on the basis of the quality of services itprovides to borrowers, interest rates and loan fees it charges and the types ofloans it originates.

TheBank attracts all of its deposits through its retail banking offices, primarilyfrom the communities in which those retail banking offices are located;therefore, competition for those deposits is principally from other commercialbanks and credit unions located in the same communities.  The Bank competes for these deposits byoffering a variety of deposit accounts at competitive rates, convenientbusiness hours, and convenient branch locations with interbranch deposit andwithdrawal privileges at each.  Thereare approximately 26 financial institutions which compete for deposits inMinnehaha County.  According toinformation contained in reports prepared by the FDIC, the Bank is the thirdlargest financial institution based on total deposits in Minnehaha County,excluding Citibank.  Management estimatesthat its deposit market share in Minnehaha County, where the majority of itsdeposits are located, is approximately 10%, excluding Citibank.

**Employees**

AtJune 30, 2001, the Bank had a total of 337 employees including 25 employees ofthe Bank's service corporations.  MidAmerica Leasing had a total of 5 employees not included in the Bank’s total.

TheBank's employees are not represented by any collective bargaining group.  Management considers its relations with itsemployees to be good.

**Regulation**

*General.* The Bank is a federally chartered thriftinstitution, the deposits of which are federally insured and backed by the fullfaith and credit of the United States Government.  Accordingly, the Bank is subject to broad federal regulation andoversight extending to all its operations. The Bank is a member of the FHLB of Des Moines and is subject to certainlimited regulation by the Federal Reserve Board.  As the savings and loan holding company of the Bank, the Companyalso is subject to federal regulation and oversight.  The purpose of the regulation of the Company and other holdingcompanies is to protect subsidiary savings associations where deposits arefederally insured.

TheBank is a member of the Savings Association Insurance Fund (the"SAIF") and the deposits of the Bank are insured by the FDIC. Certainof these regulatory requirements and restrictions are discussed below orelsewhere in this document.  Thefollowing discussion is intended to be a summary of the material statutes,regulations and policies applicable to savings associations and their holdingcompanies, and it does not purport to be a comprehensive discussion of suchstatutes, regulations and policies.
*Regulation ofFederal Savings Associations.*  As an office of the Department of the Treasury, the OTS hasextensive authority over the operations of federal savings associations, suchas the Bank.  Pursuant to thisauthority, the Bank is required to file periodic reports with the OTS and issubject to periodic examinations by the OTS and the FDIC.  The last examination of the Bank by the OTSconcluded on December 27, 2000. Examiners may require a federal savingsassociation to provide for higher general or specific loan loss–reserves.

*Assessments.*  The OTS has established a schedule for theassessment of fees upon all savings associations to fund the operations of theOTS. A schedule of fees has also been established for the various types ofapplications and filings made by savings associations with the OTS.  In addition, the general assessment, paid ona semi–annual basis, is computed based upon the savings association'stotal assets, includ­ing consolidated subsidiaries, as reported in theassociation's latest quarterly thrift financial report.  Savings associations (unlike the Bank) thatare classified as “troubled” are required to pay a 50% premium over thestandard assessment. The Bank's OTS assessment (standard assessment) for thefiscal year ended June 30, 2001 was approximately $137,000.

TheOTS has proposed amendments to its regulations that are intended to assesssavings associations on a more equitable basis.  The proposed regulations would base the assessment for anindividual savings association on three components:  the size of the association, on which the basic assessment wouldbe based; the association’s supervisory condition, which would result inpercentage increases for any savings institution with a composite rating of 3,4 or 5 in its most recent safety and soundness examination; and the complexityof the association’s operations, which would result in percentage increases fora savings association that managed over $1 billion in trust assets, servicedfor others loans aggregating more than $1 billion, or had certain off-balancesheet assets aggregating more than $1 billion. In order to avoid a disproportionate impact on the smaller savingsinstitutions, the OTS is proposing to permit the portion of the assessmentbased on assets size either under the current regulations or under the amendedregulations.  Management believes that,assuming the proposed regulations are adopted as proposed, any change in itsrate of OTS assessments will not be material.

*Enforcement.* Under the Federal Deposit Insurance Act (the “FDI Act”), the OTS hasprimary enforcement responsibility over savings associations and has theauthority to bring enforcement action against all “institution-affiliatedparties,” including any controlling stockholder or any stockholder, attorney,appraiser or accountant who knowingly or recklessly participates in anyviolation of applicable law or regulation or breach of fiduciary duty orcertain other wrongful actions that causes or is likely to cause a more than aminimal loss or other significant adverse effect on an insured savingsassociation.  Civil penalties cover awide range of violations and actions and range from $5,000 for each day duringwhich violations of law, regulations, orders, and certain written agreementsand conditions continue, up to $1 million per day for such violations if theperson obtained a substantial pecuniary gain as a result of such violation orknowingly or recklessly caused a substantial loss to the institution.  Criminal penalties for certain financialinstitution crimes include fines of up to $1 million and imprisonment for up to30 years.  In addition, regulators havesubstantial discretion to take enforcement action against an institution thatfails to comply with its regulatory requirements, particularly with respect toits capital requirements.  Possibleenforcement actions range from the imposition of a capital plan and capitaldirective to receivership, conservatorship, or the termination of depositinsurance.  Under the FDI Act, the FDIChas the authority to recommend to the Director of OTS that enforcement actionbe taken with respect to a particular savings association.  If action is not taken by the Director ofthe OTS, the FDIC has authority to take such action under certaincircumstances.

*BusinessActivities.*  The Bank derives its lending and investmentpowers from the Home Owners’ Loan Act, as amended (the “HOLA”), and theregulations of the OTS thereunder. Under these laws and regulations, the Bank may invest in mortgage loanssecured by residential and commercial real estate, commercial and consumerloans, certain types of debt securities and certain other assets.  The Bank may also establish servicecorporations that may engage in activities not otherwise permissible for theBank, including certain real estate equity investments and securities andinsurance brokerage.  These investmentpowers are subject to various limitations, including (a) a prohibition againstthe acquisition of any corporate debt security that is not rated in one of thefour highest rating categories; (b) a limit of 400% of an association’s capitalon the aggregate amount of loans secured by non-residential real estateproperty; (c) a limit of 20% of an association’s assets on the aggregate amountof commercial loans, with the amount of commercial loans in excess of 10% ofassets being limited to small business loans; (d) a limit of 35% of anassociation’s assets on the aggregate amount of consumer loans and acquisitionsof certain debt securities; (e) a limit of 5% of assets on non-conforming loans(loans in excess of the specific limitations of the HOLA); and (f) a limit ofthe greater of 5% of assets or an association’s capital on certain constructionloans made for the purpose of financing what is or is expected to becomeresidential property.
Underthe HOLA, savings associations are generally subject to the same limits onLoans to One Borrower as are imposed on national banks.  Generally, under these limits, a savingsassociation may not make a loan or extend credit to a single or related groupof borrowers in excess of 15% of the association’s unimpaired capital andsurplus.  Additional amounts may belent, not in excess of 10% of unimpaired capital and surplus, if such loans orextensions of credit are fully secured by readily-marketable collateral.  Such collateral is defined to includecertain debt and equity securities and bullion, but generally does not includereal estate.  At June 30, 2001, theBank's lending limit under this restriction was $7.9 million.  In addition, the Bank may provide purchasemoney financing for the sale of any asset without regard to the Loans to OneBorrower limitation so long as no new funds are advanced and the Bank is notplaced in a more detrimental position than if it had held the asset.  Home Federal is in compliance with the loans–to–one-­borrowerlimitation.

*Safety andSoundness Standards. *Pursuant tothe FDI Act, as amended by FDICIA and the Riegle Community Development andRegulatory Improvement Act of 1994 (the “Community Development Act”), the OTSand the federal bank regulatory agencies have adopted, effective August 9,1995, a set of guidelines prescribing safety and soundness standards pursuantto FDICIA, as amended.  The guidelinesestablish general standards relating to internal controls and informationsystems, internal audit systems, loan documentation, credit underwriting,interest rate exposure, asset growth, asset quality, earnings, andcompensation, fees and benefits.  Ingeneral, the guidelines require, among other things, appropriate systems andpractices to identify and manage the risks and exposures specified in theguidelines.  The guidelines prohibitexcessive compensation as an unsafe and unsound practice and describecompensation as excessive when the amounts paid are unreasonable ordisproportionate to the services performed by an executive officer, employee,director or principal stockholder.  Inaddition, the OTS adopted regulations that authorize, but do not require, theOTS to order an institution that has been given notice by the OTS that it is notsatisfying any of such safety and soundness standards to submit a complianceplan.  If, after being so notified, aninstitution fails to submit an acceptable compliance plan or fails in anymaterial respect to implement an accepted compliance plan, the OTS must issuean order directing action to correct the deficiency and may issue an orderdirecting other actions of the types to which an undercapitalized associationis subject under the “prompt corrective action” provisions of FDICIA.  If an institution fails to comply with suchan order, the OTS may seek to enforce such order in judicial proceedings and toimpose civil money penalties.

*AccountingStandards.* TheFinancial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”)requires the OTS to establish accounting standards to be applicable to allsavings associations for purposes of complying with regulations, except to theextent otherwise specified in the capital standards.  Such standards must incorporate generally accepted accountingstandards to the same degree as is prescribed by federal banking agencies forbanks, or may be more stringent than such requirements.

*Insurance ofAccounts and Regulation by the FDIC. *The Bank is amember of the SAIF, which is administered by the FDIC. Savings deposits areinsured up to $100,000 per insured member (as defined by law and regulation) bythe FDIC and such insurance is backed by the full faith and credit of theUnited States Government.  As insurer,the FDIC imposes deposit insurance premiums and is authorized to conductexaminations of and to require reporting by FDIC–insuredinstitutions.  It also may prohibit anyFDIC–insured institution from engaging in any activity the FDICdetermines by regulation or order to pose a serious risk to the FDIC.  The FDIC also has the authority to initiateenforcement actions against savings associations, after giving the OTS anopportunity to take such action, and may terminate the deposit insurance if itdetermines that the institution has engaged or is engaging in unsafe or unsoundpractices, or is in an unsafe or unsound condition.
OnSeptember 30, 1996, Congress passed and President Clinton signed into law TheDeposit Insurance Funds Act of 1996 (“Funds Act”) to resolve the depositinsurance premium disparity.  The FundsAct also included extensive regulatory relief for banks and thrifts. The FundsAct included a one–time special assessment on SAIF deposits to be imposedto bring the fund's reserve ratio to the statutory required 1.25 percent.  The assessment rate was 65.7 basis points ondeposits as of March 31, 1995 resulting in an assessment of $2.6 million on theBank’s deposits as recorded of March 31, 1995 which was paid on November 29,1996.  In addition, the Funds Actincludes the following items which affect SAIF members:  (1) Pro–rata sharing of the FinancingCorporation ("FICO") obligation among Bank Insurance Fund("BIF”) and SAIF members began January 1, 2000.  From 1997 through 1999, partial sharing occurred, with SAIFdeposits assessed 6.44 basis points and BIF deposits 1.29 basis points  (2) The FDIC is prohibited from setting thesemi-annual assessment at a rate in excess of that needed to maintain or meetthe required reserve ratio.  Until thefunds are merged, the FDIC is permitted to rebate or credit excess premiums toBIF members only  (3) For a three–yearperiod, the banking regulators are authorized to prevent SAIF insuredinstitutions from "facilitating or encouraging" customers to shifttheir deposits to BIF–insured affiliates for the purpose of evading theSAIF premium  and (4) Pro–rataFICO sharing began and the ban on deposit shifting ended on January 1,2000.  As a result of these changes inthe Funds Act, the Bank’s deposit assessment was decreased.

FDICIAalso authorizes the FDIC to implement a risk–based deposit insuranceassessment system.  Pursuant to thisrequirement, the FDIC adopted a transitional risk–based assessmentsystem, effective January 1, 1993, under which all insured depositoryinstitutions are placed into one of nine categories and assessed insurance premiums,ranging from .23% to .31% of deposits, based upon their level of capital andsupervisory evaluation.  The permanentsystem, adopted in June 1993 and effective January 1, 1994, continues the riskclassification system established under the transitional rule.  Under this system, institutions classifiedas well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier1 or core capital to risk–weighted assets ("Tier 1 risk–basedcapital") of at least 6% and a risk–based capital ratio of at least10%) and considered healthy would pay the lowest premium while institutionsthat are less than adequately capitalized (i.e., core and Tier 1 risk–basedcapital ratios of less than 4% or a risk–based capital ratio of less than8%) and considered of substantial supervisory concern would pay the highestpremium.  Assessments currently rangefrom 0.0% of deposits for institutions in the highest category to 0.27% ofdeposits for institutions in the lowest category.  Risk classification of all insured institutions will be made bythe FDIC for each semi–annual assessment period.

Thefinancing corporations created by FIRREA and the Competitive Equality BankingAct of 1987 are also empowered to assess premiums on savings associations tohelp fund the liquidation or sale of troubled savings associations.  Such premiums cannot, however, exceed theamount of SAIF assessments and are paid in lieu thereof.

TheFDIC has adopted regulations that generally prohibit payments to directors,officers and employees contingent upon termination of their affiliation with anFDIC–insured institution or its holding company (i.e., "goldenparachute payments") if the payment is received after or in contemplationof, among other things, insolvency, or a determination that the institution orholding company is in "troubled condition.”  Certain types of employee benefit plans are not subject to theprohibition.  The regulations would alsogenerally prohibit certain indemnification payments for civil money penaltiesor other enforcement action.

*Regulatory CapitalRequirements. *Federallyinsured savings associations, such as the Bank, are required to maintain aminimum level of regulatory capital. The OTS has established capital standards, including a tangible capitalrequirement, a leverage ratio (or core capital) requirement and a risk–basedcapital requirement applicable to such savings associations.  These capital requirements must be generallyas stringent as the comparable capital requirements for national banks.  The OTS is also authorized to impose capitalrequirements in excess of these standards on individual associations on a case–by–casebasis.

Thecapital regulations require tangible capital not less than 1.5% of adjustedtotal assets (as defined by regulation). Tangible capital generally includes common stockholders' equity andretained income, and certain noncumulative perpetual preferred stock andrelated earnings on withdrawable accounts and deposits that qualify as corecapital.  In addition, all intangibleassets, other than a limited amount of purchased mortgage servicing rights andother categories must be deducted from tangible capital.  At June 30, 2001, Home Federal had $2.8million of unamortized loan servicing rights, none of which were required to bededucted from tangible capital.

TheOTS regulations establish special capitalization requirements for savingsassociations that own subsidiaries. Under these regulations certain subsidiaries are consolidated forcapital purposes and others are excluded from assets and capital.  In determining compliance with the capitalrequirements, all subsidiaries engaged solely in activities permissible fornational banks or engaged in certain other activities solely as agent for itscustomers such as mortgage banking activities are “includable” subsidiariesthat are consolidated for capital purposes in proportion to the association'slevel of ownership, including the assets of includable subsidiaries in whichthe association has a minority interest that is not consolidated for GAAPpurposes.  All subsidiaries of the Bankare includable subsidiaries.
AtJune 30, 2001, the Bank had Tier I (Core) capital equal to $45.9 million, or5.96% of adjusted total assets, which is $30.8 million above the minimumleverage ratio requirement of 4% as in effect on that date.

Thecapital standards also require core capital equal to at least 4% of adjustedtotal assets (as defined by regulation). Core capital generally consists of tangible capital plus certainintangible assets, and up to 25% of other intangibles which meet certainseparate salability and market valuation tests.  At June 30, 2001, the Bank had $4.7 million in intangible assetswhich were subject to these tests.  Theamount of servicing rights includable as core capital is limited to 50% of suchcapital.

EffectiveDecember 31, 1990, national banks were required to maintain a ratio of corecapital to adjusted total assets not less than 3%.  Only those national banks that receive a composite rating of one(the highest rating) under the "CAMELS" rating system for commercialbanks and that, in general, are considered strong banking organizations willqualify for the 3% requirement.  Allother national banks must maintain a core capital ratio of 3% plus anadditional 100 to 200 basis points that would be established on a case–by–casebasis.  As required by federal law, theOTS has proposed a rule revising its minimum core capital requirement to be noless stringent than that imposed on national banks.  The OTS has proposed that only those savings associations rated acomposite one (the highest rating) under the MACRO rating system for savingsassociations will be permitted to operate at or near the regulatory minimumleverage ratio of 3%. All other savings associations will be required to maintaina minimum leverage ratio of 3% plus at least an additional 100 to 200 basispoints.  The OTS will assess eachindividual savings association through the supervisory process on a case–by–casebasis to determine the applicable requirement. No assurance can be given as tothe final form of any such regulation, the date of its effectiveness or therequirement applicable to the Bank.

TheOTS risk–based capital requirement requires savings associations to havetotal capital of at least 8% of risk–weighted assets.  Total capital consists of core capital, asdefined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capitalinstruments that do not qualify as core capital and general valuation loan andlease loss allowances up to a maximum of 1.25% of risk–weightedassets.  Supplementary capital may beused to satisfy the risk–based requirement only to the extent of corecapital up to 100% of core capital.  AtJune 30, 2001, Home Federal had no capital instruments that qualified assupplementary capital and $6.4 million of general loss reserves, which was notin excess of 1.25% of risk–weighted assets.

Certainexclusions from capital and assets are required to be made for the purpose ofcalculating total capital, in addition to the adjustments required forcalculating core capital.  Suchexclusions consist of equity investments (as defined by regulation) and thatportion of land loans and nonresidential construction loans in excess of an 80%loan–to–value ratio and reciprocal holdings of qualifying capitalinstruments.  Home Federal had no suchexclusions from capital and assets at June 30, 2001.

Indetermining the amount of risk–weighted assets, all assets, includingcertain off–balance sheet items, will be multiplied by the appropriaterisk weight based on the risks inherent in the type of assets.  The risk weights assigned by the OTS forprincipal categories of assets are (i) 0% for cash and securities issued by theU.S. Government or unconditionally backed by the full faith and credit of theU.S. Government, (ii) 20% for securities (other than equity securities) issuedby U.S. Government sponsored agencies, high quality mortgage-backedsecurities  and mortgage–backedsecurities issued by, or fully guaranteed as to principal and interest by, theFNMA or the FHLMC except for those classes with residual characteristics orstripped mortgaged–related securities, (iii) 50% for prudentlyunderwritten permanent one– to four–family first lien mortgageloans not more than 90 days delinquent and having a loan–to–valueratio of not more than 80% at origination unless insured to such ratio by aninsurer approved by FNMA or FHLMC, and (iv) 100% for all other loans andinvestments, including consumer loans, commercial loans, repossessed and loansmore than 90 days past due.

OnJune 30, 2001, the Bank had total risk based capital of $52.3 million(including $45.9 million in core capital and $6.4 million in qualifyingsupplementary capital) and risk–weighted assets of $526.9 million (including$1.3 million in converted off–balance sheet assets), or total capital of9.93% of risk–weighted assets. This amount was $10.2 million above the 8.0% requirement in effect onthat date.
Thefollowing table sets forth Home Federal's compliance with its capitalrequirements at June 30, 2001.

 
 Amount(2) Percent  of Applicable Assets(1)     (Dollars  in Thousands)   ** ** ** **GAAP capital$51,333 6.62%     ** ** ** **Tier I (Core) capital$45,891 5.96%Required(3)30,784 4.00    Excess over  requirement$15,107 1.96%        Risk based capital(4)$52,319 9.93%Required42,156 8.00    Excess over requirement$10,163 1.93%   (1)Tier I (Core) capital figures are  determined as a percentage of total adjusted assets; risk–based capital  figures are determined as a percentage of risk-weighted assets.  (2)The Bank's investment in its  subsidiaries is included for purposes of calculating regulatory capital.  (3)The OTS is expected to adopt a core  capital requirement for savings associations comparable to the requirement  for national banks that became effective December 31, 1990.  The OTS core capital requirement is  anticipated to be at least 3% of total adjusted assets for thrifts that  receive the highest supervisory rating for safety and–soundness, with a  4% to 5% core capital requirement for all other thrifts.  No prediction can be made as to the exact  nature of any new OTS core capital regulation, or the date of its  effectiveness, and the core capital requirement to be applicable to the Bank  under such regulation.  (4)Includes qualifying supplementary  capital of $6.4 million.
UnderFDICIA all the Federal banking agencies, including the OTS, must revise theirrisk–based capital requirements to ensure that such requirements accountfor interest rate risk, concentration of credit risk and the risks of non–traditionalactivities, and that they reflect the actual performance of and expected losson multi–family loans.

TheOTS has adopted a final rule which requires every savings association with morethan normal interest rate risk to deduct from total capital an amount equal to50% of its interest–rate risk exposure multiplied by the market value ofits assets.  This exposure is a measureof the potential decline in the market value of portfolio equity of a savingsassociation greater than 2%, based upon a hypothetical 200 basis point increaseor decrease in interest rates (whichever results in a greater decline)affecting on– and off–balance sheet assets and liabilities.  Given Home Federal's capital position, thisrule is not expected to have a material impact on its financial condition or resultsof operations.  The OTS has delayedimplementation of this Rule as of June 30, 2001.

Pursuantto FDICIA, the Federal banking agencies, including the OTS, have also proposedregulations authorizing the agencies to require a depository institution to maintainadditional total capital to account for concentration of credit risk and therisk of non–traditional activities. No assurance can be given as to the final form of any such regulation.

*Prompt CorrectiveAction Standards. *The OTS andthe FDIC are authorized and, under certain circumstances, required to takecertain actions against any association that fails to meet its capitalrequirements. The OTS is generally required to take action to restrict theactivities of an "undercapitalized association" (generally defined tobe one with less than either a 4% core ratio, a Tier 1 risked–basedcapital ratio or an 8% risk-based capital ratio).  Any such association must submit a capital restoration plan anduntil such plan is approved by the OTS may not increase its assets, acquireanother institution, establish a branch or engage in any new activities, andgenerally may not make capital distributions. The OTS is authorized to impose the additional restrictions, discussedbelow that are applicable to significantly undercapitalized associations.
As acondition to the approval of the capital restoration plan, any companycontrolling an undercapitalized association must agree that it will enter intoa limited capital maintenance guarantee with respect to the institution'sachievement of its capital requirements.

Anysavings association that fails to comply with its capital plan or is"significantly undercapitalized" (i.e., Tier 1 risk-based or corecapital ratios of less than 3% or a risk–based capital ratio of less than6%) must be subject to one or more of the additional specified actions andoperating restrictions mandated by FDICIA. These actions and restrictions include requiring the issuance ofadditional voting securities; limitations on asset growth; mandated assetreduction; changes in senior management; divestiture, merger or acquisition ofthe association; restrictions on executive compensation; and any other actionthe OTS deems appropriate.

Anassociation that becomes "critically undercapitalized" (i.e., atangible capital ratio of 2% or less) is subject to further restrictions on itsactivities in addition to those applicable to significantly undercapitalizedassociations.  The FDIC must restrictthe activities of a critically undercapitalized association and, among otherthings, prohibit any material transaction outside the ordinary course ofbusiness or engaging in certain transactions with affiliates, without theapproval of the FDIC.  The OTS mustappoint a receiver (or conservator with the concurrence of the FDIC) for asavings association, with certain limited exceptions, within 90 days after itbecomes critically undercapitalized.

Anyundercapitalized association is also subject to other possible enforcementactions by the OTS or the FDIC.  Such actionscould include a capital directive, a cease–and–desist order, civilmoney penalties, the establishment of restrictions on all aspects of theassociation's operations or the appointment of a receiver or conservator or aforced merger into another institution. The grounds for appointment of a conservator or receiver includesubstantially insufficient capital and losses or likely losses that willdeplete substantially all capital with no reasonable prospect for replenishmentof capital without federal assistance.

Ifthe OTS determines that an association is in an unsafe or unsound condition oris engaged in an unsafe or unsound practice it is authorized to reclassify awell–capitalized association as an adequately capitalized association andif the association is adequately capitalized, to impose the restrictionsapplicable to an undercapitalized association.

Theimposition by the OTS or the FDIC of any of these measures on the Bank may havea substantial adverse effect on the Bank's and the Company's operations andprofitability and the value of the Company's Common Stock.  The Company's shareholders do not havepreemptive rights, and therefore, if the Company is directed by the OTS or theFDIC to issue additional shares of Common Stock, such issuance may result inthe dilution in the percentage of ownership of the Company of those personsowning shares of the Company's Common Stock.

*Limitations onDividends and Other Capital Distributions.* OTS regulations impose various restrictions or requirements on associationswith respect to their ability to pay dividends or make other distributions ofcapital.  OTS regulations prohibit anassociation from declaring or paying any dividends or from repurchasing any ofits stock if, as a result, the regulatory capital of the association would bereduced below the amount required to be maintained for the liquidation accountestablished in connection with its mutual to stock conversion.

TheOTS utilizes a three–tiered approach to permit associations, based ontheir capital level and supervisory condition, to make capital distributionswhich include dividends, stock redemptions or repurchases, cash–outmergers, and other transactions charged to the capital account.  See "Regulatory Capital Requirements.”
Generally,Tier I associations, which are associations that before and after the proposeddistribution meet their fully phased-in capital requirements, may make capitaldistributions during any calendar year equal to the greater of 100% of netincome for the year–to–date plus 50% of the amount by which thelesser of the association's tangible, core or risk–based capital exceedsits fully phased–in capital requirement for such capital component, asmeasured at the beginning of the calendar year, or the amount authorized for aTier 2 association.  However, a Tier 1association deemed to be in need of more than normal supervision by the OTS maybe downgraded to a Tier 2 or Tier 3 association as a result of such adetermination.

Tier2 associations, which are associations that before and after the proposeddistribution meet their current minimum capital requirements, may make capitaldistributions of up to 75% of net income over the most recent four–quarterperiod.

Tier3 associations (which are associations that do not meet current minimum capitalrequirements) that propose to make any capital distribution and Tier 2associations that propose to make a capital distribution in excess of the notedsafe harbor level must obtain OTS approval written prior to making suchdistribution.  Tier 2 associationsproposing to make a capital distribution within the safe harbor provisions andTier 1 associations proposing to make any capital distribution need only submitwritten notice to the OTS 30 days prior to such distribution.  The Bank is classified as a Tier Iassociation.

As asubsidiary of the Company, the Bank is required to give the OTS 30 days' noticeprior to declaring any dividend on its stock. The OTS may object to the distribution during that 30-day period basedon safety and soundness concerns.

TheOTS has proposed regulations that would simplify the existing proceduresgoverning capital distributions by savings associations.  Under the proposed regulations, the approvalof the OTS would be required only for capital distributions by an associationthat is deemed to be in troubled condition or that is undercapitalized or wouldbe undercapitalized after the capital distribution.  A savings association would be able to make a capital distributionwithout notice to or approval of the OTS if it is not held by a savingsassociation holding company, is not deemed to be in troubled condition, hasreceived either of the two highest composite supervisory ratings and wouldcontinue to be adequately capitalized after such distribution.  Notice would have to be given to the OTS byany association that is held by a savings association holding company or thathad received a composite supervisory rating below the highest two compositesupervisory ratings.  An association’scapital rating would be determined under the prompt corrective actionregulations.

*Liquidity*.  All savings associations, including HomeFederal, are required to maintain an average daily balance of liquid assets(cash, certain time deposits, bankers’ acceptances, specified United StatesGovernment, state or federal agency obligations, shares of certain mutual fundsand certain corporate debt securities and commercial paper) in each calendarquarter equal to a certain percentage of the sum of its average daily balanceof net withdrawable deposit accounts and borrowings payable in one year orless.  Furthermore, every savingsassociation must maintain sufficient liquidity to ensure its safe and soundoperation.  For a discussion of what theBank includes in liquid assets, see "Management's Discussion and Analysisof Financial Condition and Results of Operations – Liquidity and CapitalResources.”  This liquid asset ratiorequirement has varied from time to time (between 0% and 10%) depending uponeconomic conditions and savings flows of all savings associations.  At the present time, the minimum liquidasset ratio is 0%.

Monetarypenalties may be imposed upon associations for violations of the liquid assetratio requirement.  AtJune 30, 2001, the Bank was in compliance with the liquidityrequirements, with the overall liquid asset ratio at 14.3%.

*Accounting ForInvestments. *An OTS policystatement applicable to all savings associations clarifies and re–emphasizesthat the investment activities of a savings association must be in compliancewith approved and documented investment policies and strategies, and must beaccounted for in accordance with Generally Accepted Accounting Principles“GAAP.”  Under the policy statement,management must support its classification of and accounting for loans andsecurities (i.e., whether held for investment, sale or trading) withappropriate documentation.  The Bank isin compliance with these rules.
TheOTS has adopted an amendment to its accounting regulations, which may be mademore stringent than GAAP by the OTS, to require that transactions be reportedin a manner that best reflects their underlying economic substance and inherentrisk and that financial reports must incorporate any other accountingregulations or orders prescribed by the OTS.

*Branching.*  Subject to certain limitations, the HOLA andthe OTS regulations permit federally chartered savings associations toestablish branches in any state of the United States.  The authority to establish such branches is available (a) instates that expressly authorize branches of savings associations located inanother state or (b) to an association that qualifies as a “domestic buildingand loan association” under the Internal Revenue Code of 1986, which imposesqualification requirements similar to those for a “qualified thrift lender”under the HOLA.  See “QTL Test.”  The authority for a federal savingsassociation to establish an interstate branch network would facilitate ageographic diversification of the association’s activities.  This authority under the HOLA and the OTSregulations preempts any state law purporting to regulate branching by federalsavings associations.

*CommunityReinvestment.*  Under theCommunity Reinvestment Act (the “CRA”), as implemented by OTS regulations, asavings association has a continuing and affirmative obligation consistent withits safe and sound operation to help meet the credit needs of its entirecommunity, including low and moderate income neighborhoods.  The CRA does not establish specific lendingrequirements or programs for financial institutions nor does it limit aninstitution’s discretion to develop the types of products and services that itbelieves are best suited to its particular community, consistent with theCRA.  The CRA requires the OTS, inconnection with its examination of a savings association, to assess theassociation’s record of meeting the credit needs of its community and to takesuch record into account in its evaluation of certain applications by suchassociation.  The CRA also requires allinstitutions to make public disclosure of their CRA ratings.  The Association received an  “Outstanding” CRA rating in its most recentexamination.

TheCRA regulations rate an institution based on its actual performance in meetingcommunity needs.  In particular, therating system focuses on three tests: (a) a lending test, to evaluate the institution’s record of making loansin its assessment areas; (b) an investment test, to evaluate the institution’srecord of investing in community development projects, affordable housing, andprograms benefiting low or moderate income individuals and businesses; and (c)a service test, to evaluate the institution’s delivery of services through itsbranches, ATMs and other offices.  Theamended CRA regulations also clarify how an institution’s CRA performance wouldbe considered in the application process.

*Qualified ThriftLender Test. *All savingsassociations, including the Bank, are required to meet a qualified thriftlender ("QTL") test to avoid certain restrictions on theiroperations.  This test requires asavings association to have at least 65% of its portfolio assets (whichconsists of total assets less the sum of goodwill and other intangible assets,properties used to conduct the savings association's business and specifiedliquid assets not exceeding 20% of total assets) in qualified thriftinvestments on a monthly average for nine out of every 12 months on a rollingbasis.  At June 30, 2001, the Bankmaintained 80.35% of its portfolio assets in qualified thrift investments, andthus met the test.  The Bank has alwaysmet the QTL test since its inception.

Loansand mortgage–backed securities secured by domestic residential housing,FHLB stock, credit card loans, educational loans and certain small businessloans as well as certain obligations of the Federal Savings and Loan InsuranceCorporation (“FSLIC”), the FDIC and certain other related entities may beincluded in qualifying thrift investments without limit.  FHLMC and FNMA stock and certain otherhousing–related and non–residential real estate loans andinvestments, including loans to develop churches, nursing homes, hospitals andschools, and consumer loans and investments in subsidiaries engaged in housing–relatedactivities may also be included, in varying amounts, not to exceed 20% ofportfolio assets.

Anysavings association that fails to meet the QTL test must either convert to anational bank charter or operate under certain restrictions on its activities,unless it requalifies as a QTL and thereafter remains a QTL.  If an association does not requalify andconverts to a national bank charter, it must remain SAIF-insured until the FDICpermits it to transfer to the Bank Insurance Fund.  If an association that fails the test has not yet requalified andhas not converted to a national bank, its new investments and activities arelimited to those permissible for both a savings association and a nationalbank, and it is limited to national bank branching rights in its home state.  In addition, the association is immediatelyineligible to receive any new FHLB borrowings and is subject to national banklimits for payment of dividends.  Ifsuch association has not requalified or converted to a national bank withinthree years after the failure, it must divest of all investments and cease allactivities and dispose of any investments not permissible for a nationalbank.  In addition, it must repaypromptly any outstanding FHLB borrowings, which may result in prepayment penalties.  A savings association that has failed theQTL test may requalify under the QTL test and be free of such limitations, butit may do so only once.  If anyassociation that fails the QTL test is controlled by a holding company, thenwithin one year after the failure, the holding company must register as a bankholding company and become subject to all restrictions on bank holdingcompanies.  See "Holding CompanyRegulation.”
*Transactions withAffiliates.*  The Bank’sauthority to engage in transactions with its “affiliates” is limited by the OTSregulations and by Sections 23A and 23B of the Federal Reserve Act (the“FRA”).  In general, an affiliate of theAssociation is any company that controls the Association or any other companythat is controlled by a company that controls the Association, excluding theAssociation’s subsidiaries other than those that are insured depositoryinstitutions.  The OTS regulationsprohibit a savings association (a) from lending to any of its affiliates thatis engaged in activities that are not permissible for bank holding companiesunder Section 4(c) of the BHC Act and (b) from purchasing the securities of anyaffiliate other than a subsidiary. Section 23A limits the aggregate amount of transactions with anyindividual affiliate to 10% of the capital and surplus of the savingsassociation and also limits the aggregate amount of transactions with allaffiliates to 20% of the savings association’s capital and surplus.  Extensions of credit to affiliates arerequired to be secured by collateral in an amount and of a type described inSection 23A, and the purchase of low quality assets from affiliates isgenerally prohibited.  Section 23Bprovides that certain transactions with affiliates, including loans and assetpurchases, must be on terms and under circumstances, including creditstandards, that are substantially the same or at least as favorable to theassociation as those prevailing at the time for comparable transactions withnon-affiliated companies.  In theabsence of comparable transactions, such transactions may only occur underterms and circumstances, including credit standards, that in good faith wouldbe offered to or would apply to non-affiliated companies.

TheAssociation’s authority to extend credit to its directors, executive officers,and 10% shareholders, as well as to entities controlled by such persons, iscurrently governed by the requirements of Sections 22(g) and 22(h) of the FRAand Regulation O of the FRB thereunder. Among other things, these provisions require that extensions of creditto insiders (a) be made on terms that are substantially the same as, and followcredit underwriting procedures that are not less stringent than, thoseprevailing for comparable transactions with unaffiliated persons and that donot involve more than the normal risk of repayment or present other unfavorablefeatures and (b) not exceed certain limitations on the amount of theassociation’s capital.  In addition,extensions of credit in excess of certain limits must be approved by theassociation’s board of directors.

Certaintransactions with directors, officers or controlling persons are also subjectto conflict of interest regulations enforced by the OTS.  These conflict of interest regulations andother statutes also impose restrictions on loans to such persons and theirrelated interests.  Among other things,such loans must be made on terms substantially the same as those for loans tounaffiliated individuals.

*Real Estate LendingStandards. *The OTS andthe other federal banking agencies adopted regulations to prescribe standardsfor extensions of credit that (a) are secured by real estate or (b) are madefor the purpose of financing the construction of improvements on realestate.  The OTS regulations requireeach savings association to establish and maintain written internal real estatelending standards that are consistent with safe and sound banking practices andappropriate to the size of the association and the nature and scope of its realestate lending activities.  Thestandards also must be consistent with accompanying OTS guidelines, whichinclude loan-to-value ratios for the different types of real estate loans.  Associations are also permitted to make alimited amount of loans that do not conform to the proposed loan-to-valuelimitations so long as such exceptions are reviewed and justifiedappropriately.  The guidelines also lista number of lending situations in which exceptions to the loan-to-valuestandards are justified.

*Holding CompanyRegulation.* The Companyis a unitary savings and loan holding company subject to regulatory oversightby the OTS.  As such, the Company isregistered with and files reports with the OTS and is subject to regulation andexamination by the OTS.  In addition,the OTS has enforcement authority over the Company and its non–savingsassociation subsidiaries which also permits the OTS to restrict or prohibitactivities that are determined to be a serious risk to the subsidiary savingsassociation.
As aunitary savings and loan holding company, the Company generally is not subjectto activity restrictions.  If theCompany acquires control of another savings association as a separatesubsidiary, it would become a multiple savings and loan holding company, andthe activities of the Company and any of its subsidiaries (other than the Bankor any other SAIF–insured savings association) would become subject tosuch restrictions unless such other associations each qualify as a QTL and wereacquired in a supervisory acquisition.

Ifthe Bank fails the QTL test, the Company must obtain the approval of the OTSprior to continuing after such failure, directly or through its othersubsidiaries, any business activity other than those approved for multiplesavings and loan holding companies or their subsidiaries.  In addition, within one year of such failurethe Company must register as, and will become subject to, the restrictionsapplicable to bank holding companies. The activities authorized for a bank holding company are more limitedthan are the activities authorized for a unitary or multiple savings and loanholding company.  See "QualifiedThrift Lender Test."

*Federal SecuritiesLaw. *The stock of the Company isregistered with the Securities and Exchange Commission ("SEC") underthe Securities Exchange Act of 1934, as amended (the "ExchangeAct").  The Company is subject tothe information, proxy solicitation, insider trading restrictions and otherrequirements of the SEC under the Exchange Act.

Companystock held by persons who are affiliates (generally officers, directors andprincipal stockholders) of the Company may not be resold without registrationor unless sold in accordance with certain resale restrictions.  If the Company meets specified currentpublic information requirements, each affiliate of the Company is able to sellin the public market, without registration, a limited number of shares in anythree–month period.

*Federal ReserveSystem. *The Federal Reserve Board(FRB) requires all depository institutions to maintain non–interestbearing reserves at specified levels against their transaction accounts(primarily checking, NOW and Super NOW checking accounts).  The FRB regulations generally require thatreserves be maintained in the amount of 3% of the aggregate of transactionaccounts up to $39.3 million.  Theamount of aggregate transaction accounts in excess of $39.3 million arecurrently subject to a reserve ratio of 10%, which ratio the FRB may adjustbetween 8% and 12%.  The FRB regulationscurrently exempt $5.0 million of otherwise reservable balances from the reserverequirements, which exemption is adjusted by the FRB at the end of eachyear.  At June 30, 2001, the Bank was incompliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by theFederal Reserve Board may be used to satisfy liquidity requirements that may beimposed by the OTS. See "Liquidity."

Savingsassociations are authorized to borrow from the Federal Reserve Bank(“FRB”)"discount window," but Federal Reserve Board regulationsrequire associations to exhaust other reasonable alternative sources of funds,including FHLB borrowings, before borrowing from the FRB.

*Federal Home LoanBank System.*  The Bankis a member of the FHLB of Des Moines, which is one of 12 regional FHLBs, thatadministers the home financing credit function of savings associations.  Each FHLB serves as a reserve or centralbank for its members within its assigned region.  It is funded primarily from proceeds derived from the sale ofconsolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policiesand procedures established by the board of directors of the FHLB.  These policies and procedures are subject tothe regulation and oversight of the Federal Housing Finance Board.  All advances from the FHLB are required tobe fully secured by sufficient collateral as determined by the FHLB.  In addition, all long–term advancesare required to provide funds for residential home financing.

As amember, Home Federal is required to purchase and maintain stock in the FHLB ofDes Moines.  At June 30, 2001, HomeFederal had $6.3 million in FHLB stock, which was in compliance with thisrequirement.  In past years, the Bankhas received substantial dividends on its FHLB stock.  Over the past five fiscal years such dividends have averaged6.59% and were 6.07% for fiscal year 2001.

Underfederal law, the FHLBs are required to provide funds for the resolution oftroubled savings associations and to contribute to low and moderately–pricedhousing programs through direct loans or interest subsidies on advancestargeted for community investment and low– and moderate–incomehousing projects.  These contributionshave affected adversely the level of FHLB dividends paid and could continue todo so in the future.  Thesecontributions could also have an adverse effect on the value of FHLB stock inthe future. A reduction in value of the Bank's FHLB stock may result in acorresponding reduction in Home Federal's capital.
Forthe fiscal year ended June 30, 2001, dividends paid by the FHLB of Des Moinesto Home Federal totaled approximately $351,000, which constitutes a $36,000decrease in the amount of dividends received in fiscal 2000.

**Federal and StateTaxation**

TheCompany and subsidiaries file a consolidated federal income tax return on afiscal year basis.  The Bank is allowedbad debt deductions based on actual charge-offs.

Inaddition to the regular income tax, corporations, including savingsassociations such as the Bank, generally are subject to a minimum tax.  An alternative minimum tax is imposed at aminimum tax rate of 20% on alternative minimum taxable income, which is the sumof a corporation's regular taxable income (with certain adjustments) and taxpreference items, less any available exemption.  The alternative minimum tax is imposed to the extent it exceedsthe corporation's regular income tax and net operating losses can offset nomore than 90% of alternative minimum taxable income.

Tothe extent earnings appropriated to a savings association's bad debt reservesfor "qualifying real property loans" and deducted for federal incometax purposes exceed the allowable amount of such reserves computed under theexperience method and to the extent of the association's supplemental reservesfor losses on loans ("Excess"), such Excess may not, without adversetax consequences, be utilized for the payment of cash dividends or otherdistributions to a shareholder (including distributions on redemption,dissolution or liquidation) or for any other purpose (except to absorb bad debtlosses).  As of June 30, 2001, theBank's Excess for tax purposes totaled approximately $4.8 million.

TheBank and its consolidated subsidiaries have been audited by the IRS withrespect to consolidated federal income tax returns through 1985. With respectto years examined by the IRS, all deficiencies have been satisfied.

*South DakotaTaxation. *The Bank issubject to the South Dakota franchise tax to the extent that such corporationsare engaged in business in the state of South Dakota. South Dakota does nothave a corporate income tax.  Thefranchise tax will be imposed at a rate of 6% on franchise taxable income whichis computed in the same manner as federal taxable income with some minorvariations to comply with South Dakota law, other than the carryover of netoperating losses which is not permitted under South Dakota law.  A South Dakota return of franchise tax mustbe filed annually.

*Minnesota Taxation.* The Bank is subject to theMinnesota Corporate Income tax to the extent that such corporations are engagedin business in the state of Minnesota. The Corporate Income tax is imposed at a rate of 9.8% on  corporate taxable income which is computedin the same manner as federal taxable income with some minor variations tocomply with Minnesota law.  A Minnesotareturn of Corporate Income tax must be filed annually.

*DelawareTaxation. *As a Delawareholding company, the Company is exempted from Delaware corporate income tax butis required to file an annual report with and pay an annual fee to the State ofDelaware.  The Company is also subjectto an annual franchise tax imposed by the State of Delaware.

**Executive Officersof the Company**The following information as to the business experience during the past fiveyears is supplied with respect to executive officers of the Company and theBank.

*Curtis L. Hage* - Mr. Hage, age 55, is Chairman,President and Chief Executive Officer of the Company.  He was elected Chairman of the Board of Directors of the Companyin September 1996 and has held the position of President and Chief ExecutiveOfficer since February 1991.  Prior tosuch time, Mr. Hage served as Executive Vice President of the Bank since1986.  Since joining the Association in1968, he served in various capacities prior to being elected Executive VicePresident.  Mr. Hage received his M.B.A.from the University of South Dakota and attended the Graduate School of SavingsInstitution Management at the University of Texas.

*Gene F. Uher*- Mr. Uher, age 53, is Executive Vice President/ChiefOperations Officer and Secretary of the Company, a position he has held sinceMarch 1997.  He was employed asExecutive Vice President for Packers Bank, Omaha, Nebraska from 1996 untiljoining Home Federal.  Prior to thattime, he was employed as Executive Vice President/Chief Operating Officer forConservative Savings Bank, F.S.B., Omaha, Nebraska from 1989 to 1996.  Mr. Uher received his B.A. degree fromLincoln School of Commerce, Lincoln, Nebraska. He is a graduate of the School of Executive Development at University ofConnecticut.
*David A. Brown* – Mr. Brown, age 39, is Senior VicePresident/Commercial Banking, a position he has held since November 1999.  Prior to joining Home Federal, Mr. Brownserved as Vice President/Manager Commercial Banking at Firstar Bank, SiouxCity, Iowa, a position he held since December 1998.  Mr. Brown received his Masters of Business Administration and aB.S. in Business Administration from University of South Dakota.

*Jack P. Hearst* – Mr. Hearst, age 49, is Senior VicePresident/Subsidiary Operations, a position he has held since November2000.  Prior to such time he served asVice President/Credit Cards from March 1999. He was employed by Citicorp-Corporate Control and Risk Assessment as theAudit Director for Citicorp. Bankcards prior to joining the Bank.  Mr. Hearst received a B.S. from theUniversity of Missouri.

*Mary F. Hitzemann* - Ms. Hitzemann, age 48, is Senior VicePresident/Human Resources, a position she has held since October 1993.  Ms. Hitzemann joined Home Federal in January1993.  Prior to that time, she wasemployed as Vice President of Human Resources for Rapid City Regional Hospitalfrom May 1989 to May 1992.  Ms.Hitzemann received her B.A. degree from Augustana College.

*Terry L. Kappes* - Mr. Kappes, age 47, is Senior VicePresident/Retail Banking, a position he has held since June 1998.  Prior to that time, he was employed withBank One - Colorado, Grand Junction, Colorado from 1993 until joining HomeFederal with his most recent position being Senior Vice President/Retail MarketManager.  Mr. Kappes served as SeniorVice President for First Bank System, Billings, Montana from 1988 to 1991 andFirst Bank of South Dakota, Sioux Falls, South Dakota from 1977 to 1988.  Mr. Kappes received his B.A. degreefrom Oral Roberts University, Tulsa, Oklahoma.

*John E. Roers* - Mr. Roers, age 54, is Senior VicePresident/Agricultural Lending, a position he has held since joining HomeFederal on October 31, 1995.  Prior tothat time, he was employed as Agricultural Loan Officer and Department Managerfor Western Bank, Sioux Falls (then First Bank) from June 1981 to October 1996and for Western Bank, Marshall, Minnesota from February 1974 to May 1981.  Mr. Roers received his Bachelor ofScience and Masters of Science from North Dakota State University.

*Mark S. Sivertson*-Mr. Sivertson, age 43, is Senior Vice President/Trust Officer, a position hehas held since July 1996.  He joinedHome Federal in February 1995 as Vice President/Trust Officer.  Prior to joining Home Federal, Mr. Sivertsonwas Vice President and Trust Officer in charge of the Investment Management andTrust Department at Western Bank.  Heholds a law degree from the University of North Dakota and the Certified TrustFinancial Advisor designation from the American Bankers Association.

*Gary L. Smith –*Mr. Smith, age 47, is Senior VicePresident/Information Systems, a position he has held since July 1998.  Mr. Smith joined Home Federal in 1979 andwas promoted to Vice President in 1988. He received his B.S. from the University of South Dakota.

*Michael H.Zimmerman* -Mr. Zimmerman, age 48, is Senior Vice President/Senior Retail Lending Officer,a position he has held since joining Home Federal in August 1996.  Prior to that time, he was employed as VicePresident/Mortgage Loan Manager for First Trust and Savings Bank, Cedar Rapids,Iowa from October 1995 to August 1996 and as Vice President/Eastern RegionalManager for Homeland Savings Bank FSB, Waterloo, Iowa from May 1995 to October1995; and as Vice President/ Manager Real Estate Lending for Homeland Bank,N.A., Waterloo, Iowa from August 1992 to April 1995.  Mr. Zimmerman received his B.A. from Dana College, Blair,Nebraska.

*Cristie M. Lawson**–*Ms. Lawson, age 32, is Vice President/Controller for the Bank.  Ms. Lawson joined the Bank in March 1995 asStaff Accountant.  She has held variouspositions of increasing responsibility within the Accounting Department and waspromoted to her current position in July 2000. Ms. Lawson received her B.A.from Augustana College.
**Item 2.  Properties**

TheCompany and the Bank conduct their business at their main office located at 225S. Main at 11th, Sioux Falls, South Dakota, 57104.  Currently, the Bank also conducts business from 30 other retailbanking locations located in its primary market area.

TheBank owns each of its branch offices, except for nine offices that itleases.  The total net book value of theCompany's premises and equipment (including land, building and leaseholdimprovements and furniture, fixtures and equipment) at June 30, 2001 was $13.8million.  See Note 6 of "Notes toConsolidated Financial Statements.”

**Item 3.  Legal Proceedings**

TheCompany, Home Federal and its subsidiaries are involved as plaintiff ordefendant in various legal actions arising in the normal course of theirbusinesses.  While the ultimate outcomeof these proceedings cannot be predicted with certainty, it is the opinion ofmanagement, after consultation with counsel representing Home Federal and theCompany in the proceedings, that the resolution of these proceedings should nothave a material effect on the Company's consolidated financial position orresults of operations.

**Item 4.  Submission of Matters to a Vote ofSecurity Holders**

Nomatter was submitted to a vote of security holders, through the solicitation ofproxies or otherwise, during the quarter ended June 30, 2001.
**PARTII**

**Item 5.  Market for Registrant's Common Equity andRelated Stockholder Matters**

**Stock Listing**

TheCompany’s Common stock is traded under the symbol “HFFC” on the NASDAQ NationalMarket System.

Thefollowing table sets forth the range of high and low sale prices for theCompany’s Common Stock for each of the fiscal quarters of the two years endedJune 30, 2001 and 2000.  Quotations forsuch periods are as reported by NASDAQ for National Market System issues.

 
FISCAL 2001HIGH LOW    1st Quarter$9.88 $8.50 2nd Quarter$10.50 $8.50 3rd Quarter$13.00 $9.91 4th Quarter$14.85 $9.75      FISCAL 2000HIGH LOW    1st Quarter$13.94 $11.19 2nd Quarter$13.00 $10.13 3rd Quarter$11.75 $8.06 4th Quarter$9.75 $8.00 
 

As ofSeptember 17, 2001, the Company had 552 holders of record of its Common Stock.

Thetransfer agent for the Company’s Common Stock is ChaseMellon ShareholderServices, PO Box 3315, South Hackensack, New Jersey, 07606-1915.

**Dividends**

HFFinancial Corp. paid quarterly cash dividends of $0.105 per share throughoutfiscal year 2001.  In addition, HFFinancial Corp. paid quarterly cash dividends of $0.10 throughout fiscal year2000.  The Board of Directors intends tocontinue the payment of quarterly cash dividends, dependent on the results ofoperations and financial condition of HF Financial Corp., tax considerations,industry standards, economic conditions, general business practices and otherfactors the board of directors deems relevant. On July 25, 2001, the Board of Directors approved an increase in cashdividends to $0.11 per share and HF Financial Corp. paid the respective cashdividends on August 22, 2001 to shareholders of record on August 8, 2001.  HF Financial Corp.’s ability to paydividends is dependent on the dividend payments it receives from itssubsidiary, Home Federal Savings Bank (the “Bank”), which are subject tofederal and state regulations.

**Sales ofUnregistered Stock**The Company has had no sales of unregistered stock within the last three fiscalyears.
**Item 6.  SelectedFinancial Data**The following table sets forth selected financial data with respect to theCompany for the periods indicated.  Thisinformation should be read in conjunction with the Financial Statements andrelated notes appearing elsewhere herein and “Management’s Discussion andAnalysis of Financial Condition and results of Operations.”  The Company’s selected financial statementand operations data for each of the years set forth below have been derivedfrom financial statements which have been audited by McGladrey & Pullen,LLP, independent public accountants.
 At  June 30,    2001 2000 1999 1998 1997        (Dollars  in Thousands) Selected Statement of  Financial Condition Data:          Total assets$784,002 $724,997 $658,622 $570,979 $562,114 Loans and leases  receivable, net563,836 542,494 492,302 426,522 440,019 Loans held for sale7,270 8,257 11,755 9,616 3,483 Mortgage-backed  securities available for sale43,750 53,001 41,583 39,647 30,340 Securities available  for sale49,969 60,445 61,023 44,232 46,940 Deposits601,207 545,497 510,730 446,424 418,186 Advances from FHLB of  Des Moines and other borrowings108,376 113,020 81,613 50,635 74,743 Stockholders' equity52,525 46,943 48,558 56,601 52,974            
 
 Years  Ended June 30,    2001 2000 1999 1998 1997        (Dollars  in Thousands, Except Per Share Data) Selected Operations  Data:          Interest and dividend  income$59,312 $53,131 $46,119 $46,201 $44,012 Interest expense35,343 29,601 24,658 25,449 24,832        Net interest income23,969 23,530 21,461 20,752 19,180 Provision for losses on  loans and leases2,432 5,615 12,120 4,689 693        Net interest income  after provision for losses on loans and leases21,537 17,915 9,341 16,063 18,487 Credit card fee income2,709 7,010 12,064 6,163 613 Loan servicing income1,567 1,381 1,263 1,187 1,150 Loan fees and service  charges982 1,131 1,231 1,184 946 Gain on sale of  securities, net— 185 1 226 150 Other noninterest  income6,863 5,563 4,490 4,871 3,613 Noninterest expense(26,116)(24,976)(26,415)(19,983)(19,703)       Income before income  taxes7,542 8,209 1,975 9,711 5,256 Income tax expense2,935 2,942 924 3,238 1,582        Net income$4,607 $5,267 $1,051 $6,473 $3,674       Earnings per share: (3)           Basic$1.25 $1.36 $0.25 $1.46 $0.81  Diluted$1.23 $1.34 $0.24 $1.42 $0.79            Dividends per share (4)$0.42 $0.40 $0.37 $0.28 $0.24 Dividends payout ratio33.54%29.31%143.77%19.28%29.48%
 
 Years  Ended June 30,    2001 2000 1999 1998 1997        (Dollars  in Thousands) Other Data:          Interest rate spread  (average during period)3.16%3.43%3.50%3.40%3.24%Net interest margin (1)3.41 3.65 3.84 3.80 3.64 Average  interest-earning assets to average interest-bearing liabilities1.05 1.05 1.08 1.09 1.08 Equity to total assets  (end of period)6.70 6.47 7.37 9.91 9.42            Equity-to-assets ratio  (ratio of average equity to average total assets)6.77 6.85 8.96 9.59 9.25            Nonperforming assets to  total assets (end of period)0.79 0.40 0.48 0.53 0.33            Allowance for loan and  lease losses to nonperforming loans (end of period) (2)110.54 326.97 445.27 258.86 361.50            Allowance for loan and  lease losses to total loans and leases (end of period)1.13 1.52 2.32 1.62 1.02            Nonperforming loans to  total loans and leases (end of period) (2)1.02 0.46 0.52 0.63 0.28 Other noninterest  expense to average total assets3.52 3.66 4.48 3.47 3.55 Net interest income  after provision for losses on loans and leases to noninterest expense (end of  period)82.47 71.73 35.36 80.38 93.83            Return on assets  (ratio of net income to average total  assets)0.62 0.77 0.18 1.13 0.66            Return on equity (ratio  of net income to average equity)9.16 11.27 1.99 11.73 7.17 Number of full-service  offices31 27 25 19 19 1)Net  interest income divided by average interest-earning assets.  2)Nonperforming  loans include nonaccruing loans and accruing loans delinquent more than 90  days.  3)Earnings  per share are retroactively adjusted for the three-for-two stock split in the  form of a stock dividend payable to shareholders of record on May 8, 1998.  4)Dividends  per share are retroactively adjusted for the three-for-two stock split in the  form of a stock dividend payable to shareholders of record on May 8, 1998.
**Item 7.  Management's Discussion And Analysis OfFinancial Condition And Results Of Operations**

**General**

TheCompany's net income is primarily dependent upon the difference (or"spread") between the average yield earned on loans, mortgage-backedsecurities and investments and the average rate paid on deposits andborrowings, as well as the relative amounts of such assets andliabilities.  The interest rate spreadis affected by regulatory, economic and competitive factors that influenceinterest rates, loan demand and deposit flows. The Company, like other financial institutions, is subject to interestrate risk to the degree that its interest-bearing liabilities mature or repriceat different times, or on a different basis, than its interest-earningassets.  To better insulate itself fromsuch risk, the Company has, over the last few years, attempted to increase bothnumerically and on a percentage basis its holding of consumer and commercialloans.  The Company has also decreasedits ratio of fixed-rate to adjustable-rate loans. The Company’s net income isalso affected by, among other things, gains and losses on sales of foreclosedproperty, loans, mortgage-backed securities and securities available for sale,provisions for losses on loans, service charge fees, subsidiary activities,operating expenses and income taxes.

ThisForm 10-K 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.  See “Forward-Looking Statement” under Management’s Discussion andAnalysis for further discussion.

**FinancialCondition Data**

AtJune 30, 2001, the Company had total assets of $784.0 million, an increase of$59.0 million from the level at June 30, 2000. The increase in assets was due primarily to an increase in cash and cashequivalents of $58.5 million and an increase in loans and leases receivable of$21.3 million offset by a decrease in securities available for sale of $10.5million and mortgage-backed securities of $9.3 million.  The increase in cash and cash equivalentsand loans and leases receivable was funded primarily by an increase in depositsof $55.7 million in addition to the above decrease in securities available forsale and mortgage-backed securities from the levels at June 30, 2000.  In addition, stockholders’ equity increasedfrom $46.9 million at June 30, 2000 to $52.5 million at June 30, 2001,primarily due to net income of $4.6 million and the change in net unrealizedgain (loss) on securities available for sale of $2.3 million which waspartially offset by the payment of cash dividends of  $1.5 million.

Theincrease in loans receivable of $21.3 million was due primarily to purchasesand originations of principal exceeding amortizations and prepayments ofprincipal.  Included in the aboveincrease was $8.7 million of direct financing leases resulting from theCompany’s acquisition of Mid America Leasing and $1.4 million of loansreceivable resulting from the Bank’s purchase of a bank branch.

Thedecrease in securities available for sale of $10.5 million was primarily theresult of maturities and calls of  $32.8million exceeding purchases of  $20.5million.

Thedecrease in mortgage-backed securities available for sale of $9.3 million wasprimarily the result of maturities, calls, amortization and repayments ofprincipal of $14.3 million exceeding purchases of $3.1 million.  The Bank’s purchases of mortgage-backedsecurities available for sale were comprised primarily of thirty year,fixed-rate mortgage-backed securities.

The$55.7 million increase in deposits was primarily due to an increase in demandaccounts of $10.1 million, money market accounts of $26.1 million and anincrease in certificates of deposit of $24.1 million offset by a reduction insaving accounts of $4.6 million.  Theseincreases were primarily the result of a focused marketing campaign in moneymarket accounts and certificates of deposit during the fiscal year.
**Analysis of NetInterest Income**

Netinterest income represents the difference between income on interest-earningassets and expense on interest-bearing liabilities.  Net interest income depends upon the volume of interest-earningassets and interest-bearing liabilities and the interest rates earned or paidon them.

*Average Balances,Interest Rates and Yields.*  The followingtable presents for the periods indicated, the total dollar amount of interestincome from average interest-earning assets and the resulting yields, as wellas the interest expense on average interest-bearing liabilities, expressed bothin dollars and rates, and the net interest margin.  The table does not reflect any effect of income taxes.  All average balances are monthly averagebalances and include the balances of nonaccruing loans.  The yields and costs for the years endedJune 30, 2001, 2000 and 1999 include fees which are considered adjustments toyield.

 
 Years  Ended June 30,    2001 2000 1999      Average  Outstanding  Balance Interest  Earned/  Paid Yield/  Rate 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)$567,948 $51,166 9.01%$530,738 $46,135 8.69%$465,002 $40,616 8.73% Mortgage-backed  securities49,529 3,327 6.72%51,878 3,390 6.53%44,735 2,664 5.96% Other investment  securities (2)79,389 4,468 5.63%55,420 3,219 5.81%44,357 2,568 5.79% FHLB stock6,279 351 5.59%5,898 387 6.56%4,232 271 6.40%           Total interest-earning  assets$703,145 $59,312 8.44%$643,934 $53,131 8.25%$558,326 $46,119 8.26% Noninterest-earning  assets39,082   38,317   30,824                    Total assets$742,227     $682,251     $589,150                                        Interest-bearing  liabilities:                  Deposits:                   Checking and money  market$200,004 $7,369 3.68%$161,952 $5,296 3.27%$111,899 $2,942 2.63% Savings40,212 1,469 3.65%44,976 1,533 3.41%48,958 1,533 3.13% Certificates of deposit316,994 19,582 6.18%297,788 16,633 5.59%278,256 15,878 5.71%            Total deposits$557,210 $28,420 5.10%$504,716 $23,462 4.65%$439,113 $20,353 4.64% FHLB advances and other  borrowings112,421 6,923 6.16%109,331 6,139 5.62%78,797 4,305 5.46%           Total interest-bearing  liabilities$669,631 $35,343 5.28%$614,047 $29,601 4.82%$517,910 $24,658 4.76% Other liabilities22,319   21,459   18,435                    Total liabilities$691,950     $635,506     $536,345      Equity50,277     46,745     52,805                      Total liabilities and  equity$742,227     $682,251     $589,150                                        Net interest income;  interest rate spread  $23,969 3.16%  $23,530 3.43%  $21,461 3.50%                                Net interest margin (3)    3.41%    3.65%    3.84%                
(1)         Includes interest on accruing loans past due 90 days ormore.

(2)         Includesprimarily U.S. Government and agency securities and FHLB daily time.

(3)         Netinterest margin is net interest income divided by average interest-earningassets.
**Rate/Volume Analysisof Net Interest Income**

Thefollowing schedule presents the dollar amount of changes in interest income andinterest expense for major components of interest-earning assets andinterest-bearing liabilities.  Itdistinguishes between the increases and decreases due to fluctuatingoutstanding balances that are due to the levels and volatility of interestrates.  For each category ofinterest-earning assets and interest-bearing liabilities, information isprovided on changes attributable to (i) changes in volume (i.e., changes involume multiplied by old rate) and (ii) changes in rate (i.e., changes in ratemultiplied by old volume).  For purposesof this table, changes attributable to both rate and volume, which cannot besegregated, have been allocated proportionately to the change due to volume andthe change due to rate.

 
 Years  Ended June 30, Years  Ended June 30,     2001  vs. 2000 2000  vs. 1999     (Dollars  in Thousands)               Increase  (Decrease)Due toVolume Increase  (Decrease)Due toRate TotalIncrease(Decrease) Increase(Decrease)Due toVolume Increase(Decrease)  Due toRate TotalIncrease        Interest-earning  assets:             Loans and leases  receivable (1)$3,294 $1,738 $5,032 $5,728 $(209)$5,519  Mortgage-backed  securities(157)93 (64)446 280 726  Other investment  securities (2)1,371 (122)1,249 641 10 651  FHLB stock23 (59)(36)108 8 116                     Total interest-earning  assets$4,531 $1,650 $6,181 $6,923 $89 $7,012                     Interest-bearing  liabilities:            Deposits:             Checking and money  market$1,323 $750 $2,073 $1,476 $878 $2,354  Savings(168)104 (64)(131)131 —  Certificates of deposit1,130 1,819 2,949 1,103 (348)755         Total deposits2,285 2,673 4,958 2,448 661 3,109 FHLB advances and other  borrowings182 602 784 1,692 142 1,834                     Total Interest-bearing  liabilities$2,467 $3,276 $5,742 $4,140 $803 $4,943                     Net interest income  increase    $439     $2,069            
(1)         Includes interest on loans past due 90 days or more.(2)         Includes primarily U.S. Government andagency securities and FHLB daily time.
**Asset Quality**

Inaccordance with the Bank’s internal classification of assets policy, managementevaluates the loan portfolio on a monthly basis to identify loss potential anddetermine the adequacy of the allowance for loan losses.  Loans are placed on nonaccrual status whenthe collection of principal and/or interest become doubtful.  Foreclosed assets include assets acquired insettlement of loans.  The Bank did nothave any material troubled debt restructurings at any of the datespresented.  The following table setsforth the amounts and categories of the Bank's nonperforming assets for theperiods indicated.

 
 At  June 30,    2001 2000 1999 1998 1997        (Dollars  in Thousands) Nonaccruing loans:           One- to four-family$723 $551 $209 $623 $618  Commercial385 165 46 719 154  Multi-family— — — — —  Commercial business3,223 971 111 396 —  Consumer(1)518 317 359 482 428  Agricultural373 31 307 — —  Credit cards— — — — —  Mobile homes88 43 13 31 52        Total5,310 2,078 1,045 2,251 1,252                  Accruing loans  delinquent more than 90 days           One- to four-family— — — — —  Commercial— — — — —  Multi-family304 — — — —  Commercial business— — — — —  Consumer(1)— — — — —  Agricultural23 — — — —  Credit cards283 514 1,648 530 —  Mobile homes— — — — —        Total610 514 1,648 530 —                  Foreclosed assets:           One- to four-family203 214 366 22 311  Commercial— — — — —  Multi-family— — — — —  Commercial business— — — — —  Consumer(1)105 67 49 140 158  Agricultural— — — — —  Credit cards— — — — —  Mobile homes2 15 49 67 124        Total (5)310 296 464 229 593                  Total nonperforming  assets(2)$6,230 $2,888 $3,157 $3,010 $1,845       Ratio of nonperforming  assets to total assets(3)0.79%0.40%0.48%0.53%0.33%      Ratio of nonperforming  loans to total loans and leases(4)1.02%0.46%0.52%0.63%0.28%      (1)Consists of nonperforming consumer  loans exclusive of mobile home loans and credit card loans.(2)Nonperforming assets include  nonaccruing loans, accruing loans delinquent more than 90 days and foreclosed  assets.(3)Percentage is calculated based upon  total assets of the Company, the Bank, HF Card Services L.L.C. and the  Mortgage Corp. on a consolidated basis.(4)Nonperforming loans includes  nonaccruing loans and accruing loans delinquent more than 90 days.(5)Total foreclosed assets does not  include land held for development.
 

Whena borrower fails to make a required payment on real estate secured loans within10 to 15 days after the payment is due, the Bank generally institutescollection procedures by issuing a late notice.  The customer is contacted again when the payment is 30 days pastdue.  In the case of consumer loans, theborrower is sent a notice when a loan is 10 days past due and is contacted bytelephone when a loan is 30 days past due. In most cases, delinquencies are cured promptly; however, if a loan hasbeen delinquent for more than 30 days, the Bank attempts additional written aswell as verbal contacts and, if necessary, personal contact with the borrowerin order to determine the reason for the delinquency and to effect a cure, and,where appropriate, reviews the condition of the property and the financialcircumstances of the borrower.  Basedupon the results of any such investigation, the Bank may: (i) accept arepayment program which under appropriate circumstances could involve anextension in the case of consumer loans for the arrearage from the borrower,(ii) seek evidence, in the form of a listing contract, of efforts by theborrower to sell the property if the borrower has stated that he is attemptingto sell, or (iii) initiate foreclosure proceedings. When a loan payment isdelinquent for 90 days, the Bank generally will initiate foreclosureproceedings unless management is satisfied the credit problem is correctable.

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 collectibility of principal isuncertain, are applied as principal reductions.  Credit card loans remain in accrual status until 120 days, whenaccrued interest income on the loan is taken out of income.

Nonperformingassets increased to $6.2 million at June 30, 2001 from $2.9 million at June 30,2000, an increase of $3.3 million.  Inaddition, the ratio of nonperforming assets to total assets, which is oneindicator of credit risk exposure, increased slightly to 0.79% at June 30, 2001as compared to 0.40% at June 30, 2000.

Nonaccruingloans increased to $5.3 million at June 30, 2001 from $2.1 million at June 30,2000, an increase of $3.2 million. Included in nonaccruing loans at June 30,2001 were thirteen loans totaling $723,000 secured by one- to four-family realestate, three loans in the amount of $385,000 secured by commercial realestate, six mobile home loans totaling $88,000, eighteen commercial businessloans totaling $3.2 million, two agriculture loans totaling $373,000 andforty-one consumer loans totaling $518,000. See Note 4 of “Notes to Consolidated Financial Statements” forinformation concerning interest income foregone on nonaccrual loans.

Accruingcredit card loans delinquent more than 90 days decreased from $514,000 at June30, 2000 to $283,000 at June 30, 2001. A total of $1.0 million of credit card loans were delinquent 30 days atJune 30, 2001 as compared to $1.7 million at June 30, 2000.  Net credit card loan charge-offs for theyear ended June 30, 2001 were $2.9 million as compared to $8.4 million for thesame period in fiscal 2000.  Usinghistorical stratification data on the current product, management expectscredit card loan write-offs not to exceed $1.6 million in the next six months.  Of this amount about 62% will be a charge-offagainst allowance for credit card loan losses, of which the Company currentlymaintains an allowance for credit card loan losses equal to 17% of theoutstanding credit card loan balance, or about $1.0 million.  The remaining 38% will be charged against creditcard fee income, interest income and credit card fee income in future periods.Based upon lack of performance, the Company ceased processing subprime creditcard applications in March 1999.

As ofJune 30, 2001, the Bank had $310,000 of foreclosed assets.  The balance of foreclosed assets at June 30,2001 consisted of $105,000 in consumer collateral (excluding mobile homeloans), $2,000 in mobile homes and $203,000 in single-family residences.

AtJune 30, 2001, the Bank had approximately $12.3 million of other loans ofconcern that management has determined need to be closely monitored because ofpossible credit problems of the borrowers or the cash flows of the securedproperties.  These loans were consideredin determining the adequacy of the allowance for possible loan losses.  The allowance for possible loan losses isestablished based on management's evaluation of the risks inherent in the loanportfolio and changes in the nature and volume of loan activity.  Such evaluation, which includes a review ofall loans for which full collectability may not be reasonably assured,considers the estimated fair market value of the underlying collateral,economic conditions, historical loan loss experience and other factors thatwarrant recognition in providing for an adequate loan loss allowance.  Although the Bank's management believes thatthe June 30, 2001 recorded allowance for loan losses was adequate to providefor potential losses on the related loans, there can be no assurance that theallowance existing at June 30, 2001 will be adequate in the future.
Thefollowing table sets forth information with respect to activity in theCompany’s allowance for loan and lease losses during the periods indicated.

 
 Years  Ended June 30,    2001 2000 1999 1998 1997        (Dollars in Thousands) Balance at beginning  of period$8,475 $11,991 $7,199 $4,526 $4,129            Charge-offs:           One- to four-family(21)(92)(56)(95)(104) Commercial(361)— (11)(147)(15) Commercial business(253)(54)(124)(1,065)(757) Equipment finance  leases(131)— — — —  Consumer(1,106)(827)(914)(26)—  Agriculture--- (11)(487)— —  Credit cards(3,178)(9,507)(7,040)(906)(59) Mobile homes(51)(56)(84)(184)(186)        Total charge-offs(5,101)(10,547)(8,716)(2,423)(1,121)       Recoveries:           One- to four-family— 12 16 12 24  Commercial— 6 46 --- 493  Multi-family— — — — 46  Commercial business— — 72 — 1  Equipment finance  leases16 — — — —  Consumer325 282 227 184 194  Credit cards287 1,077 515 179 19  Mobile homes13 39 48 32 48         Total recoveries641 1,416 924 407 825                    Net (charge-offs)(4,460)(9,131)(7,792)(2,016)(296)                             Additions charged to operations2,432 5,615 12,120 4,689 693 Additions from  acquisition97 — 464 — —       Balance at end of  period$6,544 $8,475 $11,991 $7,199 $4,526                  Ratio of net  (charge-offs) during the period to average  loans and leases outstanding during the period(0.79%)(1.72%)(1.68%)(0.45%)(0.07%)                 Ratio of allowance for  loan and lease losses to total loans and leases at end of period1.13%1.52%2.32%1.62%1.02%                 Ratio of allowance for  loan and lease losses to nonperforming loans at end of period(1)110.54%326.97%445.27%258.86%361.50%      
(1)         Nonperforming loans include nonaccruingloans and accruing loans delinquent more than 90 days.
Thedistribution of the Company's allowance for loan and lease losses at the datesindicated is summarized as follows:

 
 At June 30,    2001 2000 1999 1998 1997        Amount Percent of  Loans in  Each  Category to  Total Loans Amount Percent of  Loans in  Each  Category to  Total Loans Amount Percent of  Loans in  Each  Category to  Total Loans Amount Percent of  Loans in  Each  Category to  Total Loans Amount Percent of  Loans in  Each  Category to  Total Loans             (Dollars in thousands) One-to four-family(1)$1,196 21.48%$1,299 23.23%$1,233 26.35%$1,203 29.12%$1,540 36.50%Commercial and multi-family real estate(1)1,402 25.19 1,442 25.79 1,124 24.03 967 23.41 926 21.94 Commercial business(3)1,033 18.55 844 15.10 556 11.88 377 9.13 255 6.07 Consumer(2)1,523 27.36 1,536 27.47 1,268 27.11 1,219 29.49 1,254 29.73 Agricultural317 5.70 323 5.77 264 5.64 150 3.63 77 1.82 Credit cards1,036 1.05 2,976 1.66 7,474 3.44 3,181 2.74 329 0.51 Mobile homes37 0.67 55 0.98 72 1.55 102 2.48 145 3.43             Total$6,544 100.00%$8,475 100.00%$11,991 100.00%$7,199 100.00%$4,526 100.00%           
(1)         Includes construction loans.(2)         Excludes allowance for loanlosses relating to mobile home loans and credit card loans.(3)         Includes equipment financeleases.
Theallowance for loan losses was $6.5 million at June 30, 2001 as compared to $8.5million at June 30, 2000.    The ratioof the allowance for loan losses to total loans was 1.13% at June 30, 2001 and1.52% at June 30, 2000.  The Bank’smanagement has considered nonperforming assets and other assets of concern inestablishing the allowance for loan losses. The Bank continues to monitor its allowance for possible loan losses andmake future additions or reductions in light of the level of loans in itsportfolio and as economic conditions dictate.        Thecurrent level of the allowance for loan losses is a result of management'sassessment of the risks within the portfolio based on the information revealedin credit reporting processes. The Bank utilizes a risk-rating system on allcommercial business, agricultural, construction and multi-family and commercialreal estate loans, including purchased loans. A monthly credit review is performed on all types of loans to establishthe necessary reserve based on the estimated risk within the portfolio. Thisassessment of risk takes into account the composition of the loan portfolio,historical loss experience for each loan category, previous loan experience,concentrations of credit, current economic conditions and other factors that inmanagement’s judgment deserve recognition. In regard to credit card loans, theBank is providing a reserve of 31% of the loan balance until the credit cardportfolio becomes seasoned.  As of June30, 2001, $1.0 million of the $6.5 million allowance for loan losses wasreserved for the credit card loan portfolio. Regulators have reviewed theBank's methodology for determining allowance requirements on the Bank’s loanportfolio and have made no recommendations for increases in the allowancesduring the three year period ended June 30, 2001.

Real estate properties acquired through foreclosureare recorded at the lower of cost or fair value (less a deduction fordisposition costs).  Valuations areperiodically updated by management and a specific provision for losses on suchproperties is established by a charge to operations if the carrying values ofthe properties exceed their estimated net realizable values.

Althoughmanagement believes that it uses the best information available to determinethe allowances, unforeseen market conditions could result in adjustments andnet earnings being significantly affected if circumstances differ substantiallyfrom the assumptions used in making the final determinations.  Future additions to the Bank's allowancesresult from periodic loan, property and collateral reviews and thus cannot bepredicted in advance.  At June 30, 2001,the Company had a total allowance for loan and lease losses of $6.5 million, or1.1% of total loans.  See Note 1 of"Notes to Consolidated Financial Statements” for a description of theBank's policy regarding the provision for losses on loans.
**Comparisonof the Years Ended June 30, 2001 and June 30, 2000**

*General*. The Company's net income decreased $660,000 to $4.6 million for the yearended June 30, 2001 as compared to $5.3 million for the year ended June 30,2000.  As discussed in more detailbelow, this decrease was due primarily to an increase in interest expense of$5.7 million, a decrease in noninterest income of $3.1 million and an increasein noninterest expense of $1.1 million. These decreases to income were partially offset by an increase ininterest income of $6.2 million and a decrease in provision for losses on loansand leases of $3.2 million.

*Interest Income.* Interest income increased $6.2 million from $53.1 million for the yearended June 30, 2000 to $59.3 million for the year ended June 30, 2001.  The $59.2 million increase of averageearning assets resulted in a $4.5 million increase in interest income.  Average loan balances increased $37.2million due to originations and purchases exceeding amortizations, prepaymentsand sales and from leases and loans acquired in new branch and companyacquisitions and openings during the last half of fiscal 2000 and fiscal2001.  The Company continues to manageyields by changing the types of loans that comprise the portfolio to loans thathave a higher yield than single-family real estate loans.    Commercial business loans and agriculturalloans comprise 24.25% of the total loan portfolio at June 30, 2001 as comparedto 20.86% at June 30, 2000.  Inaddition, one-to four-family loans comprise 21.48% of the total loan portfolioat June 30, 2001 as compared to 23.23% at June 30, 2000.  The yield on average earning assetsincreased to 8.44% as compared to 8.25% one year ago.

*Interest Expense.* Interest expense increased $5.7 million from $29.6 million for the yearended June 30, 2000 to $35.3 million for the year ended June 30, 2001.  The $55.6 million increase of averageinterest-bearing liabilities resulted in a $2.2 million increase in interestexpense.  The average balance ofdeposits increased $52.5 million primarily due to deposits acquired in newbranch acquisitions and openings during the last half of fiscal 2000 and fiscal2001.  The average rate paid on depositsincreased to 5.10% as compared to 4.65% one year ago.  The average balance of FHLB advances and other borrowingsincreased $3.1 million during fiscal year 2001.  The average rate paid on FHLB advances and other borrowingsincreased to 6.16% at June 30, 2001 from 5.62% at June 30, 2000.  See “Financial Condition Data” for furtherdiscussion.

*Net InterestIncome.* TheCompany's net interest income for the year ended June 30, 2001 increased$439,000, or 1.87%, to $24.0 million compared to $23.5 million for the sameperiod ended June 30, 2000.  Theincrease in net interest income reflects an overall increase in net earningassets offset by a reduction in the net interest spread on average earningassets to 3.16% for the period ended June 30, 2001 from 3.43% for the sameperiod in 2000.  The decrease in the netinterest spread is due primarily to a declining rate environment.

*Provision forLosses on Loans and Leases.* The allowance for possible losses on loans and leasesis maintained at a level which is considered by management to be adequate toabsorb possible loan losses on existing loans that may become uncollectible,based on an evaluation of the collectability of loans and prior loan lossexperience.  The evaluation takes intoconsideration such factors as changes in the nature and volume of the loanportfolio, overall portfolio quality, review of specific problem loans, andcurrent economic conditions that may affect the borrower's ability to pay.  The allowance for possible loan and leaselosses is established through a provision for possible loan and lease lossescharged to expense.

Duringthe year ended June 30, 2001, the Company recorded a provision for losses onloans of $2.4 million  compared to $5.6million for the year ended June 30, 2000, a decrease of $3.2 million.  A majority of the decrease is related toreduction of the subprime credit card loan portfolio from $9.6 million for theyear ended June 30, 2000 to $6.1 million at June 30, 2001.  See "Asset Quality" for furtherdiscussion.

Theallowance for loan and lease losses at June 30, 2001 was $6.5 million.  The allowance decreased from the June 30,2000 balance primarily as a result charge-offs exceeding recoveries by $4.5million offset by the provision for losses on loans of $2.4 million.  The ratio of allowance for loan and leaselosses to nonperforming loans at June 30, 2001 was 110.54% compared to 326.97%at June 30, 2000.  The allowance forloan and lease losses to total loans and leases at June 30, 2001 was 1.13%compared to 1.52% at June 30, 2000.  TheBank's management believes that the June 30, 2001 recorded allowance for loanlosses was adequate to provide for potential losses on the related loans, basedon its evaluation of the collectability of loans and prior loss experience.

*Noninterest Income.* Noninterest income was $12.1 million for the year ended June 30, 2001 ascompared to $15.3 million for the year ended June 30, 2000.**Thedecrease in credit card fee income of $4.3 million for the year ended June 30,2001 as compared to the same period in fiscal 2000 is primarily due to adecrease in fees received on unsecured credit cards.  This is a result of the credit card loan portfolio decreasingfrom $9.6 million at June 30, 2000 to $6.1 million at June 30, 2001.  The fee income represents interchange fees,annual/monthly fees, late fees and other miscellaneous fees. This credit cardprogram was initiated in fiscal 1997. The Company ceased credit card applications in March 1999.  This decreased the level of these fees.  Interest income on credit card loans isincluded in interest income on loans.

Feeson deposits increased $842,000 due to an increase in volume from depositsacquired in new branch acquisitions/openings during the last half of fiscal2000 and fiscal 2001.

Insuranceand commissions from the sale of financial and insurance products increased$182,000 primarily due to a greater emphasis on the production of non-interestincome revenue.

Gainon sale of loans increased $207,000 for the year ended June 30, 2001 ascompared to the same period in the prior fiscal year.  This increase was due to increased sales into the secondarymarket.

Gainon sale of securities decreased $185,000 for the year ended June 30, 2001 ascompared to the same period in the prior fiscal year.  This decrease was due to no sales occurring in the current fiscalyear.

*NoninterestExpense.*  Noninterest expense increased $1.1 millionfrom $25.0 million for the year ended June 30, 2000 to $26.1 million for theyear ended June 30, 2001.  This increasewas primarily from an increase in compensation and employee benefits of $2.2million, occupancy and equipment of $521,000 and amortization of intangibleassets of $113,000 which was partially offset by a decrease in credit cardprocessing expenses of $1.8 million.

Theincrease in compensation and employee benefits, occupancy and equipment andamortization of intangible assets was primarily related to seven new bankbranches opened and two nonbank operations acquired since September 1999.

Therewas a decrease of $1.8 million in the cost of third party processors of creditcards.  This expense represents costsfor collecting loans, and marketing costs for the acquisition of credit cardsfor the unsecured credit card program. The decrease in expense is due primarily to a decrease of credit cardloans from $9.6 million as of June 30, 2000 to $6.1 million as of June 30,2001.  The Company began offering creditcards in the second quarter of fiscal 1997 and ceased credit card applicationsin March 1999.

*Income tax expense.* The Company's  income tax expensefor both of the years ended June 30, 2001 and June 30, 2000 was $2.9 million, adecrease of $7,000.  This decrease wasprimarily due to the decrease in the Company’s income before income tax offsetby an increase in the Company’s effective tax rate from 35.84% at June 30, 2000to 38.92% at June 30, 2001 due to changes in permanent tax differences.

**Comparison of theYears Ended June 30, 2000 and June 30, 1999**

*General*. The Company's net income increased $4.2 million to $5.3 million for theyear ended June 30, 2000 as compared to $1.1 million for the year ended June30, 1999.  As discussed in more detailbelow, this increase was due primarily to an increase in interest income of$7.0 million, a decrease in provision for losses on loans of $6.5 million and adecrease in noninterest expense of $1.4 million.  These increases to income were partially offset by an increase ininterest expense of $4.9 million, a decrease in noninterest income of $3.8million and an increase in income tax expense of $2.0 million.

*Interest Income.* Interest income increased $7.0 million from $46.1 million for the yearended June 30, 1999 to $53.1 million for the year ended June 30, 2000.  The $85.6 million increase of averageearning assets resulted in a $6.9 million increase in interest income.  Average loan balances increased $65.7million due to originations and purchases exceeding amortizations, prepaymentsand sales and from loans acquired in new branch acquisitions and openingsduring the last half of fiscal 1999 and fiscal 2000.  The Company continues to manage yields by changing the types ofloans that comprise the portfolio to loans that have a higher yield than single-familyreal estate loans.    Commercialbusiness loans and agricultural loans comprise 20.87% of the total loanportfolio at June 30, 2000 as compared to 17.52% at June 30, 1999.  In addition, one-to four-family loanscomprise 23.23% of the total loan portfolio at June 30, 2000 as compared to26.35% at June 30, 1999.  The yield onaverage earning assets remained stable at 8.25% as compared to 8.26% one yearago.

*Interest Expense.* Interest expense increased $4.9 million from $24.7 million for the yearended June 30, 1999 to $29.6 million for the year ended June 30, 2000.  The $96.1 million increase of averageinterest-bearing liabilities resulted in a $4.1 million increase in interestexpense.  The average balance ofdeposits increased $65.6 million primarily due to deposits acquired in newbranch acquisitions and openings during the last half of fiscal 1999 and fiscal2000.  The average rate paid on depositsremained stable at 4.65% as compared to 4.64% one year ago.  The average balance of FHLB advances andother borrowings increased $30.5 million during fiscal year 2000.  The average rate paid on FHLB advances andother borrowings increased to 5.62% at June 30, 2000 from 5.46% at June 30,1999.  See “Financial Condition Data”for further discussion.
*Net InterestIncome.* TheCompany's net interest income for the year ended June 30, 2000 increased $2.1million, or 9.64%, to $23.5 million compared to $21.5 million for the sameperiod ended June 30, 1999.  Theincrease in net interest income reflects an overall increase in net earningassets offset by a reduction in the net interest spread on average earningassets to 3.43% for the period ended June 30, 2000 from 3.50% for the sameperiod in 1999.  The decrease in the netinterest spread is due primarily to funding other noninterest-earning assetsand purchases of treasury stock.

*Provision forLosses on Loans.*The allowance for possible losses on loans is maintained at a level which isconsidered by management to be adequate to absorb possible loan losses on existingloans that may become uncollectible, based on an evaluation of thecollectability of loans and prior loan loss experience.  The evaluation takes into consideration suchfactors as changes in the nature and volume of the loan portfolio, overallportfolio quality, review of specific problem loans, and current economicconditions that may affect the borrower's ability to pay.  The allowance for possible loan losses isestablished through a provision for possible loan losses charged to expense.

Duringthe year ended June 30, 2000, the Company recorded a provision for losses onloans of $5.6 million  compared to $12.1million for the year ended June 30, 1999, a decrease of $6.5 million.  A majority of the decrease is related toreduction of the subprime credit card loan portfolio from $18.1 million for theyear ended June 30, 1999 to $9.6 million at June 30, 2000.  See "Asset Quality" for furtherdiscussion.

Theallowance for loan losses at June 30, 2000 was $8.5 million.  The allowance decreased from the June 30,1999 balance primarily as a result charge-offs exceeding recoveries by $9.1million offset by the provision for losses on loans of $5.6 million.  The ratio of allowance for loan losses tononperforming loans at June 30, 2000 was 326.97% compared to 445.27% at June30, 1999.  The allowance for loan lossesto total loans at June 30, 200 was 1.52% compared to 2.32% at June 30,1999.  The Bank's management believesthat the June 30, 2000 recorded allowance for loan losses was adequate toprovide for potential losses on the related loans, based on its evaluation ofthe collectability of loans and prior loss experience.

*Noninterest Income.* Noninterest income was $15.3 million for the year ended June 30, 2000 ascompared to $19.0 million for the year ended June 30, 1999.

The decrease in credit cardfee income of $5.1 million for the year ended June 30, 2000 as compared to thesame period in fiscal 1999 is primarily due to a decrease in fees received onunsecured credit cards.  This is aresult of the credit card loan portfolio decreasing from $18.1 million at June30, 1999 to $9.6 million at June 30, 2000. The fee income represents processing fees, interchange fees, annualfees, late fees and other miscellaneous fees. This credit card program wasinitiated in fiscal 1997.  The Companyceased credit card applications in March 1999. This decreased the level of these fees. Interest income on credit card loans is included in interest income onloans.

Feeson deposits increased $604,000 due to an increase in volume from depositsacquired in new branch acquisitions/openings during the last half of fiscal1999 and fiscal 2000.

Insuranceand commission from the sale of financial and insurance products increased$467,000 primarily due to a greater emphasis on the production of non-interestincome revenue.

Gainon sale of securities increased $184,000 for the year ended June 30, 2000 ascompared to the same period in the prior fiscal year.  This increase was due to current market prices being higher thanamortized cost at the time of sale as compared to sales in the prior year.

*NoninterestExpense.*  Noninterest expense decreased $1.4 millionfrom $26.4 million for the year ended June 30, 1999 to $25.0 million for theyear ended June 30, 2000.  This decreasewas primarily from a decrease in credit card processing expense of $3.7 millionwhich was partially offset by an increase in compensation and employee benefitsof $1.3 million, an increase in other general and administrative expenses (notincluding advertising) of $579,000 and amortization of intangible assets of$329,000.

Therewas a decrease of $3.7 million in the cost of third party processors of creditcards.  This expense represents costsfor processing of applications, collecting loans, and marketing costs for theacquisition of credit cards for the unsecured credit card program.  The decrease in expense is due primarily toa decrease of credit card loans from $18.1 million as of June 30, 1999 to $9.6million as of June 30, 2000.  TheCompany began offering credit cards in the second quarter of fiscal 1997 andceased credit card applications in March 1999.
Theincrease in compensation and employee benefits was due primarily to an increasein employee compensation of $1.0 million paid to employees from new bank branchesopened or acquired since the last quarter of fiscal 1999.

Theincrease in other general and administrative expenses was due primarily due toan increases in consulting expense of $214,000, TTL expense of $79,000, duesand subscriptions of $77,000, office supplies of $52,000 and contributions of$51,000.

*Income tax expense.* The Company's  income tax expensefor the year ended June 30, 2000 was $2.9 million compared to $924,000 for theyear ended June 30, 1999, an increase of $2.0 million. This increase wasprimarily due to the increase in the Company’s income before income tax.

**Liquidityand Capital Resources**

TheBank’s primary sources of funds are deposits, FHLB advances, amortization andprepayments of loan principal (including mortgage–backed securities) and,to a lesser extent, sales of mortgage loans, sales and/or maturities ofsecurities, mortgage–backed securities, and short–terminvestments.  While scheduled loanpayments and maturing securities are relatively predictable, deposit flows andloan prepayments are more influenced by interest rates, general economicconditions, and competition. The Bank attempts to price its deposits to meetits asset/liability objectives consistent with local market conditions.  Excess balances are invested in overnightfunds.

Federalregulations have historically required the Bank to maintain minimum levels ofliquid assets.  The required percentagehas varied from time to time based upon economic conditions and savings flowsand is currently 0% of net withdrawable savings deposits and currentborrowings.  Liquid assets for purposesof this ratio include cash, certain time deposits, U.S. Government andcorporate securities and other obligations generally having remaining maturitiesof less than five years.  The Bank hashistorically maintained its liquidity ratio at a level in excess of thatrequired by these regulations.  At June30, 2001, the Bank's regulatory liquidity ratio was 14.3%.

Liquiditymanagement is both a daily and long–term responsibility of management.  The Bank adjusts its investments in liquidassets based upon management's assessment of (i) expected loan demand, (ii)projected loan sales, (iii) expected deposit flows, (iv) yields available oninterest–bearing deposits, and (v) the objectives of its asset/liabilitymanagement program. Excess liquidity is invested generally in interest–bearingovernight deposits and other short–term government and agencyobligations.  During fiscal 2001, theBank generated funds internally.  Thusit was able to paydown FHLB advances, which decreased its borrowings with theFHLB by $10.8 million.

TheBank anticipates that it will have sufficient funds available to meet currentloan commitments.  At June 30, 2001, theBank had outstanding commitments to originate or purchase loans of $35.4million and to sell loans of $28.5 million. The Bank had no commitments to purchase or sell securities.

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

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 since1996, the Company has purchased an aggregate of 1,105,209 shares of commonstock through June 30, 2001.

Savingsinstitutions insured by the Federal Deposit Insurance Corporation are requiredby the Financial Institutions Reform, Recovery and Enforcement Act of 1989("FIRREA") to meet three regulatory capital requirements.  If a requirement is not met, regulatoryauthorities may take legal or administrative actions, including restrictions ongrowth or operations or, in extreme cases, seizure.  Institutions not in compliance may apply for an exemption fromthe requirements and submit a recapitalization plan.  Under these capital requirements, at June 30, 2001, the Bank metall current capital requirements.

TheOffice of Thrift Supervision ("OTS") has adopted a core capitalrequirement for savings institutions comparable to the requirement for nationalbanks.  The OTS core capital requirementis 3% of total adjusted assets for thrifts that receive the highest supervisoryrating for safety and soundness.  TheBank had core capital of 5.96% at June 30, 2001.
Pursuantto the Federal Deposit Insurance Corporation Insurance Act (“FDICIA”), thefederal banking agencies, including the OTS, have also proposed regulationsauthorizing the agencies to require a depository institution to maintainadditional total capital to account for concentration of credit risk and therisk of non-traditional activities.  Noassurance can be given as to the final form of any such regulation.

AtJune 30, 2001 and 2000, securities with a fair value of $84.4 million and$104.2 million, respectively, were pledged as collateral for public depositsand other purposes.  Deposits at June30, 2001 and 2000 include $37.1 million and $45.2 million, respectively, ofdeposits from one local governmental entity, the majority of which are demandaccounts.

**Impactof Inflation and Changing Prices**

TheConsolidated Financial Statements and Notes thereto presented herein have beenprepared in accordance with generally accepted accounting principles, whichrequire the measurement of financial position and operating results in terms ofhistorical dollars without considering the change in the relative purchasingpower of money over time due to inflation. The impact 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.

**Effect of New Accounting Standards**

In July, 2001, the Financial Accounting Standards Board(FASB) issued two statements - Statement 141, *Business Combinations*, andStatement 142, *Goodwill and Other Intangible Assets*, which will impact theCompany's accounting for its reported goodwill.
Statement  141: ·Eliminates  the pooling method for accounting for business combinations. ·Requires that  intangible assets that meet certain criteria be reported separately from  goodwill. ·Requires  negative goodwill arising from a business combination to be recorded as an  extraordinary gain.Statement  142: ·Eliminates  the amortization of goodwill and other intangibles that are determined to  have an indefinite life. ·Requires, at  a minimum, annual impairment tests for goodwill and other intangible assets  that are determined to have an indefinite life. ·Requires the  carrying value of goodwill which exceeds its implied fair value to be  recognized as an impairment loss.Upon adoption  of these Statements, the Company is required to: ·Evaluate its  existing intangible assets and goodwill that were acquired in prior business  combinations and to make any necessary reclassifications in order to conform  to the new criteria. ·Reassess the  useful lives of intangible assets and adjust the remaining amortization  periods accordingly. ·Recognize any  remaining negative goodwill as income.
The provisions of FASB Statement 141 apply to allbusiness combinations initiated after June 30, 2001 and all businesscombinations accounted for by  the  purchase method for which the date ofacquisition is July 1, 2001, or later. The provisions of FASB Statement 142 are required to be implemented bythe Company in the first quarter of its 2003 fiscal year, although the Companycan implement in the first quarter of its 2002 fiscal year.  The Company has not yet completed its fullassessment of the effects of these new pronouncements on its financialstatements, or whether it will adopt the FASB Statement 142 in the firstquarter of its 2002 fiscal year, and is uncertain as to the impact.
**Asset/Liability andRisk Management**

Interestrate risk is the most significant market risk affecting the Company.  Other types of market risk, such as foreigncurrency exchange rate risk and commodity price risk, do not arise in thenormal course of the Company’s business activities.  The Bank, like other thrift institutions, is subject to interestrate risk to the extent that its interest–bearing liabilities with short-and medium-term maturities mature or reprice more rapidly than itsinterest-earning assets. The Company does not currently engage in trading activitiesor use derivative instruments to control interest rate risk.  Even though such activities may be permittedwith the approval of the Board of Directors, the Company does not intend toengage in such activities in the immediate future.

As acontinuing part of its financial strategy, the Bank considers methods ofmanaging this asset/liability mismatch consistent with maintaining acceptablelevels of net interest income.  In orderto properly monitor interest rate risk, the Board of Directors has created anAsset/Liability Committee whose principal responsibilities are to assess theBank's asset/liability mix and recommend strategies to the Board that willenhance income while managing the Bank's vulnerability to changes in interestrates.

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 one-year gap and sensitivity to interest ratechanges.  The goal of this policy is toprovide a relatively consistent level of net interest income in varyinginterest rate cycles and to minimize the potential for significant fluctuationsfrom period to period.

Oneapproach used to quantify interest rate risk is the net portfolio value (“NPV”)analysis.  In essence, this analysiscalculates the difference between the present value of the liabilities and thepresent value of expected cash flows from assets and off-balance sheetcontracts.  The following table setsforth, at June 30, 2001, an analysis of the Company’s interest rate risk asmeasured by the estimated changes in NPV resulting from instantaneous andsustained parallel shifts in the yield curve (+ or –300 basis points, measuredin 100 basis point increments).

Thedata in the following tables is based on assumptions utilized by the OTS inassessing interest rate risk of thrift institutions and published in “SelectedAsset and Liability Price Tables as of June 30, 2001”.  Even if interest rates change in thedesignated amounts, there can be no assurance that the Company’s assets andliabilities would perform as set forth below. In addition, a change in U.S. Treasury rates in the designated amountsaccompanied by a change in the shape of the Treasury yield curve would causesignificantly different changes to the NPV than indicated below.

 
   Estimated Increase  (Decrease) in NPV     Change in  Interest RatesEstimated  NPV  Amount Amount Percent     Basis Points(Dollars in thousands)          +300$73,184 $(8,368)(10%)+20076,514 (5,038)(6)+10078,957 (2,595)(3)—81,552 — — -10081,098 (454)(1)-20078,133 (3,419)(4)-30076,004 (5,548)(7)
 

**Forward-LookingStatement**

This Form 10-K and other reports issued by theCompany, including reports filed with the Securities and Exchange Commission,may contain "forward-looking" statements that deal with futureresults, expectations, plans or performance. In addition, the Company's management may make such statements orally tothe media, securities analysts, investors or others. Forward-looking statementsdeal with matters that do not relate strictly to historical facts.  These forward-looking statements mightinclude one or more of the following:
 •Projections of  income, revenues, earnings per share, dividends, capital expenditures,  capital structure or other financial items. •Descriptions of  plans or objectives of management for future operations, products or  services. •Forecasts of  future economic performance. •Descriptions of  assumptions underlying or relating to such matters.
 

Forward-looking statements can be identified by thefact that they do not relate strictly to historical or current facts.  They often include words such as"believe," "expect," "anticipate,""intend," "plan," "estimate," or words of similarmeaning, or future or conditional verbs such as "will,""would," "should," "could" or "may."

The Company's future results may differ materiallyfrom historical performance, and forward-looking statements about the Company'sexpected financial results or other plans are subject to a number of risks anduncertainties.  These include but arenot limited to possible legislative changes and adverse economic, business andcompetitive developments such as shrinking interest margins; deposit outflows;reduced demand for financial services and loan products; changes in accountingpolicies or guidelines, or in monetary and fiscal policies of the federalgovernment; changes in credit and other risks posed by the Company's loanportfolios; technological, computer-related or operational difficulties;adverse changes in securities markets; results of litigation; or othersignificant uncertainties.

Forward-looking statements speak only as of the datethey are made.  The Company does notundertake to update forward-looking statements to reflect circumstances orevents that occur after the date the forward-looking statements are made.
**Item 7A.**           **Quantitativeand Qualitative Disclosures About Market Risk**

InterestRate Risk Management

TheCompany 's net income is largely dependent on its net interest income. Netinterest income is susceptible to interest rate risk to the degree thatinterest-bearing liabilities mature or reprice on a different basis thaninterest-earning assets. When interest-bearing liabilities mature or repricemore quickly than interest-earning assets in a given period, a significantincrease in market rates of interest could adversely affect net interestincome. Similarly, when interest-earning assets mature or reprice more quicklythan interest-bearing liabilities, falling interest rates could result in adecrease in net income.

In anattempt to manage its exposure to change in interest rates, management monitorsthe Company's interest rate risk. Since 1991, management's Asset-LiabilityCommittee has met monthly to review the Company’s interest rate risk positionand profitability, and to recommend adjustments for consideration by the Boardof Directors. Management also reviews the Bank's securities portfolio,formulates investment strategies, and oversees the timing and implementation oftransactions to assure attainment of the Board 's objectives in the mosteffective manner. Notwithstanding the Company's interest rate risk managementactivities, the potential for changing interest rates is an uncertainty thatcan have an adverse effect on net income.

Inadjusting the Company's asset/liability position, the Board and managementattempt to manage the Company's interest rate risk while enhancing net interestmargins. At times, depending on the level of general interest rates, therelationship between long and short-term interest rates, market conditions andcompetitive factors, the Board and management may determine to increase theCompany’s interest rate risk position somewhat in order to increase its netinterest margin. The Company's results of operations and net portfolio valuesremain vulnerable to increases in interest rates and to fluctuations in thedifference between long- and short-term interest rates.

Consistentwith the asset/liability management philosophy described above, the Company hastaken several steps to manage its interest rate risk. First, the Company hasstructured the security portfolio to shorten the lives of its interest-earningassets. The Company’s recent purchases of mortgage-backed securities andsecurities available for sale have had either short or medium terms to maturityor adjustable interest rates. At June 30, 2001, the Company had securitiesavailable for sale of $31.9 million with contractual maturities of five yearsor less and adjustable rate mortgage-backed securities of $3.8 million.Mortgage-backed securities amortize and experience prepayments of principal;the Company has received average cash flows from principal paydowns,maturities, sales and calls of securities of $41.0 million annually over thepast three fiscal years. The Company also controls interest rate risk reductionby emphasizing non-certificate depositor accounts. The Board and managementbelieve that such accounts carry a lower cost than certificate accounts, andthat a material portion of such accounts may be more resistant to changes ininterest rates than are certificate accounts. At June 30, 2001, the Company had$49.9 million of savings accounts, $139.5 million of money market accounts and$88.2 million of NOW and demand accounts, representing 46.2% of total depositoraccounts.

Oneapproach used to quantify interest rate risk is the net portfolio value("NPV") analysis. In essence, this analysis calculates the differencebetween the present value of liabilities and the present value of expected cashflows from assets and off-balance sheet contracts.  See Item 7 “Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Asset/Liability and Risk Management” forfurther discussion.

TheCompany does not currently engage in trading activities or use derivativeinstruments to control interest rate risk. Even though such activities may bepermitted with the approval of the Board of Directors, the Company does notintend to engage in such activities in the immediate future.

Interestrate risk is the most significant market risk affecting the Company. Othertypes of market risk, such as foreign currency exchange rate risk and commodityprice risk, do not arise in the normal course of the Company's businessactivities.
**Item 8.  Financial Statements and Supplementary Data**

**HFFINANCIAL CORP.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

**CONTENTS**
  INDEPENDENT AUDITOR'S REPORT   CONSOLIDATED  FINANCIAL STATEMENTS    Statements  of financial condition     Statements of income     Statements  of stockholders' equity     Statements of  cash flows     Notes to  consolidated financial statements     
 

 

**INDEPENDENTAUDITOR'S REPORT**

Tothe Board of Directors and StockholdersHF Financial Corp.Sioux Falls, South Dakota

Wehave audited the accompanying consolidated statements of financial condition ofHF Financial Corp. and subsidiaries as of June 30, 2001 and 2000, and the relatedconsolidated statements of income, stockholders' equity and cash flows for eachof the three years in the period ended June 30, 2001.  These financial statements are the responsibility of theCompany's management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

Weconducted our audits in accordance with auditing standards generally acceptedin the United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of HF Financial Corp.and subsidiaries as of June 30, 2001 and 2000, and the results of theiroperations and their cash flows for each of the three years in the period endedJune 30, 2001, in conformity with accounting principles generally accepted inthe United States of America.

/s/     McGladrey & Pullen, LLPSioux Falls, South DakotaAugust 13, 2001

 

**HF FINANCIAL CORP. AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION**

**June 30, 2001 and 2000**

**(Dollars in Thousands)**

 
**ASSETS****2001** 2000  ****  Cash and cash equivalents**$****84,913** $26,417 Securities available for  sale (Notes 3 and 8)**49,969** 60,445 Mortgage-backed securities  available for sale (Note 3)**43,750** 53,001 Loans and leases  receivable (Notes 4 and 8)**563,836** 542,494 Loans held for sale (Note  4)**7,270** 8,257 Accrued interest  receivable**5,412** 5,346 Office  properties and equipment, net of accumulated depreciation (Note 6)**13,756** 13,717 Foreclosed real estate and  other properties**1,608** 1,594 Prepaid expenses and other  assets**2,720** 2,290 Mortgage servicing rights  (Note 5)**2,775** 2,171 Deferred income taxes  (Note 9)**2,230** 4,235 Cost in excess of net  assets acquired (Note 2)**5,763** 5,030  ****   **$****784,002** $724,997  ****  
 

 

 
**LIABILITIES AND STOCKHOLDERS'  EQUITY****2001** 2000 ********  Liabilities     Deposits (Note 7)**$****601,207** $545,497  Advances from Federal Home Loan  Bank and other borrowings (Note 8)**108,376** 113,020  Advances by borrowers for taxes  and insurance**7,337** 6,543  Accrued interest payable**7,901** 6,844  Other liabilities**6,656** 6,150  ****   **Total liabilities****731,477** 678,054  ****  Commitments  and Contingencies (Notes 18 and 20)         Stockholders'  Equity (Notes 9, 10, 11, 14 and 15)     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, $.01 par value,  10,000,000 shares authorized, 4,786,005 and 4,769,314 shares issued at June  30, 2001 and 2000**48** 48  Additional paid-in capital**15,378** 15,260  Retained earnings, substantially  restricted**52,886** 49,824  Unearned compensation**-** (113) Accumulated other comprehensive  income (loss)**338** (1,951) Less cost of treasury stock, 2001  and 2000 1,105,209 shares**(16,125**)(16,125) ****   **52,525** 46,943  ****   **$****784,002** $724,997  ****       See  Notes to Consolidated Financial Statements.    
**CONSOLIDATEDSTATEMENTS OF INCOME**

**Years Ended June 30, 2001, 2000 and 1999**

**(Dollars in Thousands, Except Per Share Data)**

 
 **2001** 2000 1999  ****   Interest  and dividend income:       Loans and leases receivable**$****51,166** $46,135 $40,616  Mortgage-backed securities**3,327** 3,390 2,664  Investment securities and interest-bearing deposits**4,819**   3,606   2,839     ****    **59,312** 53,131 46,119     Interest  expense:       Deposits**28,420** 23,462 20,353  Advances from Federal Home Loan Bank and other borrowings**6,923**   6,139   4,305     ****    **35,343** 29,601 24,658  ****    **Net interest income****23,969** 23,530 21,461 Provision  for losses on loans and leases**2,432** 5,615 12,120  ****    **Net interest income after provision for  losses on loans and leases****21,537** 17,915 9,341     Noninterest  income:       Fees on deposits**3,631** 2,789 2,185  Credit card fee income**2,709** 7,010 12,064  Loan servicing income**1,567** 1,381 1,263  Commission and insurance income**1,343** 1,161 694  Loan fees and service charges**982** 1,131 1,231  Gain on sale of loans, net**842** 635 673  Trust income**392** 345 251  Appraisal and inspection fees**260** 244 363  Gain on sale of securities, net**-** 185 1  Other**395** 389 324   ****    **12,121** 15,270 19,049  ****   
 

 
 **2001** 2000 1999  ****   Noninterest expense:       Compensation and employee benefits**$****14,543** $12,382 $11,048  Other general and administrative expenses**4,012** 4,167 3,588  Occupancy and equipment**3,452** 2,931 2,843  Credit card processing expense**2,435** 4,190 7,937  Advertising**749** 543 567  Amortization of intangible assets**470** 357 28  Federal insurance premiums**273** 191 268  Losses and provision for losses and expenses on  foreclosed real estate and other properties, net**182**  215 136   ****    **26,116** 24,976 26,415  ****    **Income before income taxes****7,542** 8,209 1,975 Income tax expense (Note  9)**2,935** 2,942 924  ****    **Net income****$****4,607** $5,267 $1,051   ****          Earnings per share (Note  12):       Basic**$****1.25** $1.36 $0.25  Diluted**$****1.23** $1.34 $0.24            See  Notes to Consolidated Financial Statements.
** **

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS' EQUITY**

**Years Ended June 30, 2001, 2000 and 1999**

**(Dollars in Thousands, Except Per Share Data)**

 
 Common  Stock Additional  Paid-In  Capital Retained  Earnings Unearned  Compensation Accumulated  Other  Comprehensive  Income (Loss) Treasury  Stock Total         Balance, June 30, 1998$47 $14,863 $46,561 $(340)$(9)$(4,521)$56,601  Comprehensive income:               Net  income- - 1,051 - - -    Net change in unrealized loss on  securities available for sale, net of deferred taxes-   -   -   -   (1,227)-        Comprehensive  income (loss)- - - - - - (176) Issuance of restricted stock and  exercise of stock options (Note 15)-   265   -   -   -   -   265    Cash  dividends paid ($0.37 per share) on common stock- - (1,511)- - - (1,511) Purchase  of treasury stock (Note 11)- - - - - (6,735)(6,735) Amortization  of unearned compensation- - - 114 - - 114          Balance,  June 30, 199947 15,128 46,101 (226)(1,236)(11,256)48,558  Comprehensive income:               Net  income- - 5,267 - - -    Net change in unrealized loss on  securities available for sale, net of deferred taxes-   -   -   -   (715)-        Comprehensive  income- - - - - - 4,552  Issuance of restricted stock and  exercise of stock options (Note 15)1 132 - - - - 133  Cash  dividends paid ($0.40 per share) on common stock- - (1,544)- - - (1,544) Purchase  of treasury stock (Note 11)- - - - - (4,869)(4,869) Amortization  of unearned compensation- - - 113 - - 113          Balance, June 30, 200048 15,260 49,824 (113)(1,951)(16,125)46,943  Comprehensive income:               Net  income- - 4,607 - - -    Net change in unrealized gain  (loss) on securities available for sale, net of deferred taxes-   -   -   -   2,289   -        Comprehensive  income- - - - - - 6,896  Issuance of restricted stock and  exercise of stock options (Note 15)-   118   -   -   -   -   118    Cash  dividends paid ($0.42 per share) on common stock- - (1,545)- - - (1,545) Amortization  of unearned compensation- - - 113 - - 113          Balance, June 30, 2001**$****48**** ****$****15,378**** ****$****52,886**** ****$****-**** ****$****338**** ****$****(16,125****)****$****52,525**** ** **** **** **** **** **** **** **** 
 See Notes to Consolidated FinancialStatements.

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS****Years Ended June 30, 2001, 2000 and 1999(Dollars in Thousands)**
 **2001** 2000 1999  ****   Cash  Flows From Operating Activities       Net income**$****4,607** $5,267 $1,051  Adjustments to reconcile net income to net cash provided  by operating activities:       Provision for losses on loans and  leases**2,432** 5,615 12,120  Depreciation**1,888** 1,652 1,637  Amortization of premiums and discounts on securities  available for sale, net**(80**)(25)(2) Amortization of intangible assets**470** 357 28  Amortization of mortgage  servicing rights**272** 297 277  Amortization of unearned  compensation**113** 113 114  Noncash issuance of common stock**100** 98 95  (Decrease) in deferred loan fees**(223**)(717)(441) Loans originated for resale**(76,395**)(63,790)(80,007) Proceeds from the sale of loans**78,224** 67,923 80,680  (Gain) on sale of loans, net**(842**)(635)(673) Mortgage servicing rights  capitalized**(174**)(147)(204) Realized (gain) on sale of  securities, net**-** (185)(1) Losses and provision for losses on sales of foreclosed  real estate and other properties, net**27** 51 26  Loss on disposal of office properties and equipment, net**15** 6 28  Change in other assets and  liabilities (Note 19)**1,668** 2,560 (3,217) ****    **Net cash provided by operating  activities****12,102** 18,440 11,511     
 
 **2001** 2000 1999  ****   Cash Flows From Investing  Activities       Loans purchased**$****(4,067**)$(23,201)$(36,489) Loans and leases originated and held**(206,337**)(230,495)(202,306) Principal collected on loans and leases**196,023** 189,570 185,360  Sale of participation interests in loans**-** 8,650 2,500  Securities available for sale:       Sales and maturities**34,411** 18,440 35,088  Purchases**(23,567**)(38,237)(57,696) Repayments**12,654** 7,894 14,565  Purchase of a commercial bank, net of cash and cash  equivalents acquired**-** - (4,866) Purchase of bank branches, net of cash and cash  equivalents received**2,218** 775 -  Purchase of financing lease company, net of cash acquired**(2,857**)- -  Proceeds from sale of office properties and equipment**18** 4 46  Purchase of office properties and equipment**(1,754**)(942)(1,311) Purchase of mortgage servicing rights**(702**)(582)(389) Proceeds from sale of foreclosed real estate and other  properties, net**871** 955 548  Purchase of insurance book of business**(150**)(300)-  Purchase of land for development**-** - (261)  ****    Net cash  provided by (used in) investing activities**6,761** (67,469)(65,211)    Cash Flows From Financing  Activities       Net increase in deposit accounts**51,591** 33,373 21,670  Proceeds of advances from Federal Home Loan Bank and  other borrowings**221,174** 288,100 89,600  Payments on advances from Federal Home Loan Bank and  other borrowings**(232,399**)(256,693)(59,659) Increase in advances by borrowers for taxes and insurance**794** 373 1,378  Purchase of treasury stock**-** (4,869)(6,735) Proceeds from issuance of common stock**18** 35 170  Cash dividends paid**(1,545**)(1,544)(1,511)  ****    **Net cash provided by financing  activities****39,633** 58,775 44,913     
 
 **2001** 2000 1999  ** **   **Increase (decrease) in cash and cash  equivalents****$****58,496**** **$9,746 $(8,787)  ** **    Cash and Cash Equivalents ** **     Beginning**26,417**** **16,671 25,458   ****    Ending**$****84,913**** **$26,417 $16,671  ** **  Supplemental Disclosures  of Cash Flows Information ** **     Cash payments for interest**$****34,286**** **$28,627 $24,686  Cash payments for income and franchise taxes, net**2,293**** **587 3,966   ** **    Supplemental Schedule of  Noncash Investing and Financing Activities ** **     Purchase of land for development financed by contract for  deed**$****-**** **$- $1,037  Foreclosed real estate and other properties acquired in  settlement of loans**1,097**** **902 702  Loans made in connection with the sale of foreclosed real  estate and other properties**-** 28 108  Change in unrealized gain (loss) on securities available  for sale**3,691**** **(1,273)(1,861) Deferred income taxes related to change in unrealized  gain (loss) on securities available for sale**(1,402****)**558 634   ** **     Acquisitions, net of cash and cash equivalents acquired  (received), allocated to:       Assets ** **     Securities**$****-**** **$- $12,542  Loans and leases receivable**10,082**** **452 29,204  Accrued interest receivable**7**** **- 507  Foreclosed real estate and other properties-** **- 268  Office properties and equipment**206**** **29 491  Prepaid expenses and other assets**27**** **- -  Deferred income taxes**42**** **- -  Cost in excess of net assets acquired**1,053**** **142 4,973  Liabilities assumed ** **     Deposits**(4,119****)**(1,394)(42,636) Accrued interest payable**-**** **(4)(416) Notes payable and other borrowings**(6,581****)**- -  Other liabilities**(78****)**- (67)  ****    Net cash paid (received) on acquisitions**$****639**** **$(775)$4,866  ** **  
See Notes to Consolidated Financial Statements.

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS****(Dollars in Thousands)**

**Note 1.**             **Summary ofSignificant Accounting Policies**

Theaccounting and reporting policies of HF Financial Corp. (the Company) andsubsidiaries conform to accounting principles generally accepted in the UnitedStates of America and to general practice within the industry.  The following is a description of the moresignificant of those policies that the Company follows in preparing andpresenting its consolidated financial statements.

Principlesof consolidation:  The accompanying consolidated financialstatements include the accounts of the Company, the Company's wholly-ownedsubsidiaries, HomeFirst Mortgage Corp., HF Card Services, LLC (HF Card) andHome Federal Savings Bank (the Bank), and the Bank's wholly-owned subsidiaries,Hometown Insurors, Inc., Mid-America Service Corporation and PMD, Inc. At June30, 2001, the financial statements also include the accounts of Mid AmericaCapital Services, Inc., a wholly owned subsidiary of HomeFirst Mortgage Corp.Effective July 1, 2001, Home Federal Savings Bank began operating under the nameHome Federal Bank.  All intercompanybalances and transactions have been eliminated in consolidation.

Basisof financial statement presentation:  In preparingthe financial statements, management is required to make estimates andassumptions that affect the reported amounts of assets and liabilities as ofthe date of the statement of financial condition and revenues and expenses forthe year.  Actual results could differsignificantly from those estimates.  Amaterial estimate that is particularly susceptible to significant change in thenear-term relates to the determination of the allowance for loan and leaselosses.

Managementbelieves that the allowance for loan and lease losses is adequate.  While management uses available informationto recognize possible losses on loans and leases, future additions to theallowance may be necessary based on changes in economic conditions.

Inaddition, various regulatory agencies, as an integral part of their examinationprocess, periodically review the Bank's allowance for loan and leaselosses.  Such agencies may require theBank to recognize additions to the allowance based on their judgments aboutinformation available to them at the time of their examination.

Cashand cash equivalents:  For purposes of reporting the statements ofcash flows, the Company includes as cash equivalents all cash accounts, whichare not subject to withdrawal restrictions or penalties and time deposits withoriginal maturities of 90 days or less. The Company had $60,000 of cash equivalents at June 30, 2001 and $5,000at June 30, 2000.

Trustassets:  Assets of the trust department, other thantrust cash on deposit at the Bank, are not included in these financialstatements because they are not assets of the Bank.
Securities: Management determines the appropriate classification of securities atthe date individual securities are acquired and evaluates the appropriatenessof such classifications at each statement of financial condition date.  Securities available for sale are those debtsecurities that the Company intends to hold for an indefinite period of timebut not necessarily to maturity and all equity securities.  Any decision to sell a security classifiedas available for sale would be based on various factors, including significantmovements in interest rates, changes in the maturity mix of the Company'sassets and liabilities, liquidity needs, regulatory capital considerations, andother similar factors.  Securitiesavailable for sale are carried at fair value and unrealized gains or losses arereported as increases or decreases in other comprehensive income, net of therelated deferred tax effect.

Premiumsand discounts on securities are amortized over the contractual lives of thosesecurities, except for mortgage-backed securities, for which prepayments areprobable and predictable, which are amortized over the estimated expectedrepayment terms of the underlying mortgages. The method of amortization results in a constant effective yield onthose securities (the interest method).  Interest on debt securities is recognized in income asaccrued.  Realized gains and losses onthe sale of securities are determined using the specific identification method.

Loansheld for sale:  Loans receivable which the Bank may sell orintends to sell prior to maturity are carried at the lower of net book value orfair value on an aggregate basis.  Suchloans held for sale include loans receivable that management intends to use aspart of its asset/liability strategy, or that may be sold in response tochanges in interest rates, changes in prepayment risk or other similar factors.

Loansand leases receivable:  Loans receivable are statedat unpaid principal balances, less the allowance for loan losses, and net ofdeferred loan origination fees, costs and discounts.

Discountsand premiums on loans are amortized to income using the interest method overthe remaining period to contractual maturity, adjusted for prepayments.

Uncollectibleinterest on loans that are impaired or contractually past due is charged offbased on management's periodic evaluation. The charge to interest income is equal to all interest previouslyaccrued, and income is subsequently recognized only to the extent cash paymentsare received until, in management's judgment, the borrower's ability to makeperiodic interest and principal payments is no longer in doubt, in which casethe loan is returned to accrual status.

TheCompany’s leases receivable are classified as direct finance leases. Under thedirect financing method of accounting for leases, the total net paymentsreceivable under the lease contracts and the estimated unguaranteed residualvalue of the leased equipment, net of unearned income, are recorded as a netinvestment in direct financing leases and the unearned income is recognizedeach month on a basis which approximates the interest method. Accrual ofinterest income is suspended when collection is doubtful.**TheCompany includes all loans and leases considered impaired in its evaluation ofthe adequacy of the allowance for loan and lease losses.  A loan or lease is impaired when it isprobable the Company will be unable to collect all contractual principal andinterest payments due in accordance with the terms of the loan or lease agreement.  Impaired loans and leases are measured basedon the present value of expected future cash flows discounted at the effectiveinterest rate or, as a practical expedient, at the observable market price orthe fair value of the collateral if the loan or lease is collateral dependent.  The amount of impaired loans and leases wasnot significant at June 30, 2001 and 2000.

Theallowance for loan and lease losses is increased by provisions charged toincome and reduced by charge-offs, net of recoveries.  Management's periodic evaluation of the adequacy of the allowancefor loan and lease losses is based on the Company’s past loan and lease lossexperience, known and inherent risks in the portfolio, adverse situations thatmay affect the borrower's ability to repay, the estimated value of any underlyingcollateral, and current economic conditions.

Loanorigination fees and related discounts:  Loan feesand certain direct loan origination costs are deferred, and the net fee or costis recognized as an adjustment to interest income using the interest methodover the contractual life of the loans, adjusted for prepayments.

Creditcard fees include monthly, late, over limit, returned check, cash advance, andother miscellaneous fees.  These feesare assessed according to agreements with customers.  Accrued credit card fees on charged-off accounts are deductedfrom credit card fee income.

Commitmentfees and costs relating to commitments, the likelihood of exercise of which isremote, are recognized over the commitment period on a straight-linebasis.  If the commitment issubsequently exercised during the commitment period, the remaining unamortizedcommitment fee at the time of exercise is recognized over the life of the loanas an adjustment of yield.

Loanservicing:  The cost allocated to mortgage servicingrights purchased or retained has been recognized as a separate asset and isbeing amortized in proportion to and over the period of estimated net servicingincome.  Mortgage servicing rights areperiodically evaluated for impairment based on the fair value of thoserights.  Fair values are estimated usingdiscounted cash flows based on current market rates of interest.  For purposes of measuring impairment, therights are stratified by one or more predominant risk characteristics of theunderlying loans.  The Bank stratifiesits capitalized mortgage servicing rights based on the interest rate of theunderlying loans.  The amount ofimpairment recognized is the amount, if any, by which the amortized cost of therights for each stratum exceed their fair value.
Costin excess of net assets acquired (intangibles):  Intangiblesare the difference between purchase prices and the amounts assigned to theassets of businesses acquired and accounted for under the purchase method ofaccounting. Management reassesses the carrying value and remaining life ofintangibles of businesses acquired on an ongoing basis. Whenever eventsindicate that the carrying values are impaired, the excess cost over fair valueof those assets is adjusted appropriately. As of June 30, 2001, managementbelieves there is no impairment with respects to these assets.

Foreclosedreal estate and other properties:  Real estateand other properties acquired through, or in lieu of, loan foreclosure areinitially recorded at lower of cost or fair value less estimated costs to sellat the date of foreclosure.  Costsrelating to improvement of property are capitalized, whereas costs relating tothe holding of property are expensed. Valuations are periodically performed by management, and charge-offs tooperations are made if the carrying value of a property exceeds its estimatedfair value less estimated costs to sell.

Landheld for development is carried at the lower of cost, including cost ofimprovements and amenities incurred subsequent to acquisition, or fair valueless cost to sell.  Costs relating todevelopment and improvement of property are capitalized, whereas costs relatingto holding property are expensed.  Theportion of interest costs relating to development of real estate is capitalized.  The carrying amount of land held fordevelopment was $1,298 at June 30, 2001 and 2000.

Officeproperties and equipment:  Land is carried at cost.  All other office properties and equipmentare carried at cost, less accumulated depreciation and amortization.  Buildings and improvements and leaseholdimprovements are depreciated primarily on the straight-line method over theestimated useful lives of the assets which is five to fifty years.  Furniture, fixtures, equipment andautomobile are depreciated using both the straight-line and declining balancemethods over the estimated useful lives of the assets which is three to twelveyears.

Incometaxes:  Deferred taxes are provided on an asset andliability method whereby deferred tax assets are recognized for deductibletemporary differences and operating loss and tax credit carryforwards anddeferred tax liabilities are recognized for taxable temporary differences.  Temporary differences are the differencesbetween the reported amounts of assets and liabilities and their taxbases.  Deferred tax assets are reducedby a valuation allowance when, in the opinion of management, it is more likelythan not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities areadjusted for the effects of changes in tax laws and rates on the date ofenactment.

Earningsper share (EPS):  Basic EPS represents income available tocommon stockholders divided by the weighted-average number of common sharesoutstanding during period.  Diluted EPSreflects additional common shares that would have been outstanding if dilutivepotential common shares had been issued.

Segmentreporting:Operating segments are defined as components of an enterprise for whichseparate financial information is available that is evaluated regularly by thechief operating decision makers in deciding how to allocate resources and inassessing performance. Information regarding the Company’s operating segmentsis contained in Note 16.
Fairvalue of financial instruments:  Thefollowing methods and assumptions were used by the Company in estimating thefair value of its financial instruments:

Cash and cash equivalents: The carrying amounts reported in the statements of financial conditionfor cash and cash equivalents approximate their fair values.

Securities:  Fair valuesfor investment securities are based on quoted market prices, except for stockin the Federal Home Loan Bank for which fair value is assumed to equal cost.

Loans: Approximately 50% of loans at both June 30, 2001 and 2000 arevariable-rate loans that reprice frequently and have no significant change incredit risk.  Fair values on these loansare based on carrying values.  The fairvalues for fixed-rate loans are estimated using discounted cash flow analyses,using interest rates currently being offered for loans with similar terms toborrowers with similar credit quality or from quoted market prices of similarloans sold, adjusted for differences in loan characteristics.

Accrued interest receivable: The carrying value of accrued interest receivable approximates its fairvalue.

Mortgage servicing rights: Fair values are estimated using discounted cash flows based on currentmarket rates of interest.

Off-statement-of-financial-condition instruments: Fair values for the Company'soff-statement-of-financial-condition instruments (unused lines of credit andletters of credit), which are based upon fees currently charged to enter intosimilar agreements taking into account the remaining terms of the agreementsand counterparties' credit standing, are not significant.

Deposits:  The fairvalues for deposits with no defined maturities equal their carrying amountswhich represent the amount payable on demand. Fair values for fixed-rate certificates of deposit are estimated using adiscounted cash flow calculation that applies interest rates currently beingoffered on certificates to a schedule of aggregated expected monthly maturitieson certificates of deposit.

Borrowed funds:  The carryingamounts reported for variable rate advances approximate their fair values.  Fair values for fixed-rate advances andother borrowings are estimated using a discounted cash flow calculation thatapplies interest rates currently being offered on advances and borrowings withcorresponding maturity dates.

Accrued interest payable and advances by borrowers fortaxes and insurance:  The carrying values of accrued interestpayable and advances by borrowers for taxes and insurance approximate theirfair values.
Stock-basedcompensation:  The Company accounts for stock-basedcompensation in accordance with Accounting Principles Board (APB) Opinion No.25.

Recentaccounting pronouncements:  In July, 2001, the FinancialAccounting Standards Board (FASB) issued two statements – Statement 141, *BusinessCombinations*, and Statement 142, *Goodwill and Other Intangible Assets*,which will impact the Company’s accounting for its reported goodwill.

Statement141:
 •Eliminates the pooling method for  accounting for business combinations.    •Requires that intangible assets  that meet certain criteria be reported separately from goodwill.    •Requires negative goodwill arising  from a business combination to be recorded as an extraordinary gain.
Statement142:
 •Eliminates the amortization of  goodwill and other intangibles that are determined to have an indefinite  life.    •Requires, at a minimum, annual  impairment tests for goodwill and other intangible assets that are determined  to have an indefinite life.    •Requires the carrying value of  goodwill which exceeds its implied fair value to be recognized as an  impairment loss.
Uponadoption of these Statements, the Company is required to:
 •Evaluate its existing intangible  assets and goodwill that were acquired in prior business combinations and to  make any necessary reclassifications in order to conform to the new criteria.    •Reassess the useful lives of  intangible assets and adjust the remaining amortization periods accordingly.    •Recognize any remaining negative goodwill  as income.
Theprovisions of FASB Statement 141 apply to all business combinations initiatedafter June 30, 2001 and all business combinations accounted for by the purchasemethod for which the date of acquisition is July 1, 2001, or later. The provisionsof FASB Statement 142 are required to be implemented by the Company in thefirst quarter of its 2003 fiscal year, although the Company can implement inthe first quarter of its 2002 fiscal year. The Company has not yet completedits full assessment of the effects of these new pronouncements on its financialstatements, or whether it will adopt the FASB Statement 142 in the firstquarter of its 2002 fiscal year, and is uncertain as to the impact.
**Note 2.**              **Acquisitions**

Duringthe year ended June 30, 2001, HomeFirst Mortgage Corp. purchased 100% of theoutstanding capital stock of Mid America Capital Services, Inc., a financeleasing company, for net cash consideration of $2,857. Intangibles of $723 wererecorded and are being amortized into expense by the straight-line method over10 years. In May 1999, the Bank acquired 100% of the outstanding capital stockof a local commercial bank for net cash consideration of $4,866, resulting inintangibles of $4,973, which are being amortized to expense by thestraight-line method over 15 years. Both of these acquisitions were accountedfor under the purchase method of accounting.

Resultsof operations of the acquired entities since the dates of acquisition areincluded in the consolidated financial statements. Unaudited pro formaconsolidated results of operations for the two years ended June 30, 2001 asthough the entities had been acquired as of the beginning of the fiscal yearprior to the acquisition follows (in thousands, except per share data):

 
 Years  Ended June 30,    2001 2000    Interest and dividend  income$59,382 $54,395 Net income4,551 5,071 Earnings per share:     Basic$1.24 $1.31  Diluted1.22 1.29 
Theunaudited pro forma combined summary of operations does not purport to beindicative of the results which actually would have been obtained if theacquisitions had been made at the beginning of the fiscal year prior to therespective acquisition, or of those results which may be obtained in thefuture. The unaudited pro forma combined summary of operations includes theeffects of additional interest expense on debt incurred in connection with theacquisitions as if the debt had been outstanding since the beginning of theperiods presented.  In addition, the summaryof operations includes amortization of the cost in excess of net assets ofcompanies acquired in connection with the acquisitions as if they had beenacquired as of the beginning of the periods presented.

Duringthe years ended June 30, 2001 and 2000, several smaller acquisitions were alsomade. During the year ended June 30, 2001, the Bank acquired the assets andliabilities of a branch of a local commercial bank and received cashconsideration of $2,218, as the liabilities assumed exceeded the assetsacquired. Intangibles of $330 were recorded and are being amortized to expenseby the straight-line method over 15 years. In 2000, the Bank acquired theassets and liabilities of a branch of another local commercial bank, andreceived cash consideration of $775. Also in 2000, Hometown Insurors, Inc. paid$300 to acquire the customer base of a local insurance agency, and anadditional $150 was paid during 2001 under contingency provisions of thepurchase agreement. These acquisitions were treated as purchases for accountingpurposes, and the results of operations of the acquired entities since thedates of acquisition are included in the consolidated financial statements.****Note 3.**             **Investmentsin Securities**

Theamortized cost and fair values of investments in securities at June 30, 2001,all of which are classified as available for sale according to management'sintent, are as follows:
   Gross Gross    Amortized Unrealized Unrealized    Cost Gains (Losses) Fair  Value      Debt securities:         U.S. government agencies and corporations$18,236 $98 $(44)$18,290  Federal Home Loan Bank21,708 167 (3)21,872  Municipal bonds3,400 58 (1)3,457       43,344 323 (48)43,619      Equity securities:         Stock in Federal Home Loan Bank of Des Moines6,332 - - 6,332  FNMA common stock8 - - 8  Federal Agricultural Mortgage common stock7 3 - 10        6,347 3 - 6,350      Mortgage-backed  securities:         GNMA26,485 391 (191)26,685  REMIC3,367 - (42)3,325  FHLMC9,545 113 (42)9,616  FNMA3,328 34 - 3,362  Other triple A rated mortgage-backed securities758 4 - 762        43,483 542 (275)43,750       $93,174 $868 $(323)$93,719      
 

Theamortized cost and fair values of debt securities as of June 30, 2001, bycontractual maturity, are shown below. Expected maturities will differ from contractual maturities because theborrowers may have the right to call or prepay obligations with or without callor prepayment penalties.
 Amortized    Cost Fair Value    Due  in one year or less$5,637 $5,640 Due  after one year through five years26,310 26,600 Due  after five years through ten years11,177 11,136 Due  after ten years220 243     43,344 43,619 Mortgage-backed  securities43,483 43,750     $86,827 $87,369    
Equitysecurities have been excluded from the maturity table above because they do nothave contractual maturities associated with debt securities.  The Bank, as a member of the Federal HomeLoan Bank system, is required to maintain an investment in capital stock of theFederal Home Loan Bank.  No ready marketexists for the stock, and it has no quoted market value.  For disclosure purposes, such stock isassumed to have a fair value which is equal to cost.

Thecomponents of other comprehensive income (loss) - net change in unrealized gain(loss) on securities available for sale are as follows:
 Years Ended June 30,    2001 2000 1999     Unrealized  holding gain (loss) arising during the year$3,691 $(1,088)$(1,860)Less  reclassification adjustment for net gains realized in net income- (185)(1)     Net change in unrealized gain  (loss) before income taxes3,691 (1,273)(1,861)Income  (taxes) benefit(1,402)558 634      Other comprehensive income - net  change in unrealized gain (loss) on securities$2,289 $(715)$(1,227)    
Therewere no sales of securities in 2001, and accordingly, no realized gains orlosses.  Proceeds from the sale ofsecurities during 2000 and 1999 were $5,386 and $4,678, respectively, andresulted in gross gains of $201 and $76, respectively, and gross losses of$(16) and $(75), respectively.
AtJune 30, 2001 and 2000, securities with a fair value of $84,397 and $104,245,respectively, were pledged as collateral for public deposits and otherpurposes.

Theamortized cost and fair values of investments in securities at June 30, 2000,all of which are classified as available for sale according to management'sintent, are as follows:
   Gross Gross    Amortized Unrealized Unrealized    Cost Gains (Losses) Fair  Value      Debt securities:         U.S. government agencies and corporations$23,961 $- $(792)$23,169  Federal Home Loan Bank28,728 - (652)28,076  Municipal bonds3,086 19 (47)3,058        55,775 19 (1,491)54,303      Equity securities:         Stock in Federal Home Loan         Bank of Des Moines6,130 - - 6,130  FNMA common stock8 - - 8  Federal Agricultural Mortgage common stock7 - (3)4       6,145 - (3)6,142      Mortgage-backed  securities:         GNMA33,051 1 (960)32,092  REMIC3,642 - (277)3,365  FHLMC10,284 7 (240)10,051  Resolution Trust Corporation396 - (2)394  FNMA5,214 - (148)5,066  Other triple A rated mortgage-backed securities2,085 - (52)2,033        54,672 8 (1,679)53,001       $116,592 $27 $(3,173)$113,446      
 

**Note 4.**             **Loans andLeases Receivable**

Loansand leases receivable at June 30, 2001 and 2000 consist of the following:
 2001 2000    Loans  secured by real estate:     Residential:     One-to-four family$117,681 $125,757  Multi-family44,378 44,793  Commercial73,720 68,556  Agriculture12,753 11,669  Construction and development28,419 35,511 Consumer  and other:     Automobile78,082 81,092  Commercial business97,362 87,137  Equipment financing leases10,509 -  Junior liens on mortgages61,397 56,243  Agriculture20,370 21,597  Credit card6,088 9,592  Mobile home3,920 5,676  Education6,831 7,146  Loans on savings accounts1,917 2,360  Other loans10,939 11,570      574,366 568,699 Less:     Undisbursed portion of loans in  process3,853 17,374  Deferred loan fees and unearned  discounts and premiums, net133 356  Allowance for loan and lease  losses6,544 8,475      $563,836 $542,494    
Loansheld for sale totaling $7,270 and $8,257 at June 30, 2001 and 2000,respectively, consist of one-to-four family fixed-rate loans.
Activity in the allowance for loan and lease lossesis summarized as follows for the years ended June 30:
 2001 2000 1999     Balance,  beginning$8,475 $11,991 $7,199  Provision charged to income2,432 5,615 12,120  Allowance related to assets  acquired, net97 - 464  Charge-offs(5,101)(10,547)(8,716) Recoveries641 1,416 924     Balance,  ending$6,544 $8,475 $11,991     
Nonaccrualloans for which interest has been reduced totaled approximately $5,310, $2,078and $1,045 at June 30, 2001, 2000 and 1999, respectively.  Interest income that would have beenrecorded under the original terms of such loansand the interest income actually recognized for the years ended June 30 aresummarized below:
 2001 2000 1999     Interest  income that would have been recorded$1,669 $667 $288 Interest  income recognized(1,287)(499)(108)    Interest  income foregone$382 $168 $180     
 

**Note 5.**             **LoanServicing**

Mortgageloans serviced for others (primarily the South Dakota Housing DevelopmentAuthority) are not included in the accompanying consolidated statements offinancial condition.  The unpaidprincipal balances of mortgage loans serviced for others was $493,657 and$460,786 at June 30, 2001 and 2000, respectively.

Custodialbalances maintained in connection with the foregoing loan servicing, andincluded in deposits and advances by borrowers for taxes and insurance, wereapproximately $1,946 and $1,397 at June 30, 2001 and 2000, respectively.

Thecarrying values of mortgage servicing rights were $2,775 and $2,171 at June 30,2001 and 2000, respectively.  The fairvalues of these rights were $5,346 and $5,064 at June 30, 2001 and 2000,respectively.  The fair values of themortgage servicing rights were estimated as the present value of the expectedfuture cash flows using a discount rate of 15% for both periods.  The Company recognized expense foramortization of the cost of mortgage servicing rights in the amount of $272 and$297 for the years ended June 30, 2001 and 2000, respectively.

Novaluation allowances were provided for mortgage servicing rights capitalizedduring the years ended June 30, 2001 and 2000.

**Note 6.**              **Office Properties and Equipment**

Officeproperties and equipment at June 30, 2001 and 2000 consist of the following:
 2001 2000    Land$1,959 $1,938 Buildings  and improvements16,051 15,836 Leasehold  improvements947 672 Furniture,  fixtures, equipment and automobile10,742 9,651     29,699 28,097 Less  accumulated depreciation and amortization(15,943)(14,380)    $13,756 $13,717    
Inaddition, the Bank leases several branch facilities under operating leaseagreements which require minimum rentals totaling $1,126 through the yearending June 30, 2006.
**Note 7.**             **Deposits**

Depositsat June 30, 2001 and 2000 consist of the following:
 2001 2000    Noninterest  bearing accounts$55,003 $46,255 NOW  accounts33,165 31,838 Money  market accounts139,467 113,334 Savings  accounts49,852 54,492 Certificates  of deposit323,720 299,578     $601,207 $545,497    
Scheduledmaturities of certificates of deposit are as follows:
Maturing  in fiscal year:   2002$228,616 200364,496 200414,788 200512,905 20062,785 Thereafter130    $323,720   
Eligiblesavings accounts are insured up to $100 by the Savings Association InsuranceFund (SAIF) under management of the Federal Deposit Insurance Corporation(FDIC).  The aggregate amount of jumbocertificates of deposit with a minimum denomination of $100 was approximately$64,391 and $69,428 at June 30, 2001 and 2000, respectively.  Deposits at June 30, 2001 and 2000 include$37,079 and $45,213, respectively, of deposits from one local governmental entity,the majority of which are demand accounts.

 

**Note 8.**             **AdvancesFrom Federal Home Loan Bank and Other Borrowings**

Advancesfrom the Federal Home Loan Bank of Des Moines at June 30, 2001 and 2000 aresummarized as follows:
  2001 2000     Fixed-rate  advances (with rates ranging from 4.5% to 6.6%) $100,714 $107,928 Variable-rate  advance (with a rate of 7.5%) - 3,600       $100,714 $111,528     
Aggregatematurities of advances, computed based on call date, are as follows:  2002 $50,280; 2003 $14,936; 2004 $13,462;2005 $11,090; 2006 $1,070; and thereafter $9,876.  Prepayment of the callable advances results in a prepayment feeas negotiated between the Bank and the Federal Home Loan Bank.

Advancesare secured by stock in the Federal Home Loan Bank of Des Moines, one-to-fourfamily first mortgage loans with balances exceeding 135% of the amount of therelated advances and multi-family first mortgage loans with balances exceeding160% of the amount of the related advances.

TheBank has a $15,000 letter of credit from the Federal Home Loan Bank of DesMoines, on which nothing was drawn at June 30, 2001 and expired on July 12,2001.

Otherborrowings consist of the following at June 30, 2001 and 2000:

InAugust 2000, the Company entered into a $3,000 revolving note agreement with anunrelated bank, all of which was outstanding at June 30, 2001. The note issecured by substantially all assets of the Company, bears interest at avariable rate (5.63% at June 30, 2001), and is due August 13, 2001.

MidAmerica Capital Services, Inc. has a $4,000 line of credit with an unrelatedbank, of which $3,000 was outstanding at June 30, 2001. The note bears interestat the prime rate plus 0.5% (7.25% at June 30, 2001), is secured by substantiallyall assets of the Company, and is due September 22, 2001.

MidAmerica Capital Services, Inc. also has notes outstanding totaling $740 at June30, 2001, to its former stockholders. These notes are unsecured, due on demand,and pay interest at the prime rate (6.75% at June 30, 2001).

Duringfiscal year 1994, the South Dakota Housing Development Authority loaned $600 tothe Bank at 0% interest rate per annum to be used by the Bank to originate $600in qualified home improvement loans. The note had a balance of $524 at June 30, 2000, and was paid off duringthe year ended June 30, 2001.**TheCompany has a contract for deed which requires monthly payments of $9, plusinterest at 7.0%, to October 2013.  Thecontract for deed, which is secured by land held for development with acarrying value of $1,298, had a balance of $922 and $968 at June 30, 2001 and2000, respectively.  Aggregatematurities of the contract for deed are as follows:  2002 $48; 2003 $53;  2004$56; 2005 $60; 2006 $65; and thereafter $640.

**Note 9.**             **Income TaxMatters**

TheCompany and subsidiaries file a consolidated federal income tax return on afiscal year basis.  The Bank is allowedbad debt deductions based on actual charge-offs.

Theconsolidated provision for income taxes consists of the following for the yearsended June 30:
  2001 2000 1999      Current:        Federal $1,918 $1,332 $1,596  State 372 193 590 Deferred  expense (benefit) 645 1,417 (1,262)       $2,935 $2,942 $924      
Incometax expense is different from that calculated at the statutory federal incometax rate.  The reasons for thisdifference in the tax expense are as follows:
  2001 2000 1999      Computed  "expected" tax expense $2,640 $2,873 $691 Increase  (decrease) in income taxes resulting from:        Tax exempt interest income (99)(82)(64) State taxes, net of federal  benefit 221 231 384  Benefit of income taxed at lower  rates (73)(82)(20) Amortization of intangible assets 116 126 10  Change in valuation allowance - (195)-  Other, net 130 71 (77)       $2,935 $2,942 $924      
 

The components of the net deferred tax asset as ofJune 30, 2001 and 2000 are as follows:
  2001 2000     Deferred  tax assets:      Allowance for loan and leases  losses $2,183 $2,840  Deferred loan fees 105 143  Discounts on loans from acquired  associations 58 74  Accrued expenses 196 233  Net unrealized loss on securities  available for sale - 1,195  Other 206 154       2,748 4,639  Less valuation allowance (44)(44)      2,704 4,595     Deferred  tax liabilities:      Net unrealized gain on securities  available for sale 207 -  FHLB stock dividends 148 148  Office properties and equipment - 129  Other 119 83       474 360       $2,230 $4,235     
Retainedearnings at June 30, 2001 and 2000, include approximately $4,805 related to thepre-1987 allowance for loan losses for which no deferred federal income taxliability has been recognized.  Theseamounts represent an allocation of income to bad debt deductions for taxpurposes only.  If the Bank no longer qualifiesas a bank, or in the event of a liquidation of the Bank, income would becreated for tax purposes only, which would be subject to the then currentcorporate income tax rate.  Theunrecorded deferred income tax liability on the above amount for financialstatement purposes was approximately $1,634 at June 30, 2001 and 2000.****Note 10.            Regulatory Capital**

TheBank is subject to various regulatory capital requirements administered byfederal banking agencies.  Failure tomeet minimum capital requirements can initiate certain mandatory - and possiblyadditional discretionary - actions by regulators that, if undertaken, couldhave a direct material effect on the Bank's financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank's assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The Bank'scapital amounts and classification are also subject to qualitative judgments bythe regulators about components, risk weightings, and other factors.

Quantitativemeasures established by regulation to ensure capital adequacy require the Bankto maintain minimum amounts and ratios (set forth in the following table) oftotal and Tier I capital (as defined in the regulations) to risk-weightedassets (as defined), and of Tier I capital (as defined) to adjusted totalassets (as defined).  Managementbelieves, as of June 30, 2001 and 2000, that the Bank meets all capitaladequacy requirements to which it is subject.

As ofJune 30, 2001, the most recent notification from the Office of ThriftSupervision (OTS) categorized the Bank as "adequately capitalized"under the regulatory framework for prompt corrective action.  To be categorized as adequately capitalized,the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I(core) capital ratios as set forth in the table.  There are no conditions or events since that notification thatmanagement believes have changed the Bank's category.**Thefollowing table summarizes the Bank's compliance with its regulatory capitalrequirements at June 30, 2001 and 2000:
  Actual Minimum Capital Requirement To Be Adequately Capitalized Under  Prompt Corrective Action Provisions        Amount Percent Amount Percent Amount Percent         As  of June 30, 2001:              Tier I (core) capital (to  adjusted total assets) $45,891 5.96%$30,784 4.00%$30,784 4.00% Total risk-based capital (to  risk-weighted assets) 52,319 9.93 42,156 8.00 42,156 8.00  Tangible capital (to tangible  assets) 45,891 5.96 11,544 1.50 N/A N/A  Tier 1 (core) capital (to risk-weighted  assets) 45,891 8.71 N/A N/A 21,078 4.00 As  of June 30, 2000:              Tier I (core) capital (to  adjusted total assets) $41,989 5.83%$21,594 3.00%$28,792 4.00% Total risk-based capital (to  risk-weighted assets) 48,378 9.50 40,723 8.00 40,723 8.00  Tangible capital (to tangible  assets) 41,989 5.83 10,797 1.50 N/A N/A  Tier 1 (core) capital (to  risk-weighted assets) 41,989 8.25 N/A N/A 20,362 4.00 
 

**Note 11.            Stockholders' Equity**

TheCompany has continued a stock buy back program in which up to 10% of the commonstock of the Company may be acquired in each series of buy-backs.  The current program is in effect throughApril 30, 2002.  Since inception of theprogram through June 30, 2001, a total of 1,105,209 shares of common stock havebeen purchased.  No shares of commonstock were purchased pursuant to this program during the year ended June 30,2001.

TheCompany has authorized 50,000 shares of Preferred Stock, designated as"Series A Junior Participating Preferred Stock" with a stated valueof $1.00 per share.  Outstanding sharesof the Junior Preferred Stock are entitled to cumulative dividends.  Such shares have voting rights of 100 votesper share and a preference in liquidation. The shares are not redeemable after issuance.

TheCompany also has preferred share purchase rights (Rights). Each Right entitlesthe registered holder to purchase from the Company one one-hundredth of a shareof Series A Junior Participating Preferred Stock at a price of $65 perone-hundredth of a preferred share, subject to the complete terms as stated inthe Rights Agreement.  The Rights becomeexercisable immediately after the earlier of (i) ten business days following apublic announcement that a person or group has acquired beneficial ownership of20% or more of the outstanding common shares of the Company (subject to certainexclusions), (ii) ten business days following the commencement or announcementof an intention to make a tender offer or exchange offer, the consummation ofwhich would result in the beneficial ownership by a person or group of 20% ormore of such outstanding common shares. The Rights expire on October 22, 2006, which date may be extendedsubject to certain additional conditions.

Undercurrent regulations, the Bank is not permitted to pay dividends on its stock ifits regulatory capital would reduce below (i) the amount required for theliquidation account established to provide a limited priority claim to theassets of the Bank to qualifying depositors (Eligible Account Holders) at March31, 1992 who continue to maintain deposits at the Bank after its conversionfrom a federal mutual savings and loan association to a federal stock savingsbank pursuant to its Plan of Conversion adopted August 21, 1991, or (ii) theBank's regulatory capital requirements. As a "Tier 1" institution (an institution with capital inexcess of its capital requirements, both immediately before the proposedcapital distribution and after giving effect to such distribution), the Bankmay make capital distributions without the prior consent of the OTS in anycalendar year.  Capital distributionsare limited to the greater of 100% of net income for the year to date plus 50%of the amount by which the lesser of the institution's tangible, core orrisk-based capital exceeds its capital requirement for such capital commitment,as measured at the beginning of the calendar year or up to 75% of net incomeover the most recent four quarter period. On August 10, 2001, the Bank sent written notification to the OTS of itsintention to pay up to 75% of the Bank's net income for each quarter in theyear ending June 30, 2002, to the Company.****Note 12.**           **Earnings PerShare**

Areconciliation of the income and common stock share amounts used in thecalculation of basic and diluted earnings per share (EPS) for the fiscal yearsended June 30, 2001, 2000 and 1999 follow.
  Net Income Shares Per ShareAmount      2001:        Basic EPS $4,607 3,680,796 $1.25  Effect of dilutive securities:        Exercise of stock options - 56,817 (0.02)      Diluted EPS $4,607 3,737,613 $1.23      2000:        Basic EPS $5,267 3,861,633 $1.36  Effect of dilutive securities:        Exercise of stock options - 57,986 (0.02)      Diluted EPS $5,267 3,919,619 $1.34      1999:        Basic EPS $1,051 4,197,485 $0.25  Effect of dilutive securities:        Exercise of stock options - 98,381 (0.01)      Diluted EPS $1,051 4,295,866 $0.24      
Optionsoutstanding of approximately 142,000 and 128,000 shares of common stock atweighted average share prices of $14.46 and $15.54 during the years ended June30, 2001 and 2000, respectively, were not included in the computation ofdiluted earnings per share because the exercise prices of those instrumentsexceeded the average market prices of the common shares during the years.  There were no options excluded from thecomputation of diluted earnings per share for the year ended June 30, 1999.

**Note 13.**           **DefinedBenefit Plan**

TheCompany has a noncontributory (cash balance) defined benefit pension plancovering all employees of the Company and its wholly-owned subsidiaries whohave attained the age of twenty-one and have completed one year ofservice.  The benefits are based on 6%of each eligible participant’s annual compensation, plus income earned in theaccounts at a rate determined annually based on 30-year Treasury Billrates.  The Company's funding policy isto make the minimum annual required contribution plus such amounts as theCompany may determine to be appropriate from time to time.  One hundred percent vesting occurs after fiveyears, and retirement at age 65.**Informationrelative to the Company's defined benefit plan is presented below:

 
  2001 2000     Changes  in benefit obligations:      Benefit obligations, beginning $2,792 $2,142  Service cost 480 344  Interest cost 202 166  Benefits paid (547)(195) Actuarial loss 276 335      Benefit obligations, ending $3,203 $2,792     Changes  in plan assets:      Fair value of plan assets,  beginning $2,947 $2,431  Actual return on plan assets (264)400  Company contributions 275 311  Benefits paid (547)(195)     Fair value of plan assets, ending $2,411 $2,947     Funded  status at end of year:      Plan assets in excess (deficient)  of obligations $(792)$155  Unrecognized losses 1,193 429  Unrecognized prior service cost  (benefit) (136)(183) Unrecognized transition  obligation 58 70      Prepaid asset at end of year $323 $471     
 

Thecomponents of pension cost for the years ended June 30 consist of thefollowing:
  2001 2000 1999      Service  cost $480 $344 $310 Interest  cost 202 166 137 Net  asset gain - - 234 Expected  return on plan assets (240)(198)(161)Amortization  of prior losses 12 29 31 Amortization  of prior service cost (46)(46)(49)Recognized  net actuarial losses - (70)(164)Amortization  of transition obligation 12 12 12       Total costs recognized in expense $420 $237 $350      
Theweighted-average post-retirement and pre-retirement discount rates used indetermining the actuarial present value of the benefit obligations were 6.23%and 7.50% for fiscal year 2001 and 6.0% and 6.0% for fiscal year 2000,respectively.  The rate of increase infuture compensation levels used to determine the actuarial present value of thebenefit obligations was 5.5% for both fiscal years 2001 and 2000.  The expected long-term rate of return onplan assets was 8.0% for both fiscal years 2001 and 2000.

**Note 14.**           **EmployeeStock Ownership Plan**

TheCompany has an employee stock ownership plan (ESOP) covering all full-timeemployees of the Company who have attained age 21 and completed one year ofservice during which they worked at least 1,000 hours.  The ESOP includes an employee savings planfeature which provides for voluntary contributions by eligible employees on atax-deferred basis with no matching contribution by the Company.  All shares owned by the ESOP are included inearnings per share computations, with shares being allocated to eligibleemployees as the corresponding ESOP debt is repaid.  At June 30, 2001, the ESOP holds 257,530 shares, all of whichhave been allocated to eligible employees. Annual contributions are limited to the maximum tax-deductible amountand amounts necessary to ensure continued compliance with the Bank's regulatorycapital requirements.  During 1994, theCompany made payments to the ESOP trust in the amount of $906 to enable thetrust to pay off the ESOP debt.  TheCompany recorded a receivable equal to the amounts paid which was reflected asa deduction from stockholders' equity (unearned compensation) in the accompanyingconsolidated statements of financial condition.  The receivable was reduced as the Bank made contributions to thePlan, which in turn were used to repay the Company with correspondingcompensation expense recorded.**Forfinancial statement purposes, expense for the ESOP is determined on the percentageof shares allocated to participants each period (allocations are based onprincipal and interest payments) times the original amount of the debt plus theinterest incurred.  The compensationcost charged to expense was $113, $113 and $114 for 2001, 2000 and 1999,respectively.

TheCompany elected not to adopt the accounting treatment for the ESOP sharesprovided by AICPA Statement of Position 93-6, "Employers' Accounting forEmployee Stock Ownership Plans", as all ESOP shares were held by the ESOP asof December 31, 1992 and are allowed to be accounted for under previouslyexisting accounting standards.

During2001, the final payment for the ESOP was made. Effective July 1, 2001, the ESOPwas amended and restated, and renamed the HF Financial Corp. Retirement SavingsPlan. The amended plan is intended to be a qualified profit sharing plan with acash or deferred arrangement pursuant to Code Section 401(K) and regulationsissued thereunder. Participation and eligibility requirements are similar to theprevious plan. The amended plan continues to allow voluntary contributions byeligible employees, and also allows discretionary contributions by the Company,as determined annually by the Board of Directors.

**Note 15.**           **Stock-Based Compensation Plans**

The Company has stock-based compensationplans which are described below.  TheCompany applies APB Opinion No. 25 and related interpretations in accountingfor its plans.  Accordingly, nocompensation cost has been recognized for grants under the fixed stock optionplans.  Had compensation cost for theCompany's stock-based compensation plans been determined based on the grantdate fair values of awards (the method described in FASB Statement No. 123),reported net income and earnings per common share would have been reduced tothe pro forma amounts shown below:
 2001 2000 1999     Net  income:       As reported$4,607 $5,267 $1,051  Pro forma4,468 5,146 956        Basic  earnings per share:       As reported1.25 1.36 0.25  Pro forma1.21 1.33 0.23        Diluted  earnings per share:       As reported1.23 1.34 0.24  Pro forma1.20 1.31 0.22 
Under the Company's stock option andincentive plan (Option Plan), stock options of 828,000 common shares, of which10,000 shares are restricted under a stock pool (see below), may be granted todirectors and employees of the Bank. Options granted under the Option Plan may be either options that qualifyas Incentive Stock Options, as defined in Section 422 of the Internal RevenueCode of 1986, as amended (the Code), or options that do not qualify.  The Option Plan also provides for the awardof stock appreciation rights, limited stock appreciation rights and restrictedstock.

At June 30, 2001, 600,926 shares ofcommon stock were reserved for issuance under the Option Plan.  The options granted under the Option Planexpire ten years from the date of grant.

During fiscal year 2001, the Companycreated a pool of 10,000 restricted shares (Pool). Awards from the Pool are atthe discretion of the Chairman of the Board of Directors on a spot basis toemployees. The restricted shares vest 33 1/3% after 3 years, 66 2/3% after 4years, and 100% after 5 years of continued employment.  Key provisions of the Pool include: outrightgrant of shares with restrictions as to sale, transfer, and pledging; duringthe restriction period, the grantee receives dividends and has voting rightsrelated to the shares awarded; all nonvested shares are forfeited upontermination. During 2001, no shares were issued from the Pool.**The fair value of each grant is estimatedat the grant date using the Black-Scholes option-pricing model. No options weregranted during fiscal year 2000.  Thefollowing weighted average assumptions were used for grants in fiscal years2001 and 1999, respectively:  a dividendrate as a percentage of stock price of 3.02% and 2.69%; price volatility of26.00% and 28.00%; risk-free interest rates of 5.10% and 5.09% and expectedlives of seven years for both years.

A summary of the status of the plan andchanges during the years ended June 30 are as follows:
 2001 2000 1999        Weighted   Weighted   Weighted    Average   Average   Average    Exercise   Exercise   Exercise Fixed  OptionsShares Price Shares Price Shares Price       Outstanding  at beginning of year262,047 $10.66 279,972 $10.72 253,516 $9.48 Granted96,655 9.38 - - 84,723 15.38 Forfeited(10,589)13.52 (11,495)15.09 (36,957)14.43 Exercised(5,442)3.33 (6,430)5.52 (21,310)7.98        Outstanding  at end of year342,671 $10.33 262,047 $10.66 279,972 $10.72           
Options for 232,005, 193,780 and 174,373shares were exercisable at June 30, 2001, 2000 and 1999, respectively.  The weighted average fair value of optionsgranted was $2.88 and $4.00 for the fiscal years ended June 30, 2001 and 1999,respectively.**Fixed optionsoutstanding at June 30, 2001 are summarized as follows:
Options Outstanding Options Exercisable       Remaining   Number Number Contractual Exercise Outstanding Exercisable Life Price     53,499 53,499 2 years $3.33 10,191 10,191 2 years 5.04 4,773 4,773 3 years 7.33 23,556 23,556 4 years 8.17 10,191 10,191 3 years 8.75 94,093 18,810 10 years 9.38 420 420 5 years 9.92 29,147 29,147 6 years 10.21 336 336 5 years 11.17 10,770 8,616 6 years 13.00 60,343 36,196 8 years 15.38 45,352 36,270 7 years 16.25       342,671 232,005           
The Company has a Director RestrictedStock Plan (Plan) which provides that awards of restricted shares of theCompany's common stock be made to outside directors of the Company.  The Plan is designed to allow for payment ofthe annual retainer fee in shares of the Company's common stock, with theinclusion of an annual cost of living adjustment based on the Consumer PriceIndex.  Each outside director isentitled to all voting, dividend and distribution rights during the restrictionperiod.  The effective date of the Planwas July 1, 1997.  The Plan has 75,000shares allocated to it and is in effect for a period of ten years.  During fiscal years 2001 and 2000, 11,249and 7,252 shares were awarded and $100 and $98 of expense was incurred underthe Plan as the annual retainer for the Company's Board of Directors for theyears ending June 30, 2001 and 2000, respectively.  On July 31, 2001, 7,560 shares were awarded under the Plan as theannual retainer for the year ended June 30, 2002.
**Note 16.**            **Segment Information**

The management approach is used as theconceptual basis for identifying reportable segments and is based on the waythat management organizes the segments within the enterprise for makingoperating decisions, allocating resources, and monitoring performance.

The Company's reportable segments arebanking, credit card, and other.  The"banking" segment is conducted through the subsidiary, Home FederalSavings Bank, and the "credit card" segment is conducted through thesubsidiary, HF Card Services, L.L.C. The "other" segment is composed of smaller nonreportablesegments, the parent company, and inter-segment eliminations.
   Credit     2001Banking Card Other Total     Net  interest income$22,673 $185 $1,111 $23,969 Provision  for losses on loans and leases(1,347)(950)(135)(2,432)Noninterest  income8,048 2,698 1,375 12,121 Noninterest  expense(21,433)(2,608)(2,075)(26,116)      Income (loss) before income taxes$7,941 $(675)$276 $7,542      Total  assets$769,172 $5,398 $9,432 $784,002                  Credit     2000Banking Card Other Total     Net  interest income$22,497 $461 $572 $23,530 Provision  for losses on loans(1,682)(3,933)- (5,615)Noninterest  income7,187 6,979 1,104 15,270 Noninterest  expense(19,172)(4,501)(1,303)(24,976)      Income (loss) before income taxes$8,830 $(994)$373 $8,209      Total  assets$715,645 $7,224 $2,128 $724,997                  Credit     1999Banking Card Other Total     Net  interest income$19,821 $1,264 $376 $21,461 Provision  for losses on loans(1,300)(10,820)- (12,120)Noninterest  income5,981 12,046 994 19,021 Noninterest  expense(16,661)(8,375)(1,351)(26,387)      Income (loss) before income taxes$7,841 $(5,885)$19 $1,975      Total  assets$645,658 $13,103 $(139)$658,622      
 

**Note17.**           **Financial Instruments**

The Bank is a party to financialinstruments with off-balance-sheet risk in the normal course of business tomeet the financing needs of its customers. These financial instruments include commitments to extend credit,standby letters of credit and financial guarantees.  Those instruments involve, to varying degrees, elements of creditand interest-rate risk in excess of amounts recognized in the consolidatedstatements of financial condition.  Thecontract or notional amounts of those instruments reflect the extent of theBank's involvement in particular classes of financial instruments.

The Bank's exposure to credit loss in theevent of nonperformance by the other party to the financial instrument forcommitments to extend credit, standby letters of credit, and financialguarantees written is represented by the contractual notional amount of thoseinstruments.  The Bank uses the samecredit policies in making commitments and conditional obligations as it doesfor on-balance-sheet instruments.

Unless noted otherwise, the Bank does notrequire collateral or other security to support financial instruments withcredit risk.

Estimated fair values of the Company'sfinancial instruments are as follows:
 2001 2000     Carrying   Carrying    Amount Fair Value Amount Fair Value      Financial  Assets         Cash and cash equivalents$84,913 $84,913 $26,417 $26,417  Securities93,719 93,719 113,446 113,446  Loans560,713 561,965 550,751 544,614  Accrued interest receivable5,412 5,412 5,346 5,346  Mortgage servicing rights2,775 5,346 2,171 5,064          Financial  Liabilities         Deposits601,207 606,322 545,497 543,774  Borrowed funds108,376 109,376 113,020 108,176  Accrued interest payable and advances  by borrowers for taxes and insurance15,238 15,238 13,387 13,387 
 

**Note18.**           **Commitments, Contingencies and Credit Risk**

The Bank originates first mortgage,consumer and other loans primarily in eastern South Dakota and holdsresidential and commercial real estate loans which were purchased from otheroriginators of loans located throughout the United States.  The Bank has primarily unsecured credit cardloans which were issued through third parties nationwide to a target customermarket consisting of sub-prime credit customers who have either an insufficientcredit history or a negative credit history. The Bank issued no new credit cards in fiscal years 2001 and  2000. Collateral for substantially all noncredit card consumer loans aresecurity agreements and/or Uniform Commercial Code (UCC) filings on thepurchased asset.  At June 30, 2001 and2000, the Bank has approximately $99 and $143 of loans sold with recourse tothe Federal National Mortgage Association (FNMA).  The collateral securing these loans are one-to-four familymortgage loans, which are seasoned. Unused lines of credit amounted to $58,880 and $59,421 at June 30, 2001and 2000, respectively.  Unused lettersof credit amounted to $1,213 and $1,410 at June 30, 2001 and 2000, respectively.  The lines of credit and letters of creditare collateralized in substantially the same manner as loans receivable.

The Bank had outstanding commitments tooriginate or purchase loans of $35,449 and to sell loans of approximately$28,475 at June 30, 2001.  The portionof commitments to originate or purchase fixed rate loans totaled $29,785 with arange in interest rates of 5.0% to 8.8%. No losses are expected to be sustained in the fulfillment of any ofthese commitments.

The Company is involved in various claimsand legal actions arising in the ordinary course of business.  In the opinion of management, based uponconsultation with legal counsel, the ultimate disposition of these matters willnot have a material adverse effect on the Company's consolidated financialposition.

**Note 19.**            **Cash Flow Information**

Changes in other assets and liabilitiesfor the years ended June 30, 2001, 2000 and 1999 consist of:
 2001 2000 1999     (Increase)  decrease in accrued interest receivable$(59)$(515)$14 (Increase)  decrease in prepaid expenses and other assets(403)219 (510)Deferred  income taxes (credits)645 1,417 (1,262)Increase  (decrease) in accrued interest payable and other liabilities1,485 1,439 (1,459)     $1,668 $2,560 $(3,217)    
** **

**Note20.**            **Subsequent Event**

At June 30, 2001, the Company was innegotiation with its insurance carrier regarding a possible recovery of priorlosses, due to inappropriate actions by a former employee. At June 30, 2001, nosettlement had been reached, and, accordingly, the amount of the settlement hasnot been recognized in the accompanying financial statements. In August 2001,the Company received $700 in full settlement of the claim, which will berecognized in income in fiscal year ending June 30, 2002.

**Note 21.**            **Financial Information of HF Financial Corp. (ParentOnly)**

The Company's condensed balance sheets asof June 30, 2001 and 2000 and related condensed statements of income and cashflows for each of the years in the three year period ended June 30, 2001 are asfollows:

CONDENSEDBALANCE SHEETS
 2001 2000    Assets     Cash, all with Home Federal  Savings Bank$610 $1,290  Note receivable, HF Card  Services, L.L.C.7,362 6,699  Investments, marketable  securities383 378  Investments in subsidiaries46,784 38,279  Land held for development1,298 1,298  Other140 144     $56,577 $48,088    Liabilities     Other borrowings$3,922 $968  Other liabilities130 177 Stockholders'  equity52,525 46,943     $56,577 $48,088    
 

CONDENSED STATEMENTS OF INCOME
 2001 2000 1999     Interest  income$751 $649 $435 Equity  in earnings (loss) of subsidiaries4,324 4,717 (639)Other  income18 52 31 Expenses(574)(328)(447)Income  tax benefit88 177 1,671      Net income$4,607 $5,267 $1,051     
 

CONDENSED STATEMENTS OF CASH FLOWS
 2001 2000 1999     Cash  Flows From Operating Activities       Net income$4,607 $5,267 $1,051  Adjustments to reconcile net  income to net cash provided by operating activities:       Amortization of unearned  compensation113 113 114  Noncash issuance of common stock100 98 95  Equity in (earnings) loss of  subsidiaries(4,324)(4,717)639  Cash dividends received from  subsidiaries2,703 4,244 4,122  Increase (decrease) in  liabilities(47)138 (100) Other, net4 782 (902)      Net cash provided by operating  activities3,156 5,925 5,019             Cash  Flows From Investing Activities       Disbursements on note receivable  from HF Card(1,383)(6,624)(3,473) Repayments on note receivable from  HF Card720 2,355 1,043  Purchase of securities- - (517) Proceeds from maturities and  sales       of securities- 135 500  Purchase of land for development- - (261) Capital contribution to Home  Federal Savings Bank(1,650)- -  Capital contribution to HomeFirst  Mortgage Corp.(2,950)- -       Net cash (used in) investing  activities(5,263)(4,134)(2,708)           Cash  Flows From Financing Activities       Purchase of treasury stock- (4,869)(6,735) Cash dividends paid(1,545)(1,544)(1,511) Proceeds from issuance of common  stock18 35 170  Proceeds from other borrowings3,000 - -  Payments on other borrowings(46)(43)(26)      Net cash provided by (used in)  financing activities1,427 (6,421)(8,102)      (Decrease) in cash(680)(4,630)(5,791)       Cash  at Beginning of Period1,290 5,920 11,711     Cash  at End of Period$610 $1,290 $5,920     
** **

 

**Note 22.**            **Quarterly Financial Information (Unaudited)**

(Dollars in thousands except per sharedata)
Fiscal  year 20011st Quarter 2nd Quarter 3rd Quarter 4th Quarter     Total  interest income$14,760 $15,107 $14,976 $14,469 Net  interest income6,139 5,873 5,859 6,098 Provision  for losses on loans and leases778 486 310 858 Net  income1,260 1,350 1,088 909          Earnings  per share:         Basic0.34 0.37 0.30 0.25  Diluted0.34 0.36 0.29 0.24          Fiscal  year 20001st Quarter 2nd Quarter 3rd Quarter 4th Quarter     Total  interest income$12,462 $12,990 $13,493 $14,186 Net  interest income5,807 5,820 5,865 6,038 Provision  for losses on loans1,870 1,668 874 1,203 Net  income1,388 1,256 1,317 1,306          Earnings  per share:         Basic0.34 0.32 0.35 0.35  Diluted0.34 0.32 0.34 0.35          
 

 

 

 

 

 

**Item 9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

Duringthe Company’s two most recent fiscal years there have been no disagreementswith our accountant on any matter of accounting principle or financialstatement disclosure.

**PARTIII**

**Item 10.  Directors and Executive Officers of theRegistrant**

Informationregarding untimely filings pursuant to Section 16 of the Securities ExchangeAct of 1934, as amended, is incorporated herein by reference from the Company'sdefinitive Proxy Statement for the Annual Meeting of Stockholders to be held in2001, a copy of which will be filed not later than 120 days after the close ofthe fiscal year.

**Directors**

Informationconcerning Directors of the Company is incorporated herein by reference fromthe definitive Proxy Statement for the Annual Meeting of Stockholders to beheld in 2001, a copy of which will be filed not later than 120 days after theclose of the fiscal year.

**Executive officers**

Informationregarding the business experience of the executive officers of the Company andthe Bank contained in Part I of this Form 10–K is incorporated herein byreference.

**Item 11.  Executive Compensation**

Informationconcerning executive compensation is incorporated herein by reference from thedefinitive Proxy Statement for the Annual Meeting of Stockholders to be held in2001, except for information contained under the headings "BoardCompensation Committee Report on Executive Compensation" and"Stockholder Return Performance Presentation", a copy of which willbe filed not later than 120 days after the close of the fiscal year.

**Item 12.  Security Ownership of Certain BeneficialOwners and Management**

Informationconcerning security ownership of certain beneficial owners and management isincorporated herein by reference from the definitive Proxy Statement for theAnnual Meeting of Stockholders to be held in 2001, a copy of which will befiled not later than 120 days after the close of the fiscal year.

**Item 13.  Certain Relationships and Related Transactions**

Informationconcerning certain relationships and related transactions is incorporatedherein by reference from the definitive Proxy Statement for the Annual Meetingof Stockholders to be held in 2001, except for information contained under theheadings "Board Compensation Committee Report on ExecutiveCompensation" and "Stockholder Return Performance Presentation",a copy of which will be filed not later than 120 days after the close of thefiscal year.

**PARTIV**

**Item 14.  Exhibits, Financial Statement Schedules, andReports on Form 8–K**
(a)Documents filed with this report.   (1)See “HF Financial Corp. Index to  Consolidated Financial Statements” under Item 8 of this report.    (2)All supplemental schedules are  omitted because of the absence of conditions under which they are required or  because the information is shown in the Consolidated Financial Statements or  notes thereto.
 

**(a) (3) Exhibits**
**Regulation  S-K Exhibit  Number** **Document** **Reference  to  Prior Filing  or Exhibit  Number  Attached  Hereto** **Sequential  Page  Number Where  Attached Exhibits  Are Located in This  Form 10-K  Report**         3(i) Articles of Incorporation (1) Not  Applicable         3(ii) By-Laws (1) Not  Applicable         4.0 Rights Agreement (4) Not  Applicable         10.1 Employment Contracts  between the Bank and Curtis L. Hage (1) Not  Applicable         10.2 Amendment to  Employment Contract between the Bank and Curtis L. Hage (3) Not  Applicable         10.4 1991 Stock Option and  Incentive Plan (2) Not  Applicable         10.5 Articles of  Incorporation of HF Card Services L.L.C. (3) Not  Applicable         10.6 Amendment to 1991  Stock Option and Incentive Plan (5) Not  Applicable         10.7 1996 Director  Restricted Stock Plan (5) Not  Applicable         10.8 Employment Contract  between the Bank and Gene F. Uher (5) Not  Applicable         10.9 Employment Contract  between the Bank and Mark S. Sivertson (6) Not  Applicable         10.10 Employment Contract  between the Bank and Michael H. Zimmerman (6) Not  Applicable         10.11 Change in Control  Contract between the Bank and Gene F. Uher (6) Not  Applicable         10.12 Change in Control  Contract between the Bank and Mark S. Sivertson (6) Not  Applicable         10.13 Change in Control  Contract between the Bank and Michael H. Zimmerman (6) Not  Applicable         10.14 Amendment to  Employment Contract between the Bank and Gene F. Uher (7) Not  Applicable         10.17 Employment Contract  between the Bank and David A. Brown 10.17 Page  102         10.18 Change in Control Contract  between the Bank and David A. Brown 10.18 Page  106         21 Subsidiaries of  Registrant 21 Page  112         23 Consents of Experts  and Counsel 23 Page  113   (1)Filed as exhibits to the Company's  Form S–1 registration statement filed on December 6, 1991 (File  No. 33–44383) pursuant to Section 5 of the Securities Act of 1933.(2)Filed as exhibits to the Company’s  Annual Report on Form 10K for the fiscal year ended June 30, 1993.(3)Filed as exhibits to the Company’s  Annual Report on Form 10K for the fiscal year ended June 30, 1996.(4)Filed as Exhibit I to the Company’s  filing on Form 8-A, filed on October 28, 1996.(5)Filed as exhibits to the Company’s  Annual Report on Form 10K for the fiscal year ended June 30, 1997.(6)Filed as exhibits to the Company’s  Annual Report on Form 10K for the fiscal year ended June 30, 1998.(7)Filed as exhibits to the Company’s  Annual Report on Form 10K for the fiscal year ended June 30, 1999.
Allof such previously filed documents are hereby incorporated herein by referencein accordance with Item 601 of Regulation S–K.

**(b) Reports on Form8–K**

Nocurrent reports on Form 8–K were filed by the Company during the quarterended June 30, 2001.
**SIGNATURES**

Pursuantto the requirements of Section 15(d) of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
   HF  FINANCIAL CORP.             By /s/ Curtis L. Hage        Curtis  L. Hage, Chairman, President and    Chief  Executive Officer    (Duly  Authorized Representative)     
 

             Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons in the capacities and on the dates indicated.

 
/s/  Curtis L. Hage /s/  Cristie M. Lawson Curtis  L. Hage, Chairman, President and  Chief Executive Officer *(Principal  Executive and  Operating Officer)* Cristie  M. Lawson, Vice President and  Controller *(Principal Financial and Accounting  Officer)*   Date:September  25, 2001 Date:September  27, 2001         /s/  Thomas L. Van Wyhe /s/  Paul J. Hallem Thomas  L. Van Wyhe, Director Paul  J. Hallem, Director   Date:September  25, 2001 Date:September  25, 2001         /s/  Jeffrey G. Parker /s/  Robert L. Hanson Jeffrey  G. Parker, Director Robert  L. Hanson, Director   Date:September  27, 2001 Date:September  27, 2001         /s/  William G. Pederson /s/  JoEllen G. Koerner   William.  G. Pederson, Director JoEllen  G. Koerner, Ph.D., Director   Date:September  27, 2001 Date:September  27, 2001      
 

**Indexto Exhibits**
Exhibit  Number    10.17 Employment Contract between the Bank and David A. Brown10.18 Change in Control Contract between the Bank and David  A. Brown21 Subsidiaries of Registrant23 Consents  of Experts and Counsel
 

 

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