<PAGE>

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

                                      FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
    OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ________________ TO _________________

COMMISSION FILE NUMBER 0-19972

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

            Delaware                                 46-0418532
---------------------------------       ---------------------------------------
  (State or other jurisdiction                    (I.R.S. Employer
of incorporation or organization)                 Identification No.)


225 South Main Avenue, Sioux Falls, South Dakota             57102
--------------------------------------------------------------------------------
    (Address of principal executive offices)               (Zip Code)

Registrant's telephone number, including area code:   (605) 333-7556
                                                   -----------------------

             Securities Registered Pursuant to Section 12(b) of the Act:

                                         NONE
                                         ----

             Securities Registered Pursuant to Section 12(g) of the Act:


                        COMMON STOCK, PAR VALUE $.01 PER SHARE
                        --------------------------------------
                                   (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such requirements for
the past 90 days.
                                   YES  X   NO   .
                                    ---    ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of September 18, 1997, there were 3,142,810 issued and outstanding shares of
the Registrant's Common Stock.

The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the bid and asked price of
such stock as of September 18, 1997, was $74.9 million (The exclusion from such
amount of the market value of the shares owned by any person shall not be deemed
an admission by the registrant that such person is an affiliate of the
Registrant.)

                         DOCUMENTS INCORPORATED BY REFERENCE

Part III of Form 10-K - Portions of the Proxy Statement for 1997 Annual Meeting
of Stockholders.


                                          1

<PAGE>


                                        PART I

ITEM 1.  BUSINESS

THE COMPANY

HF Financial Corp. (the "Company") was formed in November 1991, for the purpose
of owning all of the outstanding stock of Home Federal Savings Bank ("Home
Federal" or the "Bank") issued in the mutual to stock conversion of Home Federal
(the "Conversion").  The Company acquired all of the outstanding stock of the
Bank on April 8, 1992.  In October 1994, the Company acquired and began
operating a mortgage subsidiary as HomeFirst Mortgage Corp. ("Mortgage Corp.").
In May, 1996, the Company formed a Limited Liability Company named HF Card
Services L.L.C. ("HF Card Services") and became the owner of 51% of this entity.
At June 30, 1997, the Company had total assets of $562.1 million and
consolidated stockholders' equity of $53.0 million (or 9.43% of assets).

The Company is incorporated under the laws of the State of Delaware and
generally is authorized to engage in any activity that is permitted by the
Delaware General Corporation Law.  The activities of the Company itself have no
significant impact on the results of operations on a consolidated basis.  Unless
otherwise indicated, all matters discussed herein relate to the Company, and its
direct and indirect subsidiaries, including without limitation, the Bank,
Mortgage Corp. and HF Card Services.

The executive offices of the Company, the Mortgage Corp. and HF Card Services
are located at 225 South Main Avenue, Sioux Falls, South Dakota 57102.  The
Company's telephone number at that address is (605) 333-7556.

THE BANK

Home Federal is a federally chartered stock savings bank headquartered in Sioux
Falls, South Dakota.  Its deposits are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF"), administered by the Federal Deposit
Insurance Corporation ("FDIC").  Originally chartered in 1929, Home Federal
serves 14 cities in eastern South Dakota through its main office in Sioux Falls
and its network of 18 retail banking offices located throughout eastern South
Dakota.

The Bank attracts deposits from the general public and uses such deposits,
together with borrowings and other funds, to originate one- to four-family
residential, consumer, multi-family, commercial real estate, construction,
agricultural, credit card and commercial business loans.  The Bank's consumer
loan portfolio includes, among other things, mobile home loans, automobile
loans, home equity loans, credit card loans, loans secured by deposit accounts
and student loans.

The Bank also purchases mortgage-backed securities and invests in U.S.
Government and agency obligations and other permissible investments.  Home
Federal does not rely on any brokered deposits and does not hold any
non-investment grade bonds (i.e., "junk bonds").

At June 30, 1997, the Bank's loan portfolio totalled $453.7 million, which
consisted of $165.6 million of one- to four- family residential mortgage loans,
$60.0 million of multi-family real estate loans, $34.3 million of commercial
real estate loans, $5.3 million of construction and development loans, $152.7
million of consumer loans, $8.3 million of agricultural loans and $27.5 million
of commercial business loans.  On such date, the Bank had $30.3 million of
mortgage-backed securities and $46.9 million of investment securities.

MORTGAGE CORP.

HomeFirst Mortgage Corp. is a South Dakota Corporation with an office in Omaha,
Nebraska.  The Mortgage Corp. is a mortgage banking operation that originates
one-to-four family residential loans which are sold into the secondary market.
Mortgage Corp. had assets of $547,000 at June 30, 1997 and originated $10.6
million in one-to-four family residential loans during fiscal 1997.  The Company
will cease operations of the Mortgage Corp. during the first quarter of fiscal
1998.


                                          2

<PAGE>


HF CARD SERVICES

In May, 1996 the Company formed a Limited Liability Company named HF Card
Services L.L.C. ("HF Card Services") and became the owner of 51% of the
membership interest of this entity.  HF Card Services was established to provide
secured, partially-secured and unsecured credit cards nationwide to sub-prime
credit customers who have either an insufficient credit history or a negative
credit history and are unable to obtain a credit card from more traditional
credit card issuers.  HF Card Services had net income of $27,000 during fiscal
year 1997.

OTHER SUBSIDIARIES

Home Federal, through its wholly-owned subsidiaries, Hometown Insurors, Inc. and
Mid-America Service  Corporation, offers credit-life, hazard and other insurance
products and appraisal services. See "-- Subsidiary Activities."  In addition,
Home Federal's subsidiary, PMD, Inc., has been engaged in the business of
buying, selling and managing repossessed real estate properties of Home Federal.

MARKET AREA

Based on total assets at June 30, 1997, Home Federal is the largest thrift
institution headquartered in South Dakota.  During its 68-year existence, among
its other lending activities, Home Federal served its customers located in
eastern South Dakota, including the cities of Sioux Falls, Brandon, Pierre,
Winner, Freeman, Dell Rapids, Hartford, Canton, Parker, Lennox, Aberdeen,
Mobridge, Brookings and Redfield, and the communities surrounding such
communities through its network of 19 full service offices.  The Bank's
immediate market area features a variety of agri-business, banking, financial
services, health care and light manufacturing firms.

Mortgage Corp. services customers located primarily in the cities of Omaha,
Nebraska and Council Bluffs, Iowa.

HF Card Services provides services to customers nationwide.

LENDING ACTIVITIES

GENERAL.  Historically, the Bank has originated fixed-rate one- to four-family
mortgage loans.  Since 1984, however, the Bank has emphasized the origination of
adjustable-rate mortgage ("ARM") loans and short-term loans for retention in its
portfolio in order to increase the percentage of loans in its portfolio with
more frequent repricing or shorter maturities, and in some cases higher yields,
than fixed-rate mortgage loans.  The Bank has continued to originate fixed-rate
mortgage loans in response to customer demand.  During fiscal 1997, the Bank
sold fixed-rate loans with maturities of 15 years or greater and conventional
ARM loans into the secondary market and has historically retained servicing
whenever possible.  However, during fiscal 1997 the Bank sold the majority of
the loans with servicing released.

While the Bank primarily focuses its lending activities on the origination of
loans secured by first mortgages on owner-occupied one- to four-family
residences as well as consumer loans, the Bank also originates multi-family
residential and commercial real estate, construction, agricultural and
commercial business loans in its primary market area.  During fiscal 1997, the
Bank began making credit card loans to customers on a nationwide basis.  The
Bank originates residential and non-owner occupied construction loans that are
presold 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 secured by homes located in its market area in South Dakota.
At June 30, 1997, the Bank's net loan portfolio totalled $443.5 million.


                                          3

<PAGE>


LOAN PORTFOLIO COMPOSITION.  The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.


<TABLE>
<CAPTION>

                                                                               At June 30,
---------------------------------------------------------------------------------------------------------------------------------

                                                        1997                         1996                        1995 
                                                        ----                         ----                        ---- 
                                             AMOUNT             PERCENT    AMOUNT            PERCENT     AMOUNT        PERCENT
                                             ------             -------    ------            -------     ------        -------
                                                             (Dollars In Thousands)                                             
<S>                                        <C>               <C>         <C>               <C>         <C>              <C>     
REAL ESTATE LOANS:                                                                                                              
------------------                                                                                                              
    One- to four-family. . . . . . . . .    $165,573          36.50%      $178,198          41.12%      $163,379        42.99%  
    Multi-family . . . . . . . . . . . .      59,971          13.22         62,932          14.52         73,516        19.34   
    Commercial . . . . . . . . . . . . .      34,252           7.55         26,130           6.03         22,400         5.89   
    Construction and development . . . .       5,315           1.17         20,823           4.81         12,522         3.30   
                                             -------         ------        -------         ------        -------      -------   
    Total real estate loans. . . . . . .     265,111          58.44        288,083          66.48        271,817        71.52   
                                             -------         ------        -------         ------        -------      -------   
                                                                                                                                
OTHER LOANS:                                                                                                                    
------------                                                                                                                    
Consumer Loans:                                                                                                                 
    Mobile Homes . . . . . . . . . . . .      15,571           3.43         20,031           4.62         25,462         6.70   
    Automobiles. . . . . . . . . . . . .      66,483          14.66         48,181          11.12         32,583         8.57   
    Home Improvement . . . . . . . . . .       1,957           0.43          1,146           0.26          2,456         0.65   
    Deposit Account. . . . . . . . . . .       2,299           0.51          2,210           0.51          2,761         0.73   
    Student. . . . . . . . . . . . . . .       6,409           1.41          5,729           1.32          2,884         0.76   
    Junior Liens . . . . . . . . . . . .      36,779           8.11         23,152           5.34         20,157         5.30   
    Credit Cards . . . . . . . . . . . .       2,310           0.51          - - -           0.00          - - -         0.00   
    Other (1). . . . . . . . . . . . . .      20,934           4.61         25,475           5.88         10,784         2.84   
                                             -------         ------        -------         ------        -------      -------   
    Total consumer loans . . . . . . . .     152,742          33.67        125,924          29.05         97,087        25.55   
                                             -------         ------        -------         ------        -------      -------   
                                                                                                                                
Commercial Business Loans. . . . . . . .      27,534           6.07         13,913           3.21         11,129         2.93   
                                             -------         ------        -------         ------        -------      -------   
Agricultural Loans . . . . . . . . . . .       8,261           1.82          5,461           1.26          - - -         0.00   
                                             -------         ------        -------         ------        -------      -------   
                                                                                                                                
      Total other loans. . . . . . . . .     188,537          41.56        145,298          33.52        108,216        28.48   
                                             -------         ------        -------         ------        -------      -------   
                                                                                                                                
      Total gross loans. . . . . . . . .     453,648         100.00%       433,381         100.00%       380,033       100.00%  
                                             -------         ------        -------         ------        -------       ------   
                                                             ------                        ------        -------       ------   
                                                                                                                                
LESS:                                                                                                                           
-----                                                                                                                           
    Loans in process . . . . . . . . . .     (4,272)                       (7,349)                      (10,934)                
    Deferred fees and discounts. . . . .     (1,348)                       (1,480)                         (914)                
    Allowance for lossess. . . . . . . .     (4,526)                       (4,129)                       (4,039)                
                                            --------                      --------                                              
      Total loans receivable, net. . . .    $443,502                      $420,423                      $364,146                 
                                            --------                      --------                                               
                                            --------                      --------                              
<CAPTION>                                                                                                       
                                                                   At June 30,
---------------------------------------------------------------------------------------------------------------------

                                                         1994                          1993
                                                         ----                          ----
                                               AMOUNT            PERCENT     AMOUNT         PERCENT
                                               ------            -------     ------         -------
                                                               (Dollars In Thousands)
<S>                                          <C>         <C>               <C>            <C>
REAL ESTATE LOANS:
------------------
    One- to four-family. . . . . . . . .   $145,142          44.56%      $144,552          45.42%
    Multi-family . . . . . . . . . . . .     56,906          17.48         50,669          15.92
    Commercial . . . . . . . . . . . . .     18,710           5.74         25,650           8.06
    Construction and development . . . .     17,590           5.40         14,116           4.44
                                             ------        -------         ------        -------
    Total real estate loans. . . . . . .    238,348          73.18        234,987          73.84
                                             ------        -------         ------        -------

OTHER LOANS:
------------
Consumer Loans:
    Mobile Homes . . . . . . . . . . . .     31,762           9.75         42,343          13.30
    Automobiles. . . . . . . . . . . . .     22,586           6.93         14,500           4.55
    Home Improvement . . . . . . . . . .      2,522           0.77          2,888           0.91
    Deposit Account. . . . . . . . . . .      2,051           0.63          2,450           0.77
    Student. . . . . . . . . . . . . . .      2,508           0.77          2,185           0.69
    Junior Liens . . . . . . . . . . . .     16,154           4.96         11,734           3.69
    Credit Cards . . . . . . . . . . . .      - - -           0.00          - - -           0.00
    Other (1). . . . . . . . . . . . . .      5,077           1.57          3,191           1.00
                                             ------        -------         ------        -------
    Total consumer loans . . . . . . . .     82,660          25.38         79,291          24.91
                                             ------        -------         ------        -------

Commercial Business Loans. . . . . . . .      4,700           1.44          3,976           1.25
                                             ------        -------         ------        -------
Agricultural Loans . . . . . . . . . . .      - - -           0.00          - - -           0.00
                                             ------        -------         ------        -------

      Total other loans. . . . . . . . .     87,360          26.82         83,267          26.16
                                             ------        -------         ------        -------

      Total gross loans. . . . . . . . .    325,708         100.00%       318,254         100.00%
                                            -------         ------        -------         ------
                                                            ------                        ------

LESS:
-----
    Loans in process . . . . . . . . . .   (11,552)                       (7,402)
    Deferred fees and discounts. . . . .      (909)                         (994)
    Allowance for lossess. . . . . . . .    (4,899)                       (4,829)
      Total loans receivable, net. . . .   $308,348                      $305,029
                                           --------                      --------
                                           --------                      --------



</TABLE>



(1) Includes primarily second mortgage loans.


                                          4

<PAGE>


The following table shows the composition of the Bank's loan portfolio by fixed-
and adjustable-rate at the dates indicated.




<TABLE>
<CAPTION>
                                                                                    At June 30,
                                                  ------------------------------------------------------------------
                                                          1997                          1996                         1995  
                                                          ----                          ----                         ----  
                                                  AMOUNT        PERCENT         AMOUNT        PERCENT         AMOUNT     PERCENT 
                                                 -------         ------        -------         ------        -------    --------- 
                                                                               (Dollars In Thousands)                             
<S>                                             <C>             <C>           <C>             <C>           <C>         <C>      
FIXED-RATE LOANS:                                                                                                                 
-----------------                                                                                                                 
Real Estate:                                                                                                                      
    One- to four-family. . . . . . . . . . . .   $72,198          15.92%       $82,108          18.95%     $  73,460        19.33%
    Multi-family, commercial & construction. .    18,463           4.07         24,706           5.70         18,821         4.95 
                                                 -------         ------        -------         ------        -------    --------- 
      Total real estate loans. . . . . . . . .    90,661          19.98        106,814          24.65         92,281        24.28 
                                                 -------         ------        -------         ------        -------    --------- 
                                                                                                                                  
Consumer (including mobile home loans) . . . .   124,054          27.35        114,434          26.40         94,955        24.99 
Agricultural Loans . . . . . . . . . . . . . .     1,293           0.29          - - -           0.00          - - -         0.00 
Commercial business. . . . . . . . . . . . . .     8,516           1.88            960           0.22          3,602          .95 
                                                 -------         ------        -------         ------        -------    --------- 
      Total fixed-rate loans . . . . . . . . .   224,524          49.49        222,208          51.27        190,838        50.22 
                                                 -------         ------        -------         ------        -------    --------- 
                                                                                                                                  
ADJUSTABLE-RATE LOANS:                                                                                                            
----------------------                                                                                                            
Real estate: . . . . . . . . . . . . . . . . .                                                                                    
    One- to four-family. . . . . . . . . . . .    93,375          20.58        105,389          24.32         96,213        25.32 
    Multi-family, commercial & construction. .    81,075          17.87         75,880          17.51         83,323        21.92 
                                                 -------         ------        -------         ------        -------    --------- 
        Total real estate loans. . . . . . . .   174,450          38.45        181,269          41.83        179,536        47.24 
                                                 -------         ------        -------         ------        -------    --------- 
                                                                                                                                  
Consumer Loans . . . . . . . . . . . . . . . .    28,688           6.32         16,951           3.91          2,132          .56 
Agricultural Loans . . . . . . . . . . . . . .     6,968           1.54          - - -           0.00          - - -         0.00 
                                                                                               ------                   ---------
------- 
Commercial business. . . . . . . . . . . . . .    19,018           4.19         12,953           2.99          7,527         1.98 
                                                 -------         ------        -------         ------        -------    --------- 
         Total adjustable-rate loans . . . . .   229,124          50.51        211,173          48.73        189,195        49.78 
                                                 -------         ------        -------         ------        -------    --------- 
                                                                                                                                  
         Total loans . . . . . . . . . . . . .   453,648         100.00%       433,381         100.00%       380,033       100.00%
                                                 -------         ------        -------         ------        -------    --------- 
                                                                 ------                        ------                   --------- 
                                                                                                                                  
LESS:                                                                                                                             
----                                                                                                                              
    Loans in process . . . . . . . . . . . . .   (4,272)                       (7,349)                      (10,934)              
    Deferred fees and discounts. . . . . . . .   (1,348)                       (1,480)                         (914)              
    Allowance for loan lossess . . . . . . . .   (4,526)                       (4,129)                       (4,039)              
                                                 -------                       -------                     ---------              
                                                                                                                                  
        Total loans receivable, net. . . . . .  $443,502                      $420,423                      $364,146              
                                                 -------                       -------                     ---------              
                                                 -------                       -------                     ---------      




                                                                                At June 30,
                                               ------------------------------------------------------------------------
                                                               1994                          1993
                                                               ----                          ----
                                                      AMOUNT        PERCENT         AMOUNT        PERCENT
                                                   ---------      ---------      ---------      ---------
                                                                    (Dollars In Thousands)               
<S>                                                  <C>           <C>             <C>           <C>     
FIXED-RATE LOANS:                                 
-----------------
Real Estate:
    One- to four-family. . . . . . . . . . . .     $  77,615          23.83%     $  88,107          27.68%
    Multi-family, commercial & construction. .        18,929           5.81         25,050           7.87
                                                   ---------      ---------      ---------      ---------
      Total real estate loans. . . . . . . . .        96,544          29.64        113,157          35.55
                                                   ---------      ---------      ---------      ---------

Consumer (including mobile home loans) . . . .        79,899          24.53         76,178          23.93
Agricultural Loans . . . . . . . . . . . . . .         - - -           0.00          - - -           0.00
Commercial business. . . . . . . . . . . . . .         2,283           0.70          3,976           1.25
                                                   ---------      ---------      ---------      ---------
      Total fixed-rate loans . . . . . . . . .       178,726          54.87        193,311          60.73
                                                   ---------      ---------      ---------      ---------

ADJUSTABLE-RATE LOANS:
----------------------
Real estate: . . . . . . . . . . . . . . . . . 
    One- to four-family. . . . . . . . . . . .        75,738          23.25         60,899          19.14
    Multi-family, commercial & construction. .        66,067          20.29         60,930          19.15
                                                   ---------      ---------      ---------      ---------
        Total real estate loans. . . . . . . .       141,805          43.54        121,829          38.29
                                                   ---------      ---------      ---------      ---------

Consumer Loans . . . . . . . . . . . . . . . .         2,760           0.85          3,114           0.98
Agricultural Loans . . . . . . . . . . . . . .         - - -           0.00          - - -           0.00
                                                   ---------      ---------      ---------      ---------
Commercial business. . . . . . . . . . . . . .         2,417           0.74          - - -          - - -
                                                   ---------      ---------      ---------      ---------
         Total adjustable-rate loans . . . . .       146,982          45.13        124,943          39.27
                                                   ---------      ---------      ---------      ---------

         Total loans . . . . . . . . . . . . .       325,708         100.00%       318,254         100.00%
                                                   ---------      ---------      ---------      ---------
                                                                  ---------                     ---------

LESS:
-----
    Loans in process . . . . . . . . . . . . .      (11,552)                       (7,402)
    Deferred fees and discounts. . . . . . . .         (909)                         (994)
    Allowance for loan lossess . . . . . . . .       (4,899)                       (4,829)
                                                   ---------                     ---------

        Total loans receivable, net. . . . . .      $308,348                      $305,029
                                                   ---------                     ---------
                                                   ---------                     ---------
</TABLE>




                                          5

<PAGE>




The following schedule illustrates the scheduled principal contractual
repayments of the Bank's loan portfolio at June 30, 1997.  Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.



<TABLE>
<CAPTION>
                                        Real Estate                          Non-Real Estate
                          ----------------------------------   -------------------------------------------------
Due during Years          One- to Four-  Multi-                                Credit                 Commercial
ending June 30,              Family      Family  Commercial (2)  Consumer       Cards   Agricultural   Business     Total
                             ------      ------  --------------  --------       -----   ------------   --------     -----
                                                          (Dollars in Thousands)
<S>                       <C>          <C>       <C>           <C>          <C>        <C>          <C>          <C>
1998 (1) . . . . . . . .  $  3,943     $  2,266    $  2,516    $  31,099    $  2,310     $  4,064   $  18,643     $ 64,841
1999 . . . . . . . . . .     4,265        2,466       2,744       31,590       - - -        1,123       2,698       44,886
2000 . . . . . . . . . .     4,617        2,685       2,994       31,154       - - -        1,234       2,973       45,657
2001 and 2002. . . . . .    10,399        6,101       6,830       35,505       - - -          956       1,886       61,677
2003 to 2007 . . . . . .    34,377       20,652      20,882       18,039       - - -          884       1,323       96,157
2008 and following . . .   107,972       25,801       3,601        3,045       - - -        - - -          11      140,430
                           --------     --------    --------   ---------     --------    --------     ---------   ---------
Total. . . . . . . . . .  $165,573     $ 59,971    $ 39,567    $ 150,432    $  2,310     $  8,261    $ 27,534     $453,648
                           --------     --------    --------   ---------     --------    --------     ---------    --------
                           --------     --------    --------   ---------     --------    --------     ---------    --------
</TABLE>



(1) Includes demand loans, loans having no stated maturity and overdraft loans.
(2) Includes construction loans.

The total amount of loans due after June 30, 1997 which have predetermined
interest rates is $224.5 million, while the total amount of loans due after such
date which have floating or adjustable interest rates is $229.1 million.


Scheduled contractual principal repayments of loans do not reflect the actual
life of such assets.  The average life of loans is substantially less than their
average contractual terms because of prepayments.  In addition, due-on-sale
clauses on loans generally give the Bank the right to declare a conventional
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid.  The average life of mortgage loans tends to increase, however, when
current mortgage loan rates are substantially higher than rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgages are
substantially higher than current mortgage loan rates.

                                          6
<PAGE>

ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING.  Residential loan originations
of this type are generated by the Company's marketing efforts, its present
customers, walk-in customers and referrals from real estate brokers and
builders.  Historically, the Bank has focused its lending efforts primarily on
the origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences.  At June 30, 1997, the Company's one- to four-family
residential mortgage loans totalled $165.6 million, or approximately 36.5% of
the Company's gross loan portfolio.

Historically, the Company has emphasized the origination of conventional ARM 
loans for retention in its portfolio and fixed-rate conforming loans suitable 
for sale in the secondary market.  However, during fiscal 1997 the Company 
sold conventional ARM loans into the secondary market.  Presently, the 
Company follows the practice of generally selling fixed rate conventional 
mortgage loans with maturities of 15 years or greater.  See "-- Originations, 
Purchases, Sales and Servicing of Loans and Mortgage-Backed Securities."  
During the year ended June 30, 1997, the Company originated $44.9 million of 
adjustable-rate real estate loans, the majority of which were secured by one- 
to four-family residential real estate.  During the same period, the Company 
originated $16.6 million, of fixed-rate real estate loans, the majority of 
which were secured by one- to four-family residential real estate.  The 
Bank's one- to four-family residential mortgage originations are primarily in 
its market area.

The Company currently makes 15- and 30-year fixed and adjustable-rate one-to
four-family residential mortgage loans in amounts up to 95% of the appraised
value of the collateral property provided that private mortgage insurance is
obtained in an amount sufficient to reduce the Company's exposure at or below
the 80% level.  The Company currently offers an ARM loan which has a fixed rate
for the initial three years and converts to a one-year ARM loan for the
remainder of the life of the loan.  The Company also offers a one-year ARM loan
with a rate below the Company's then current fixed-rate loan for a comparable
15- or 30-year term loan.  These loans provide for up to a 2.0% annual cap and a
lifetime cap of 6.0% over the fully-indexed rate.  These ARM products have an
interest rate margin generally 2.875% over the one-year Treasury Bill rate.
These loans provide for up to a 2.0% annual cap and a lifetime cap of 6.0% over
the fully-indexed rate calculated at the date of origination.  As a consequence
of using caps, the interest rates on these loans are not as rate sensitive as is
the Company's cost of funds.  The initial rate used for the loan is usually
below the fully-indexed rate and is determined by the Company in accordance with
market and competitive factors.

In addition, the Company offers a 30-year balloon loan which has a fixed-rate
for the first five or seven years of the loan term.  At the end of the five- or
seven-year period, the loan converts to a 23- or 25-year fixed-rate loan at the
then current market rate provided that the borrower qualifies at the new rate.
If the borrower fails to qualify at the new rate, the loan becomes payable in
full.  These loans are underwritten to conform to the Federal Home Loan Mortgage
Corporation's ("FHLMC") secondary market standards.

The Company also offers fixed-rate 15- through 30-year mortgage loans that
conform to secondary market standards (i.e., Federal National Mortgage Bank
("FNMA"), Government National Mortgage Bank ("GNMA") and FHLMC standards).
Interest rates charged on these fixed-rate loans are competitively priced on a
daily basis according to market conditions.  Residential loans generally do not
include prepayment penalties.  Most of these loans with maturities of 30 years
are held for sale or sold in the secondary market.  Historically, the Company
has generally retained servicing rights on such loans whenever possible.
However, during fiscal 1997 the Company sold the majority of its loans with
servicing released.

The Bank also originates fixed-rate one- to four-family mortgage loans through
the South Dakota Housing Development Authority ("SDHDA") program.  These loans
generally have terms not to exceed 30 years and are either insured by the FHA/VA
or private mortgage insuror or must have no more than a 80% loan to value ratio.
The Bank receives an origination fee of one percent of the loan amount from the
borrower and a servicing fee currently three-eighths of one percent from the
SDHDA for these services.  The Bank is the largest servicer of loans for the
SDHDA.  At June 30, 1997, the Bank serviced $232.7 million of mortgage loans for
the SDHDA.

In underwriting one- to four-family residential real estate loans, Home Federal
evaluates both the borrower's ability to make monthly payments and the value of
the property securing the loan.  These criteria are also applied to loans
purchased.  Most property securing real estate loans made by Home Federal are
appraised by an appraiser employed by Mid-America Service Corporation, Home
Federal's wholly-owned subsidiary.  Other appraisals are performed by
independent appraisers selected by Home Federal.  Home Federal requires
borrowers to obtain title and fire and

                                          7
<PAGE>

casualty insurance in an amount not less than the amount of the loan.  Real
estate loans originated by the Bank contain a "due-on-sale" clause allowing the
Bank to declare the unpaid principal balance due and payable upon the sale of
the collateral property.

MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING.  The Bank engages in
multi-family and commercial real estate lending primarily in South Dakota and
the adjoining mid-western states.  These lending activities may include existing
property or new construction development.

Loans secured by multi-family and commercial real estate properties are
generally larger and involve a greater  degree of credit risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
multi-family and commercial real estate properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to 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 to repay the loan may be impaired.

The Bank presently originates adjustable-rate, short-term balloon payment,
fixed-rate multifamily and commercial real estate loans.  The Bank's
multi-family and commercial real estate loan portfolio is secured primarily by
apartment buildings and, to a lesser extent, churches, motels, strip shopping
centers and nursing homes.  The terms of such loans are negotiated on a case by
case basis.  Commercial real estate loans generally have terms that do not
exceed 25 years.  The Bank has a variety of rate adjustment features, call
provisions and other terms in its multi-family and commercial real estate loan
portfolio.  Generally, the loans are made in amounts up to 75% of the appraised
value of the collateral property and with debt service coverage ratios of 115%
or higher.  The debt service coverage is the ratio of net cash from operations
before payment of debt service.  However, these percentages may vary depending
on the type of security and the guarantor.  Such loans provide for a negotiated
margin over a designated index which is generally the one-year Treasury Bill
Rate.  Fixed rate loans are generally made when advances from the Federal Home
Loan Bank of Des Moines can be used to fund the loan.  The Bank analyzes the
financial condition of the borrower, the borrower's credit history, the
borrower's prior record for producing sufficient income from similar loans,
references and the reliability and predictability of the net income generated by
the property securing the loan.  The Bank generally requires personal guaranties
of the borrowers.  Depending on the circumstances of the security of the loan or
the relationship with the borrower, the Bank may decide to sell participations
in the loan.  The sale of participation interests in a loan are necessitated by
the amount of the loan or the loans to one borrower requirements which would
require the sale of the loan.  In return for servicing these loans for the
participants, the Bank generally receives a fee of one-fourth to three-eighths
of one percent.  Also, income is received at loan closing from loan fees and
discount points.  Appraisals on properties securing multi-family and commercial
real estate loans originated by the Bank are performed by independent appraisers
selected by Home Federal and reviewed by bank employees.

At June 30, 1997, the Bank had $60.0 million of multi-family and $34.3 million
of commercial real estate loans, which represented 13.2% and 7.6%, respectively,
of the Bank's gross loan portfolio.  At June 30, 1997, $154,000 of the Bank's
multi-family and commercial real estate portfolio or 0.1% of the Bank's gross
loan portfolio was non-performing.  See "-- Non-Performing Assets and Classified
Loans" for a discussion of the Bank's largest non-performing assets and items of
concern and the allowances established for each.

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
("FIRREA") includes a provision that limits the Bank's non-residential real 
estate lending (i.e., commercial real estate lending, other than lending on 
certain multi-family residences) to no more than four times its total 
capital. This maximum limitation, which at June 30, 1997 was $169.0 million, 
has not materially limited the Bank's lending practices.  See "-- Regulation --
Regulatory Capital Requirements."

Under FIRREA, the maximum amount which Home Federal may lend to any one borrower
is 15% of Home Federal's unimpaired capital and surplus or $7.0 million at June
30, 1997.  Loans in an amount equal to an additional 10% of unimpaired capital
and surplus may be made to the same borrower if such loans are fully secured by
readily marketable collateral.  See "-- Regulation -- Federal Regulation of
Savings Associations" for a discussion of the loans-to-one borrower rule.  On
June 30, 1997, the Bank did not have any loans exceeding the loans to one
borrower requirements.

                                          8
<PAGE>

At June 30, 1997, Home Federal had no loans in excess of its present legal
lending limit.  On such date, the Bank had loans in excess of $1.0 million to 43
borrowers or groups of affiliated borrowers.

CONSTRUCTION AND DEVELOPMENT LENDING.  The Bank makes construction loans to
individuals for the construction of their residences as well as to builders and,
to a lesser extent, developers for the construction of one- to four-family
residences and condominiums and the development of one- to four-family lots in
the Bank's primary market area.

Construction loans to individuals for their residences are structured to be
converted to permanent loans at the end of the construction phase, which
typically runs for 6 to 12 months.  These construction loans have rates and
terms which match the one- to four-family permanent loans offered by the Bank.
Residential construction loans are generally underwritten pursuant to the same
guidelines used for originating permanent residential loans.  At June 30, 1997,
the Bank had $2.2 million of residential construction loans to borrowers
intending to live in the properties upon completion of construction.

At June 30, 1997, the Bank had approximately $269,000 in construction loans to
builders of one- to four-family  residences.  In addition, the Bank has
developed a line of credit for qualified builders.  This product provides the
builder flexibility while the Bank maintains its credit standards.  The line of
credit does not advance more than 75% of the approved value or cost on a
construction project, a mortgage is filed on each construction project and
interest is collected monthly.  These lines provide for the payment of interest
and loan fees, with interest rates of 1% to 2.5% over the prime rate adjusted on
a monthly basis.

The Bank also makes loans to developers for the purpose of developing one- to
four-family lots.  These loans typically have terms of one year and carry
interest rates which float monthly based on a national designated index such as
the prime rate.  Loan commitment and partial release fees are charged.  These
loans generally provide for the payment of interest and loan fees from loan
proceeds.  The principal balance of these loans is typically paid down as lots
are sold.  At June 30, 1997, the Bank had no development loans outstanding.

Builder construction and development loans are obtained principally through
continued business from developers and builders who have previously borrowed
from the Bank as well as broker referrals and direct solicitations of developers
and builders.  The application process includes a submission to the Bank of
accurate plans, specifications and costs of the project to be constructed or
developed.  These items are used as a basis to determine the appraised value of
the subject property.  Loans are based on the lesser of current appraised value
and/or the cost of construction (land plus building).

The Bank makes loans for the construction of multi-family residential
properties.  Such loans are generally made at adjustable rates which adjust
annually based upon a national designated index.  At June 30, 1997, no
multi-family residential construction loans were outstanding.   At June 30,
1997, all of the Bank's construction loans were performing in accordance with
their terms.

Construction loans are generally made up to a maximum loan-to-value ratio of 75%
and land development loans are generally made up to a maximum loan-to-value
ratio of 60%, based upon an independent appraisal.  Because of the uncertainties
inherent in estimating development and construction costs and the market for the
project upon completion, it is relatively difficult to evaluate accurately the
total loan funds required to complete a project, the related loan-to-value
ratios and the likelihood of ultimate success of the project.  Construction and
development loans to borrowers other than owner occupants also involve many of
the same risks discussed above regarding multi-family and commercial real estate
loans and tend to be more sensitive to general economic conditions than many
other types of loans.

Prior to making a commitment to fund a construction loan, the Bank requires an
appraisal of the property, or, for larger projects, both an appraisal and a
study of the feasibility of the proposed project.  The Bank's construction loan
policy provides for the inspection of properties by in-house and independent
inspectors at the commencement of construction and prior to disbursement of
funds during the term of the construction loan.

CONSUMER LENDING.  Management considers its consumer loan products to be an
important component of its lending


                                          9
<PAGE>

strategy.  Specifically, consumer loans generally have shorter terms to maturity
and carry higher rates of interest than do one- to four-family residential
mortgage loans.  In addition, management believes that the offering of consumer
loan products helps to expand and create stronger ties to its existing customer
base, by increasing the number of customer relationships and providing
cross-marketing opportunities.  For these reasons, Home Federal has continued to
focus on the origination of consumer loans.

Home Federal offers a variety of secured consumer loans, including home
improvement and second mortgage loans, loans secured by savings deposits, home
equity loans, mobile home loans and automobile loans.  In addition, Home Federal
offers student loans, boat and vacation loans and other secured and unsecured
consumer loans.  All secured consumer loans over $100,000 must be approved by
the Bank's loan committee except for loans over $250,000 which must be approved
by the Bank's Board of Directors.  The Bank originates consumer loans on both a
direct and indirect basis. Direct loans are made when the Bank extends credit
directly to the borrower.  Indirect loans are obtained when the Bank purchases
loan contracts from retailers of goods or services which have extended credit to
their customers.  The only indirect lending by Home Federal, described below, is
with selected automobile dealers located in the Bank's lending area.

Most of the Bank's mobile home loans have been originated with fixed rates of
interest and are generally made in amounts of up to a maximum of the lesser of
125% of the net invoice or 90% of the buyer's cost.  The buyer's cost can
include such items as freight, itemized set-up charges, physical damage
insurance, sales tax and filing and recording fees.  Home Federal is permitted
by regulation to make mobile home loans for terms of up to 20 years, although
most of the Bank's mobile home loans are for terms of 15 years or less.  At June
30, 1997, mobile home loans amounted to $15.6 million or 3.4% of the Bank's
gross loan portfolio.

Home Federal currently purchases automobile conditional sales contracts from
selected dealers within its market area as well as originating automobile loans
directly.  At June 30, 1997, automobile loans amounted to $66.5 million or
14.7% of the Bank's gross loan portfolio.

Loans secured 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 the loan and generally have maximum terms that do not exceed seven to
ten years.  As of June 30, 1997, such loans amounted to $36.8 million or 8.1% of
the Bank's gross loan portfolio.

The student loans originated by Home Federal are guaranteed as to principal and
interest by the South Dakota Education Assistance Corporation.  Upon the student
nearing graduation, Home Federal sells such student loans with servicing rights
released.  At June 30, 1997, student loans amounted to $6.4 million or 1.4% of
the Bank's gross loan portfolio.

At June 30, 1997, the Bank's consumer loan portfolio totalled $152.7 million, or
33.7% of its gross loan portfolio.  Of the consumer loan portfolio at
June 30, 1997, 18.8% were adjustable-rate loans.

Consumer loan terms vary according to the type of collateral, length of contract
and creditworthiness of the borrower.  Home Federal offers both open- and
closed-end credit.  Overdraft lending is extended through lines of credit that
are tied to a negotiated order of withdrawal ("NOW") account.  The credit lines
generally bear interest at 18% and are generally limited to no more than $5,000.
Loans secured by deposit accounts at the Bank are currently originated for up to
90% of the account balance (though historically the Bank has loaned up to 100%),
with a hold placed on the account restricting the withdrawal of the account
balance.  The interest rate on such loans is typically equal to 2% above the
contract rate.

The underwriting standards employed by the Bank for consumer loans, including
mobile home loans, include an application, a determination of the applicant's
payment history on other debts and an assessment of the ability to meet existing
obligations and payments on the proposed loan.  Although creditworthiness of the
applicant is a primary consideration, the underwriting process also includes a
comparison of the value of the security, if any, in relation to the proposed
loan amount.

Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer


                                          10
<PAGE>

loans which are unsecured or are secured by rapidly depreciable assets, such as
mobile homes, automobiles or boats.  In such cases, any repossessed collateral
for a defaulted consumer loan may not provide an adequate source of repayment of
the outstanding loan balance as a result of the greater likelihood of damage,
loss or depreciation.  In addition, consumer loan collections are dependent on
the borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans.  Although management
believes that the level of delinquencies in the Bank's consumer loan portfolio,
has generally been low (at June 30, 1997, $480,000 (excluding $282,000 of
repossessed consumer collateral), or approximately 0.31% of the consumer loan
portfolio, was non-performing), there can be no assurance that delinquencies
will not increase in the future.

CREDIT CARD LENDING.  During fiscal 1991, the Bank began offering
VISA/Mastercard card credit card services on an agency basis to its customers.
The Bank does not retain or have any credit liability related to the credit
which is extended in connection with such cards.  The Bank is paid a fee for
each card issued and receives a fee for each transaction completed on these
cards.  During fiscal 1997, the Company made a strategic decision to enter the
credit card business in a more direct fashion and took a majority (51%) position
in a newly formed subsidiary, HF Card Services, L.L.C.  The target market for
credit cards in this line of business is sub-prime credit customers who have
either an insufficient credit history or a negative credit history and are
unable to obtain a credit card from more traditional card issuers.  The Bank
manages the overall risk of the credit card program by its underwriting criteria
that demands a recent history of acceptable performance on all accounts and
product design and pricing which limits a new customer's available line of
credit while providing an immediate revenue source.  Examples include an
unsecured product which starts with a $300 line of credit, but charges both a
$50 annual fee and a $150 acceptance fee to the card, resulting in an initial
$100 of available credit to the customer.  The secured product also delivers a
$300 line of credit to the customer, but charges a $50 annual fee and takes
$225 cash advance against the card to be held as a security deposit, resulting
in an initial $25 of available credit to the customer.  The Company had
approximately $2.3 million in credit card loans at June 30, 1997.  The Bank has
added a new officer to its staff with 12 years of experience in the credit card
industry.  Back office support for credit card processing is being provided by
an independent third party located in Sioux Falls, South Dakota.  The Bank will
continue to explore new credit card product opportunities and relationships with
other interested businesses who are able to demonstrate a sound financial
position coupled with positive industry backgrounds and whose ownership and
management is found to be acceptable.

COMMERCIAL BUSINESS LENDING.  In order to serve the needs of the local business
community and improve the  interest rate sensitivity and yield of its assets,
the Bank originates commercial loans to local businesses.  See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management".  At June 30, 1997, approximately $27.5 million or
6.1% of the Bank's total loan portfolio was comprised of commercial business
loans.  Home Federal's commercial business lending activities encompass loans
with a variety of purposes and security, including loans to finance accounts
receivable, inventory, equipment and business expansion within the Bank's market
area.  Virtually all of Home Federal's commercial business loans have been to
borrowers in its primary lending areas.  The Bank originates commercial business
loans directly and through programs sponsored by the Small Business
Administration ("SBA") of which a portion of such loans are also guaranteed in
part by the SBA.  The Bank generally originates commercial business loans for
its portfolio and retains the servicing with respect to such loans.  In the
future, Home Federal intends to continue to expand its commercial business
lending, subject to market conditions.  Interest rates on commercial business
loans adjust or float with a designated national index plus a specified margin.

Unlike residential mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business.  As a result, the availability of funds for the repayment of
commercial business loans may be substantially 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 are sometimes, but
not always, secured by business assets, such as accounts receivable, equipment
and inventory.  However, the collateral securing the loans may depreciate over
time, may be difficult to appraise and may fluctuate in value based on the
success of the business.  Virtually all of the Bank's commercial business loans
include personal guarantees.  At June 30, 1997, none of the Bank's commercial
business loan portfolio was non-performing.


                                          11
<PAGE>

AGRICULTURAL LOANS.  In order to serve the needs of the local business community
and improve the interest rate sensitivity and yield of its assets, the Company
established an agricultural lending department in fiscal 1996.  The Company
employed experienced lenders to establish this department and to ensure a high
quality portfolio.  The agricultural division offers four types of loans to its
consumers: (1) operating loans which are used to fund operating expenses which
typically have a one year term and are indexed to the national prime rate; (2)
term loans on machinery equipment and breeding stock that may have a term up to
seven years and require annual payments; (3) agricultural farmland term
loans-which are used to fund land purchases or refinances; (4) specialized
livestock loans-fund facilities and equipment for confinement enterprises.
These loans typically will have personal guarantees, a first lien on the real
estate, interest rates adjustable to the national prime rate and require
quarterly or monthly payments.  All loans are secured by the operating assets of
the borrower.  The Bank had approximately $8.3 million of its loan portfolio in
agricultural loans which was 1.8% of its loan portfolio at June 30, 1997.

Loan customers are required to supply current financial statements, tax returns
for the past three to five years, and cash flow projections which are updated on
an annual basis.  In addition, on major loans the loan officer will perform an
annual farm visit, obtain financial statements and perform a financial review of
the loan.

At June 30, 1997, none of the agricultural loan portfolio was non-performing.

ORIGINATIONS, PURCHASES, SALES AND SERVICING OF LOANS AND MORTGAGE-BACKED
SECURITIES

Real estate loans are originated by Home Federal's staff of salaried loan
officers working in the Bank's retail banking offices and by the Mortgage
Corp's. staff of commissioned loan officers working in Omaha, Nebraska.  Loan
applications are taken in each office, submitted to the main office for
processing, for underwriting, and then, if the amount requested requires, to the
loan committee for approval.  Walk-in customers and referrals from real estate
brokers and builders are important sources of loan originations.

The Company originates both adjustable-rate and fixed-rate loans.  Its ability
to originate loans is dependent upon the relative customer demand for fixed-rate
or ARM loans in its market, which is affected by the term structure (short-term
compared to long-term) of interest rates as well as the current and expected
future level of interest rates.  Virtually all newly originated fixed-rate
residential mortgage loans with maturities of 15 years or greater are originated
pursuant to prior commitments for immediate sale in the secondary market.  The
Company sells loans to private investors as well as to FNMA and FHLMC.  At June
30, 1997, the Company had $3.5 million of loans secured by one-to four-family
residential real estate which were held for sale.  See Notes 3 and 4 of the
Notes to Consolidated Financial Statements.  These loans are originated to
satisfy customer demand and to generate fee income and sold to achieve the goals
in the Bank's asset/liability management program.  In selling these fixed-rate
mortgage loans, the Bank has historically retained the servicing rights whenever
possible.  However, during fiscal 1997 the Bank has sold the majority of these
loans with servicing released.  The Bank also  occasionally sells loan
participations in order to diversify risk and to comply with loans-to-one
borrower requirements.

Home Federal has had a substantial portfolio of fixed-rate and adjustable-rate
mortgage-backed securities which it uses for investment and liquidity
management.  During fiscal 1997, the Bank purchased no mortgage-backed
securities.  At June 30, 1997, mortgage-backed securities totalled $30.3
million, or 6.30% of Home Federal's gross loans and mortgage-backed securities
portfolio.  Such mortgage-backed securities can serve as collateral for
borrowings and, through repayments, as a source of liquidity.  For information
regarding the carrying and market values of Home Federal's mortgage-backed
securities portfolio, see Note 2 of the Notes to Consolidated Financial
Statements.  Under the risk-based capital requirement, GNMA mortgage-backed
securities have a risk-weighting of 0% and FNMA and FHLMC mortgage-backed
securities and mortgage-backed securities issued by U.S. Government sponsored
agencies have a risk weighting of 20%, in contrast to the 50% risk weight
carried by residential loans.  While the Bank could exchange its long-term,
fixed-rate mortgage loans for FHLMC participation certificates in order to
achieve the same benefit of increased liquidity, to date, it has not elected to
do so.

Since 1982, the Bank has purchased mortgage servicing rights from other
originators on loans of the SDHDA, a state agency which provides low-interest
residential housing financing for first time home buyers in South Dakota.  In
return

                                          12
<PAGE>

for servicing such portfolio, the Bank generally receives a fee of three-eighths
of one percent from the SDHDA.  At June 30, 1997, the Bank serviced $322.1
million in loans for others (primarily the SDHDA).

The contractual right to service mortgage loans has an economic value that, in
accordance with generally accepted accounting principles, was not recognized in
the Bank's financial statements prior to implementation of Statement of
Financial Accounting Standards #122, "Accounting for Mortgage Servicing Rights",
unless purchased.  The value results from the future income stream of the
servicing fees, the availability of the cash balances associated with escrow
funds collected monthly for real estate taxes and insurance, the availability of
the cash from monthly principal and interest payments from the collection date
to the remittance date, and the ability of the servicer to cross-sell other
products and services.  The actual value of a servicing portfolio is dependent
upon such factors as the age and maturity of the loans in the portfolio, the
average dollar balance of the loans, the location of the collateral property,
the average amount of escrow funds held, the interest rates and delinquency
experience on the loans, the types of loans and other factors.

The unamortized cost of loan servicing rights was $1.1 million at June 30, 1997.
Home Federal had no long-term capitalized excess servicing fees receivable as of
that date.  Home Federal has elected to amortize the servicing rights over the
life of the loans using the interest method.  Management reviews its
amortization schedules at least quarterly to assure that the carrying value of
mortgage servicing is fairly stated.

From time to time, Home Federal has purchased whole loans and loan
participations in accordance with its ongoing asset/liability management
objectives.

The following table shows the loan and mortgage-backed securities origination,
purchase and repayment activities of the Company for the years indicated.

                                          13
<PAGE>

                                              Year Ended June 30,
                                            -----------------------
                                            1997     1996      1995
                                            ----     ----      ----
                                             (Dollars in Thousands)
ORIGINATIONS BY TYPE:
Adjustable rate
    Real estate. . . . . . . . . . . .   $ 44,899  $ 26,848  $ 46,668
    Non-Real Estate. . . . . . . . . .     29,554    21,987    12,550
                                         --------  --------  --------
       Total adjustable rate . . . . .     74,453    48,835    59,218
                                         --------  --------  --------
    Fixed-rate:
    Real estate. . . . . . . . . . . .     16,601    33,083    33,710
    Non-real estate. . . . . . . . . .    104,217    89,847    51,403
                                         --------  --------  --------
       Total fixed-rate. . . . . . . .    120,818   122,930    85,113
                                         --------  --------  --------

         Total loans originated. . . .    195,271   171,765   144,331
                                         --------  --------  --------

PURCHASES:
    Loan participations. . . . . . . .     13,813    23,886    15,120
    Mortgage-backed securities . . . .      - - -    20,162    18,623
                                         --------  --------  --------
       Total purchased . . . . . . . .     13,813    44,048    33,743
                                         --------  --------  --------

SALES:
    Real estate loans. . . . . . . . .     53,250    55,050    31,943
    Mortgage-backed securities . . . .     12,184    20,978     - - -
                                         --------  --------  --------
       Total sales . . . . . . . . . .     65,434    76,028    31,943
PRINCIPAL REPAYMENTS . . . . . . . . .    147,954   104,358    81,212
                                         --------  --------  --------

       Total reductions. . . . . . . .    213,388   180,386   113,155
                                         --------  --------  --------

Other, net . . . . . . . . . . . . . .    (1,938)   (3,039)     (631)
                                         --------  --------  --------
       Net increase (decrease) . . . .   $(6,242)  $ 32,388  $ 64,288
                                         --------  --------  --------
                                         --------  --------  --------


NON-PERFORMING ASSETS AND CLASSIFIED LOANS

When a borrower fails to make a required payment on real estate secured loans
within 10 to 15 days after the  payment is due, the Bank generally institutes
collection procedures by issuing a late notice.  The customer is contacted again
when the payment is 30 days past due.  In the case of consumer loans, the
borrower is sent a notice when a loan is 10 days past due and is contacted by
telephone when a loan is 30 days past due.  In most cases, delinquencies are
cured promptly; however, if a loan has been delinquent for more than 30 days,
the Bank attempts additional written as well as verbal contacts and, if
necessary, personal contact with the borrower in order to determine the reason
for the delinquency and to effect a cure, and, where appropriate, reviews the
condition of the property and the financial circumstances of the borrower.
Based upon the results of any such investigation, the Bank may: (i) accept a
repayment program which under appropriate circumstances could involve an
extension 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 the
borrower to sell the property if the borrower has stated that he is attempting
to sell, or (iii) initiate foreclosure proceedings. When a loan payment is
delinquent for 90 days, the Bank generally will initiate foreclosure proceedings
unless management is satisfied the credit problem is correctable.

Generally, when a loan becomes delinquent 90 days or more, the Bank will place
the loan on a non-accrual status and, as a result, accrued interest income on
the loan is taken out of income.  Future interest income is recognized on a cash
basis.  The loan will remain on a non-accrual status until the borrower has
brought the loan current.

                                          14
<PAGE>


The Company includes all loans considered impaired under FASB Statement No. 114
in nonaccrual loans.  The amount of impaired loans was not material at June 30,
1997.

The following table sets forth information concerning delinquent mortgage and
other loans at June 30, 1997.  The amounts presented represent the total
remaining principal balances of the related loans, rather than the actual
amounts which are overdue.



<TABLE>
<CAPTION>

                                                     REAL ESTATE
-------------------------------------------------------------------------------------------------
                         One- to four-family          Commercial              Consumer
-------------------------------------------------------------------------------------------------
                                     Percent                 Percent                  Percent
                                     of Total                of Total                 of Total
                     Number  Amount   Loans   Number  Amount  Loans   Number  Amount   Loans
                     ------  ------   -----   ------  ------  ------- ------  -------  ------
<S>                  <C>   <C>       <C>      <C>     <C>     <C>     <C>     <C>     <C>
                                    (Dollars in Thousands)
Loans delinquent for:
  30-59 days . . .    48  $1,065      0.23%        0   $  0    0.00%   231   $ 2,216    0.49%
  60-89 days . . .    19     670      0.15         2     29    0.01     77       671    0.15
  90 days 
  and over . . . .    28     725      0.16         1    154    0.03     45       487    0.11
                      --  ------      ----         -   ----    ----    ---    ------    ----
Total Delinquent
   loans . . . . .    95  $2,460      0.54%        3   $183    0.04%   353    $3,374    0.74%
                      --  ------      ----         -   ----    ----    ---    ------    ----
                      --  ------      ----         -   ----    ----    ---    ------    ----
<CAPTION>
                                   NON REAL ESTATE
---------------------------------------------------------------------------
                         Credit Card                    Business
---------------------------------------------------------------------------
                                       Percent                     Percent
                                       of Total                    of Total
                     Number    Amount   Loans    Number   Amount     Loans
                     ------    ------   -----    ------   ------    -------
                                   (Dollars in Thousands)
<S>                  <C>       <C>     <C>       <C>      <C>       <C>
Loans delinquent for:
  30-59 days . . .   294      $100      0.02%        9    $  405      0.09%
  60-89 days . . .   162        64      0.01         4       946      0.21
  90 days
  and over . . . .   165        68      0.01         0         0      0.00
                     ---      ----      ----       ---     -----      ----
Total Delinquent
   loans . . . . .   621      $232      0.05%       13    $1,351      0.30%
                     ---      ----      ----       ---    -----       ----
                     ---      ----      ----       ---    -----       ----

</TABLE>


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

There were no construction and development loans delinquent at June 30, 1997.
There were no agricultural loans delinquent at June 30, 1997.
There were no multi-family loans delinquent at June 30, 1997.


                                          15
<PAGE>


The following table sets forth the amounts and categories of the Bank's
non-performing assets.  Loans are placed on non-accrual status when the
collection of principal and/or interest become doubtful.  Foreclosed assets
include assets acquired in settlement of loans.  The Bank did not have any
material troubled debt restructurings at any of the dates presented.

                                                     At June 30,
                                   --------------------------------------------
                                   1997      1996      1995      1994      1993
                                   ----      ----      ----      ----      ----
                                               (Dollars in Thousands)
Non-accruing loans:
  One- to four-family. . . .     $  618    $  682    $  169    $  263    $  298
  Commercial real estate . .        154       556       710       717       906
  Multi-family . . . . . . .      - - -     - - -     1,611     1,718     1,871
  Mobile homes . . . . . . .         52        58       198       122       123
  Consumer(1). . . . . . . .        428       340        23        51        47
  Commercial business. . . .      - - -       427     - - -     - - -     - - -
                                   -----     -----     -----     -----     -----
    Total. . . . . . . . . .      1,252     2,063     2,711     2,871     3,245
                                   -----     -----     -----     -----     -----
Accruing loans delinquent more
    than 90 days
  One- to four-family. . . .      - - -     - - -       143        60        97
  Commercial real estate . .      - - -     - - -     - - -     - - -     - - -
  Multi-family . . . . . . .      - - -     - - -     - - -     - - -     - - -
  Mobile homes . . . . . . .      - - -     - - -         7        51     - - -
  Consumer(1). . . . . . . .      - - -     - - -         2        10     - - -
  Commercial business. . . .      - - -     - - -     - - -     - - -     - - -
                                   -----     -----     -----     -----     -----
    Total. . . . . . . . . .      - - -     - - -       152       121        97
                                   -----     -----     -----     -----     -----
Foreclosed assets:
  One- to four-family. . . .        311        52       108        50       203
  Commercial real estate . .      - - -         1         3     1,005     1,069
  Multi-family . . . . . . .      - - -     - - -     - - -       150     1,380
  Mobile homes . . . . . . .        124        88        38       152       198
  Credit Cards . . . . . . .      - - -     - - -     - - -     - - -     - - -
  Consumer(1). . . . . . . .        158        87        54        25        19
  Commercial Business. . . .      - - -     - - -     - - -     - - -     - - -
                                   -----     -----     -----     -----     -----
    Total. . . . . . . . . .        593       228       203     1,382     2,869
                                   -----     -----     -----     -----     -----
Total non-performing
  assets(2). . . . . . . . .     $1,845    $2,291    $3,066    $4,374    $6,211
                                   -----     -----     -----     -----     -----
                                   -----     -----     -----     -----     -----
Non-performing assets to total
  assets(3). . . . . . . . .      0.33%     0.41%     0.57%     0.89%     1.29%
                                   -----     -----     -----     -----     -----
                                   -----     -----     -----     -----     -----
Non-performing loans to
  total loans(4) . . . . . .      0.28%     0.49%     0.79%     0.97%     1.10%
                                   -----     -----     -----     -----     -----
                                   -----     -----     -----     -----     -----

---------------------
(1)  Consists of non-performing consumer loans exclusive of mobile home loans.
(2)  Non-performing assets includes non-accruing 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)  Non-performing loans includes non-accruing loans and accruing loans
     delinquent more than 90 days.


                                          16
<PAGE>

For the year ended June 30, 1997, gross interest income which would have been
recorded had the non-accruing loans been current in accordance with their
original terms amounted to approximately $178,000.  Income that was recorded on
these non-accrual loans amounted to approximately $88,000 for the year ended
June 30, 1997.

NON-ACCRUING LOANS.  As of June 30, 1997, the Bank had $1.3 million in net book
value of non-accruing loans.  Included in non-accruing loans at June 30, 1997
were 15 loans totalling $618,000 secured by one- to four-family real estate, one
loan in the amount of $154,000 secured by commercial real estate, five mobile
home loans totalling $52,000, and thirty-eight consumer loans (excluding mobile
home loans) totalling $428,000.

ACCRUING LOANS DELINQUENT MORE THAN 90 DAYS.  At June 30, 1997 the bank had no
accruing loans delinquent more than 90 days.

FORECLOSED ASSETS.  As of June 30, 1997, the Bank had $593,000 of foreclosed
assets.  The balance of foreclosed assets at June 30, 1997 consisted of $158,000
in consumer (other than mobile homes) collateral, $124,000 in mobile homes and
$311,000 in single-family residences.

OTHER LOANS OF CONCERN.  In addition to the non-performing assets set forth in
the previous table, as of June 30, 1997 there was also an aggregate of $8.1
million in net book value of loans classified by the Bank with respect to which
known information about the possible credit problems of the borrowers or the
cash flows of the security properties have caused management to have some doubts
as to the ability of the borrowers to comply with present loan repayment terms
and which may result in the future inclusion of such items in the non-performing
asset categories.

CLASSIFIED ASSETS.  Federal regulations provide for the classification of loans
and other assets such as debt and equity securities considered by the OTS to be
of lesser quality as "substandard," "doubtful" or "loss." An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings association will sustain "some loss" if the deficiencies are
not corrected.  Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable".  Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.  Assets which do not
currently expose the thrift institution to sufficient risk to warrant
classification in one of the aforementioned categories, but possess weaknesses,
are required to be designated "Special Mention" by management.

When a thrift institution classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management.  General allowances represent loss allowances
which have been established to recognize the inherent risk 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 for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount.  An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the association's Regional Director at the regional OTS
office, who may order the establishment of additional general or specific loss
allowances.

In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank regularly reviews
the problem loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations.  On the basis of
management's monthly review of its assets, at June 30, 1997, the Bank had
classified $4.9 million of its assets as special mention (including certain
loans discussed herein), $4.4 million as substandard (including certain loans
discussed herein), and approximately $555,000 as doubtful.  Classified assets at
June 30, 1997 consisted of the $1.8 million of non-performing assets, and the
$8.1 million of other loans of concern discussed above.

ALLOWANCE FOR LOAN LOSSES.  The allowance for loan losses is established through
a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity.  Such evaluation, which includes a review of all loans of which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan allowance.

                                          17
<PAGE>

Real estate properties acquired through foreclosure are recorded at the lower of
cost or fair value (less a deduction for disposition costs).  Valuations are
periodically updated by management and a specific provision for losses on such
property is established by a charge to operations if the carrying value of the
property exceeds its estimated net realizable value.

Although management believes that it uses the best information available to
determine the allowances, unforeseen  market conditions could result in
adjustments and net earnings being significantly affected if circumstances
differ substantially from the assumptions used in making the final
determinations.  Future additions to the Bank's allowances result from periodic
loan, property and collateral reviews and thus cannot be predicted in advance.
At June 30, 1997, the Bank had a total allowance for losses on loans of $4.5
million, or 1.02% of total loans.  See Note 1 of the Notes to Consolidated
Financial Statements for a description of the Bank's policy of provision for
losses on loans.

                                          18
<PAGE>

The following table sets forth information with respect to activity in the
Bank's allowance for losses on loans during the periods indicated.



<TABLE>
<CAPTION>

                                                       Year Ended June 30,
                                    --------------------------------------------------------
                                      1997        1996        1995       1994          1993
                                      ----        ----        ----       ----          ----
                                                        (Dollars in Thousands)
<S>                                 <C>          <C>          <C>      <C>            <C>
  Balance at beginning of
    period . . . . . . . . .        $4,129      $4,039       $4,899    $4,829         $4,552

  Charge-offs
       One- to four-family .          (104)        (23)         (34)      (61)           (30)
       Commercial. . . . . .           (15)        (35)       - - -       (40)          (666)
       Multi-family. . . . .         - - -       - - -         (400)     (322)         - - -
       Consumer. . . . . . .          (757)       (487)        (264)     (102)          (269)
       Credit Cards. . . . .           (59)      - - -        - - -     - - -          - - -
       Mobile homes. . . . .          (186)       (305)        (265)     (220)          (501)
                                    -------       -----        -----    ------
       Total charge-offs . .        (1,121)       (850)        (963)     (745)        (1,466)
                                    -------       -----        -----    ------
  Recoveries:
       One- to four-family .            24          51           16         6             41
       Commercial. . . . . .           493          58           90       359            115
       Multi-family. . . . .            46           6          398        87            310
       Commercial Business .             1          43           54        40            101
       Consumer. . . . . . .           194         100           54        40            101
       Credit Cards. . . . .            19       - - -        - - -     - - -          - - -
       Mobile homes. . . . .            48          92           60        48             66
                                    -------       -----        -----    ------
       Total recoveries. . .           825         350          618       540            633
                                    -------       -----        -----    ------
       Net recoveries
         (charge-offs) . . .          (296)       (500)        (345)     (205)          (833)
                                    -------       -----        -----    ------

  Additions (recoveries) charged
  to operations. . . . . . .           693         590         (515)      275          1,110
                                    -------       -----        -----    ------
  Balance at end of period .        $4,526      $4,129       $4,039    $4,899         $4,829
                                    -------       -----        -----    ------
                                    -------       -----        -----    ------
  Ratio of net recoveries
  (charge-offs) during the
  period to average loans
  outstanding during the
  period . . . . . . . . . .         (0.07)%      (.12)%       (.10)%    (.07)%         (.26)%
                                    -------       -----        -----    ------
                                    -------       -----        -----    ------
  Ratio of allowance for loan
  losses to total loans at
  end of period. . . . . . .          1.02%       0.98%        1.11%     1.59%          1.58%
                                    -------       -----        -----    ------
                                    -------       -----        -----    ------
  Ratio of allowance for loan
  losses to non-performing
  loans at end of period(1).        361.50%     200.15%      141.08%    163.74        144.49%
                                    -------       -----        -----    ------
                                    -------       -----        -----    ------

</TABLE>



-----------------
(1) Non-performing loans include non-accruing loans and accruing loans
delinquent more than 90 days.

                                          19
<PAGE>

    The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:



<TABLE>
<CAPTION>
                                                                          At June 30,
                                       -------------------------------------------------------------------------
                                             1997                     1996                    1995
                                             ----                     -----                   ----
                                                 Percentage of            Percentage of            Percentage of
                                                   Loans in                 Loans in                 Loans in
                                                    Each                      Each                     Each
                                                 Category to              Category to               Category to
                                       Amount    Total Loans    Amount    Total Loans    Amount     Total Loans
                                       ------    ------------   ------    ------------   ------     -----------

                                                               (Dollars in thousands)
<S>                                   <C>        <C>          <C>        <C>            <C>        <C>
One-to four-family(1). . . . . . .    $1,540        36.50%     $1,789        43.27%     $  910        44.64%
Commercial and multi-family
  real estate(1) . . . . . . . . .       926        21.94         957        23.21       1,743        26.88
Mobile homes . . . . . . . . . . .       145         3.43         191         4.62         608         6.70
Consumer(2). . . . . . . . . . . .     1,254        29.73       1,060        25.69         644        18.85
Credit Cards . . . . . . . . . . .       329         0.51       - - -        - - -       - - -        - - -
Agricultural . . . . . . . . . . .        77         1.82       - - -        - - -       - - -        - - -
Commercial business. . . . . . . .       255         6.07         132         3.21         134         2.93
                                       ------      ------       ------      ------       ------      ------
  Total. . . . . . . . . . . . . .    $4,526       100.00%     $4,129       100.00%     $4,039       100.00%
                                       ------      ------       ------      ------       ------      ------
                                       ------      ------       ------      ------       ------      ------
<CAPTION>
                                                           At June 30,
                                     --------------------------------------------------
                                             1994                    1993
                                             ----                    ----
                                                 Percentage of            Percentage of
                                                   Loans in                 Loans in
                                                    Each                      Each
                                                 Category to              Category to
                                       Amount    Total Loans    Amount    Total Loans
                                       ------    ------------   ------    ------------

                                                           (Dollars in thousands)
<S>                                 <C>           <C>          <C>         <C>        
One-to four-family(1). . . . . . .  $  1,320        47.08%     $1,388        46.82%
Commercial and multi-family
  real estate(1) . . . . . . . . .     1,677        26.10       1,640        27.02
Mobile homes . . . . . . . . . . .       908         9.75       1,123        13.30
Consumer(2). . . . . . . . . . . .       901        15.63         599        11.61
Credit Cards . . . . . . . . . . .     - - -        - - -       - - -        - - -
Agricultural . . . . . . . . . . .     - - -        - - -       - - -        - - -
Commercial business. . . . . . . .        93         1.44          79         1.25
                                       ------      ------       ------      ------
  Total. . . . . . . . . . . . . .  $  4,899       100.00%   $  4,829       100.00%
                                       ------      ------       ------      ------
                                       ------      ------       ------      ------

</TABLE>


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

  (1)  Includes construction loans.
  (2)  Excludes allowances for losses relating to mobile home loans.


                                          20
<PAGE>

MORTGAGE-BACKED SECURITIES

Home Federal had maintained a substantial portfolio of mortgage-backed
securities which it held for investment and liquidity purposes.  Such
mortgage-backed securities can serve as collateral for borrowings and, through
repayments and sales, as a source of liquidity.  During Fiscal 1997, the Bank
had $12.1 million of sales and repayments of $17.2 million.  The bank had no
purchases of mortgage-backed securities during fiscal 1997.  The $29.2 million
decrease in mortgage-backed securities was used primarily to fund the increase
in loans receivable during fiscal 1997.  For information regarding the carrying
and market values of Home Federal's mortgage-backed securities portfolio, see
Note 2 of the Notes to Consolidated Financial Statements.  Under the Bank's
risk-based capital requirement, mortgage-backed securities have a risk weight of
20% (or 0% in the case of GNMA securities) in contrast to the 50% risk weight
carried by residential loans.  See "Regulation."  In order to reduce its
risk-based capital requirement, Home Federal may consider securitizing a portion
of its fixed-rate mortgage loan portfolio.  However, securitizing mortgage loans
may result in a reduction in yield.


                                          21
<PAGE>

The following table sets forth the contractual maturities (without any
prepayment assumptions) of the Bank's mortgage-backed securities at June 30,
1997 at amortized cost.



<TABLE>
<CAPTION>

                                                                                   DUE IN
                                                    ------------------------------------------------------------------
                                                    6 Months  6 Months  1 to 3   3 to 5    5 to 10  Over 10   Total at
                                                     or Less  to 1 Year  Years    Years     Years    Years    June 30,
                                                    --------  ---------  -----   ------    -------  --------  --------
                                                                                                                1997
                                                                                                                ----
       <S>                                          <C>        <C>       <C>      <C>      <C>      <C>       <C>
       FIXED RATE:
       Federal Home Loan Mortgage Corporation . . .  $- - -    $- - -    $1,202    $1,220    $- - -  $  - - -   $ 2,422
       Federal National Mortgage Association. . . .   - - -     - - -       860     - - -     - - -     3,857     4,717
       Government National Mortgage Association . .   - - -     - - -     - - -     - - -     - - -       140       140
       Real Estate Mortgage Investment Conduit. . .   - - -     - - -    - - --    - - --     - - -     3,577     3,577
                                                     ------    ------   -------   -------   -------  --------   -------
           Total Fixed Rate . . . . . . . . . . . .   - - -     - - -     2,062     1,220     - - -     7,574    10,856
                                                     ------    ------   -------   -------   -------  --------   -------
       VARIABLE RATE:
       Resolution Trust Corporation . . . . . . . .   - - -     - - -     - - -     - - -     - - -       989       989
       Resolution Funding Mortgage Security . . . .   - - -     - - -     - - -     - - -     - - -     1,515     1,515
       Real Estate Mortgage Investment Conduit. . .   - - -     - - -     - - -     - - -     - - -    10,808    10,808
       Federal Home Loan Mortgage Corporation . . .   - - -     - - -     - - -     - - -     - - -     4,143     4,143
       Federal National Mortgage Association. . . .   - - -     - - -     - - -     - - -     - - -     2,259     2,259
                                                     ------    ------   -------   -------   -------  --------   -------
           Total Variable Rate. . . . . . . . . . .   - - -     - - -     - - -     - - -     - - -    19,714    19,714
                                                     ------    ------   -------   -------   -------  --------   -------
                 Total. . . . . . . . . . . . . . .  $- - -    $- - -    $2,062    $1,220    $- - -   $27,288 $  30,570
                                                     ------    ------   -------   -------   -------  --------   -------
                                                     ------    ------   -------   -------   -------  --------   -------
</TABLE>

Based on historical experience, Home Federal believes that its mortgage-backed
securities will be prepaid significantly in advance of the date of maturity as
reflected in the table above.  For information regarding prepayment assumptions,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations and Asset/Liability Management".


                                          22

<PAGE>


INVESTMENT ACTIVITIES

Home Federal is required under OTS regulation to  maintain minimum levels of
investments that qualify as liquid assets.  Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans.  Historically, the Bank has maintained its
liquid assets above the minimum requirements imposed by the OTS regulations and
at a level believed by management adequate to meet requirements of normal daily
activities, repayment of maturing debt and potential deposit outflows.  As of
June 30, 1997, the Bank's liquidity ratio (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was 11.5%. See "-
Regulation - Liquidity."

Federally chartered savings institutions have the authority to invest in various
types of liquid assets, including United States Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and federal funds.  Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly.

Generally, the investment policy of the Bank is to invest funds among various
categories of investments and maturities based upon the Bank's asset/liability
management policies, investment quality and marketability, liquidity needs and
performance objectives.

At June 30, 1997, the Company had $6.0 million in interest-bearing deposits, and
investment securities totalled $41.8 million, or 7.4% of its total assets. As of
such date, the Bank also had a $5.2 million investment in the stock of the FHLB
of Des Moines in order to satisfy the FHLB of Des Moines' requirement for
membership.  It is the Bank's general policy to purchase investment securities
which are U.S. Government securities and federal agency obligations and other
issues rated investment grade.  At June 30, 1997, the average term to maturity
or repricing of the investment securities portfolio was 0.58 years.

                                          23
<PAGE>

The following table sets forth the composition of the Company's and the Bank's
investment portfolio at the dates indicated.



<TABLE>
<CAPTION>
                                                                            June 30,
                                               --------------------------------------------------------------------
                                                       1997                   1996                    1995
                                                       ----                   ----                    ----
                                               Amortized   % of     Amortized       % of     Amortized       % of
                                                 Cost      Total      Cost          Total       Cost         Total
                                                 ----      -----      ----          -----       ----         -----
         <S>                                   <C>        <C>       <C>           <C>        <C>          <C>
         Interest-bearing deposits. . . . .    $ 6,000     11.32%   $  - - -        - - -%   $  - - -        - - -%
                                               -------    ------    --------      -------    --------      -------
                                               -------    ------    --------      -------    --------      -------
         Investment securities:
           U.S. government securities . . .      7,019     13.24%     14,280        22.91%     23,561        29.02%
           Federal agency obligations . . .     21,428     40.41      36,086        57.89      48,147        59.30
           Federal Home Loan Bank . . . . .     11,999     22.63       - - -        - - -       - - -        - - -
           FHLMC preferred stock. . . . . .        500      0.94         508         0.81         500          .61
           FNMA common stock. . . . . . . .          8      0.02           8         0.01           8          .01
           Redwood Financial common stock .        462      0.87       - - -        - - -       - - -        - - -
           Tax Free Bonds . . . . . . . . .        385      0.73         565         0.91         565         0.69
           Corporate Bond . . . . . . . . .      - - -     - - -       6,222         9.99       5,324         6.56
                                               -------    ------    --------      -------    --------      -------
              Subtotal. . . . . . . . . . .     41,801     78.84      57,669        92.52      78,105        96.19
                                               -------    ------    --------      -------    --------      -------
         FHLB stock . . . . . . . . . . . .      5,222      9.84       4,665         7.48       3,091         3.81
       
           Total investment securities and
           FHLB stock . . . . . . . . . .      $53,023    100.00%    $62,334       100.00%    $81,196       100.00%
                                               -------    ------    --------      -------    --------      -------
                                               -------    ------    --------      -------    --------      -------
         Average remaining life or term to 
         repricing, excluding FHLB stock,
         FHLMC Preferred Stock, Redwood
         Financial Common Stock . . . . . .            .58 years               1.46 years               2.01 years

</TABLE>




                                          24

<PAGE>


    The composition and maturities of the investment securities portfolio,
    excluding FHLB of Des Moines stock, FNMA stock, FHLMC preferred stock, and
    Redwood Financial Stock are indicated in the following table.


<TABLE>
<CAPTION>
                                                                 At June 30, 1997
                                        -------------------------------------------------------------------
                                     Less than 1   1 to 5      5 to 10      Over 10       Total Investment
                                       Year         Years       Years        Years          Securities
                                       Cost         Cost        Cost          Cost       Cost     Market Value
                                       ----         ----        ----          ----       ----     ------------
                                                               (Dollars in Thousands)
<S>                                  <C>         <C>           <C>          <C>        <C>        <C>
U.S. government securities . . . .     - - -     $  7,019       - - -        - - -      $7,019       $7,018
Federal agency obligations . . . .    10,000       23,427       - - -        - - -      33,427       33,286
Tax Free Bonds . . . . . . . . . .     - - -        - - -       - - -          385         385          403
                                      -------      -------      ------      -------     -------      -------
Total investment securities. . . .   $10,000      $30,446      $  ---       $  385     $40,831      $40,707
                                      -------      -------      ------      -------     -------      -------
                                      -------      -------      ------      -------     -------      -------

Weighted average yield . . . . . .      5.14%        6.09%       0.00%        6.50%       5.86%
                                      -------      -------      ------      -------     -------      -------
                                      -------      -------      ------      -------     -------      -------
</TABLE>




    The Company's investment securities portfolio at June 30, 1997 contained no
    tax-exempt securities in excess of 10% of the Company's stockholders'
    equity, excluding those issued by the United States Government or its
    agencies.  The Company's investment securities portfolio also contained no
    non-investment grade or other corporate debt securities (i.e., "junk
    bonds").  In addition, the Company does not invest in derivatives as
    defined by SFAS #119.

    Home Federal's investment security portfolio is managed in accordance with
    a written investment policy adopted by the Board of Directors.  Investments
    may be made by Home Federal officers must be within specified limits and
    approved in advance by the Board of Directors for transactions over certain
    limits.  At the present time, Home Federal does not have any investments
    that are held for trading purposes.  At June 30, 1997, the Company has $46.9
    million of securities available for sale, including FHLB stock of $5.2
    million.  See "Note 2 in the Notes to Consolidated Financial Statements".

    SOURCES OF FUNDS

    GENERAL.  The Bank's primary sources of funds are deposits, amortization
    and prepayment of loan principal (including mortgage-backed securities),
    and, to a lesser extent, sales of mortgage loans, sales or maturities of
    investment securities, mortgage-backed securities, and short term
    investments.

    Borrowings, presently all from the FHLB of Des Moines, may be used on a
    short-term basis to compensate for seasonal reductions in deposits or
    deposit inflows at less than projected levels, and may be used on a
    longer-term basis to support expanded lending activities.  The Bank in
    recent years has not relied on outside borrowings other than FHLB
    borrowings.  The availability of funds from loan sales is influenced by
    general interest rates.

    DEPOSITS.  Home Federal offers a variety of deposit accounts having a wide
    range of interest rates and terms.  The Bank's deposits consist of
    statement savings accounts, NOW and checking accounts, money market and
    certificate accounts ranging in terms from 30 days to five years.  The
    Bank's deposit products also include IRA certificates and Keogh plan
    retirement certificates.  The Bank only solicits deposits from its market
    area and does not use brokers to obtain deposits.  The Bank relies
    primarily on competitive pricing policies, advertising, and customer
    service to attract and retain these deposits.

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

    The variety of deposit accounts offered by the Bank has allowed it to be
    competitive in obtaining funds and to respond with flexibility to changes
    in consumer demand.  In recent years, the Bank has become more susceptible
    to short-term fluctuations in deposit flows as customers have become more
    interest rate conscious.  The Bank manages the pricing of its deposits in
    keeping with its asset/liability management and profitability objectives.
    Based on its experience, the Bank believes that its statement savings,
    money market, NOW and checking accounts are stable sources of deposits.
    However, the ability of the Bank to attract and maintain certificates of
    deposit, and the rates paid on these deposits, has been and will continue
    to be significantly affected by market conditions.

                                          25
<PAGE>

The following table sets forth the dollar amount of deposits in the various
types of deposit accounts offered by the Company as of the dates indicated.



<TABLE>
<CAPTION>
                                                                               At June 30,
                                                 ------------------------------------------------------------------------
                                                          1997                    1996                     1995
                                                 -----------------------   ---------------------    ---------------------
                                                              Percent of              Percent of                Percent of
                                                  Amount         Total     Amount        Total      Amount        Total
                                                  ------         -----     ------        -----      ------        -----
                                                                          (Dollars in Thousands)
<S>                                              <C>          <C>         <C>         <C>          <C>          <C>
TRANSACTION ACCOUNTS:
Savings Accounts weighted average rates
of 2.02%, 2.44%and 2.48% at June 30,
1997, 1996 and 1995                              $ 28,968        6.93%    $ 31,445        7.90%    $ 31,002        7.74%
NOW Accounts weighted average rates
of 1.51%, 1.44% and 1.78% at June 30,
1997, 1996 and 1995. . . . . . . . . . . . . .     26,924        6.44       22,030        5.53       21,545        5.38
Non-interest bearing Accounts. . . . . . . . .     18,663        4.46       11,293        2.84        5,045        1.25
Money Market Accounts weighted average
rates of 4.03%, 2.90% and 3.% at
June 30, 1997, 1996 and 1995 . . . . . . . . .     34,421        8.23       34,339        8.62       29,811        7.44
                                                 --------      ------     --------      ------     --------      ------

Total Transaction Accounts . . . . . . . . . .    108,976       26.06       99,107       24.89       87,403       21.81
                                                 --------      ------     --------      ------     --------      ------

CERTIFICATES OF DEPOSIT:

    0.00 - 3.99% . . . . . . . . . . . . . . .        322        0.08          191        0.01          259         .06
    4.00 - 4.99% . . . . . . . . . . . . . . .      6,230        1.49       28,524        7.16       30,542        7.62
    5.00 - 5.99% . . . . . . . . . . . . . . .    175,399       41.94      152,678       38.35       84,108       20.99
    6.00 - 6.99% . . . . . . . . . . . . . . .    100,314       23.99       86,363       21.69      120,661       30.11
    7.00 - 7.99% . . . . . . . . . . . . . . .     25,819        6.17       29,551        7.42       69,478       17.34
    8.00 - 8.99% . . . . . . . . . . . . . . .      1,114        0.27        1,747        0.44        7,659        1.91
    9.00% and greater. . . . . . . . . . . . .         12        0.00            5        0.01          565         .14
                                                 --------      ------     --------      ------     --------      ------

Total Certificates of Deposit. . . . . . . . .    309,210       73.94      299,059       75.11      313,272       78.19
                                                 --------      ------     --------      ------     --------      ------
Total Deposits . . . . . . . . . . . . . . . .   $418,186      100.00%    $398,166      100.00%    $400,675      100.00%
                                                 --------      ------     --------      ------     --------      ------
                                                 --------      ------     --------      ------     --------      ------
</TABLE>






                                          26
<PAGE>

The following table sets forth the savings flows at the Company during the
periods indicated.  Net increase (decrease) refers to the amount of deposits
during a period less the amount of withdrawals during the period.  The net
withdrawals (before interest credited) during the years ended June 30, 1997,
1996, and 1995 reflect management's strategy of pricing deposits to control the
Bank's cost of funds.  The Bank generally prices its deposits to remain
competitive with other financial institutions, but does not necessarily seek to
match the highest rates paid by competing institutions in its market area.
Deposit flows at savings associations, however, may also be influenced by
external factors such as governmental credit policies and, particularly in
recent periods, depositors' perceptions of the adequacy of federal insurance of
accounts.


                                                  Year Ended June 30,
                                      -----------------------------------------
                                           1997          1996           1995
                                           ----          ----           ----
                                                (Dollars in Thousands)
                                     
         Opening balance . . . . . .    $398,166       $400,675       $392,415
                                     
         Net (withdrawals) . . . . .       (763)       (23,188)       (11,642)
                                     
         Interest credited . . . . .      20,783         20,679         19,902
                                        --------       --------       --------
                                     
         Ending balance  . . . . . .    $418,186       $398,166       $400,675
                                        --------       --------       --------
                                        --------       --------       --------
                                     
         Net increase (decrease) . .     $20,020       ($2,509)         $8,260
                                        --------       --------       --------
                                        --------       --------       --------
                                     
         Percent increase
           (decrease). . . . . . . .       5.03%        (0.63%)          2.11%
                                        --------       --------       --------
                                        --------       --------       --------


                                          27
<PAGE>


<TABLE>
<CAPTION>

The following table shows rate and repricing information for the Company's certificates of deposit as of June 30, 1997.

                        0.00-        4.00-       5.00-        6.00-       7.00%        8.00%       9.00%                  Percent
                        3.99%        4.99%       5.99%        6.99%       7.99%        8.99%    or Greater     Total      of Total
                        -----        -----       -----        -----       -----        -----    ----------     -----      --------
                                                                 (Dollars in Thousands)
  CERTIFICATES OF DEPOSIT
  MATURING IN QUARTER
  ENDING:
  <S>                   <C>         <C>      <C>           <C>           <C>           <C>         <C>        <C>           <C>
  September 30, 1997.   $  63       $2,522    $ 48,806     $  9,092     $   767       $   34       $   3      $61,287       19.82%
  December 31, 1997 .      45           26      32,371        4,150         352           14           4       36,962       11.95
  March 31, 1998. . .      14        1,375      21,503        7,006          11          126       - - -       30,035        9.71
  June 30, 1998 . . .   - - -        1,140      20,447       14,243         922           97       - - -       36,849       11.92
  September 30, 1998.      29        1,140      22,996       14,243         922           97       - - -       39,427       12.75
  December 31, 1998 .     113            7       3,887       14,939         633          220           2       19,801        6.40
  March 31, 1999. . .       9           19       7,180        3,820       6,247          189           3       17,467        5.65
  June 30, 1999 . . .   - - -        - - -       6,519        9,277      11,802           23       - - -       27,621        8.93
  September 30, 1999.   - - -        - - -       2,618        9,227       1,345           60       - - -       13,250        4.29
  December 31, 1999 .   - - -        - - -       3,373        7,602       1,746           54       - - -       12,775        4.13
  March 31, 2000. . .      49        - - -       1,615        4,151         710           93       - - -        6,618        2.14
  June 30, 2000 . . .   - - -        - - -         346          508         316        - - -       - - -        1,170        0.38
  Thereafter. . . . .   - - -            1       3,738        2,056          46          107       - - -        5,948        1.92
                        -----       ------    --------     --------     -------       ------       -----     --------      ------

  Total   . . . . . .    $322       $6,230    $175,399     $100,314     $25,819       $1,114       $  12     $309,210      100.00%
                        -----       ------    --------     --------     -------       ------       -----     --------      ------
                        -----       ------    --------     --------     -------       ------       -----     --------      ------

  Percent of Total. .    0.10%        2.01%      56.74%       32.44%       8.35%        0.36%       0.00%      100.00%
                        -----       ------    --------     --------     -------       ------       -----     --------     
                        -----       ------    --------     --------     -------       ------       -----     --------     


</TABLE>


                                          28

<PAGE>


The following table sets forth the amount of the Company's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 1997.

<TABLE>
<CAPTION>

                                                                          Maturity
                                         --------------------------------------------------------------------
                                                                Over                Over
                                         3 Months              3 to 6             6 to 12             Over
                                         or Less               Months              Months           12 Months               Total
                                         -------               ------              ------           ---------               -----
                                                                          (Dollars in Thousands)
<S>                                      <C>                  <C>                 <C>               <C>                  <C>
Certificates of deposit less than
$100,000 . . . . . . . . . .              $46,096             $26,797             $43,890            $124,705            $241,488

Certificates of deposit of
$100,000 or more . . . . . .                2,329               3,932              19,568              11,379              37,208

Public funds(1)  . . . . . .               12,862               6,233               3,426               7,993              30,514
                                           ------               -----               -----               -----              ------

Total certificates of deposit             $61,287             $36,962             $66,884            $144,077            $309,210
                                          -------             -------             -------            --------            --------
                                          -------             -------             -------            --------            --------

</TABLE>
 --------------------
(1) Includes certificates of deposit of $100,000 or more from governmental and
    other public entities.


The Bank solicits certificates of deposit of $100,000 or greater ("jumbo
certificates") from various state, county and local government units which carry
rates which are negotiated at the time of deposit.  See Note 7 of Notes to
Consolidated Financial Statements.  In July 1997, the Bank received deposits of
approximately $36,000 from a local governmental entity which requires a pledge
of collateral of 110% of deposits.  The Bank subsequently pledged debt and
mortgage-backed securities to meet this requirement.

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

Home Federal's borrowings consist primarily of advances from the FHLB of Des
Moines upon the security of its capital stock of the FHLB of Des Moines and
certain of its mortgage loans and mortgage-backed securities.  Such advances can
be made pursuant to several different credit programs, each of which has its own
interest rate and range of maturities.  At June 30, 1997, the Bank's FHLB
advances totalled $74.2 million, representing 14.6% of total liabilities.

The following table sets forth the maximum month-end balances and average
balances of FHLB advances and other borrowings at the dates indicated.



                                         YEAR ENDED JUNE 30,
                                       ------------------------
                                       1997      1996      1995
                                       ----      ----      ----
                                        (Dollars in Thousands)
         MAXIMUM BALANCE:
         FHLB advances . . . . . .   $87,516   $97,996   $86,286
         Other borrowings. . . . .       600       600       600

         AVERAGE BALANCE:
         FHLB advances . . . . . .   $77,629   $86,851   $75,215
         Other borrowings. . . . .       562       600       600



                                          29
<PAGE>

The following table sets forth certain information as to the Bank's FHLB 
advances and other borrowings at the dates indicated.

                                         Year Ended June 30,
                                      --------------------------
                                       1997      1996       1995
                                       ----      ----       ----
                                         (Dollars in Thousands)

         FHLB advances . . . . . .  $ 74,219   $ 89,523  $ 73,095
         Other borrowings. . . . .       524        600       600
                                    --------   --------  --------
         Total borrowings. . . . .  $ 74,743   $ 90,123  $ 73,695
                                    --------   --------  --------
                                    --------   --------  --------

         Weighted average interest
         rate of FHLB advances . .     5.69%      5.59%     5.73%

SUBSIDIARY ACTIVITIES

As a federally chartered thrift institution, Home Federal is permitted by OTS 
regulations to invest up to 2% of its assets, or $11.2 million at June 30, 
1997, in the stock of, or loans to, service corporation subsidiaries.  As of 
such date, the net book value of Home Federal's investment in and loans to 
its service corporations was approximately $278,000.  Home Federal may invest 
an additional 1% of its assets in service corporations where such additional 
funds are used for inner-city or community development purposes.  In addition 
to investments in service corporations, federal associations are permitted to 
invest an unlimited amount in operating subsidiaries engaged solely in 
activities which a federal association may engage in directly.

Home Federal has three service 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 
insurance products to customers of Home Federal and members of the general 
public in Home Federal's market area. Insurance products offered by Hometown 
include annuities and life, credit life, health, homeowners, and auto 
insurance and, to a lesser extent, certain commercial-related insurance 
products.  Home Federal's investment in Hometown was approximately $118,000 
at June 30, 1997. Hometown had a loss before tax of $33,000 for the 1997 
fiscal year.

Mid-America, is an appraisal company located in Sioux Falls, South Dakota, 
that provides appraisal services to Home Federal and other lenders in the 
Bank's market area.  At June 30, 1997, the Bank had a $159,000 investment in 
Mid-America.  Mid-America had income before tax of $13,000 for the 1997 
fiscal 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, 
1997, the Bank had a $1,000 investment in PMD.  PMD had no activity during 
fiscal year 1997.

In May, 1996 the Company formed a Limited Liability Company named HF Card 
Services L.L.C. ("HF Card Services") and became the owner of 51% of the 
membership interest of this entity.  HF Card Services was established to 
provide secured, partially-secured and unsecured credit cards nationwide.  At 
June 30, 1997, the Company had a $60,000 investment in HF Card Services.  HF 
Card Services had net income of $27,000 for the 1997 fiscal year.

COMPETITION

Home Federal faces strong competition, both in originating real estate and 
other loans and in attracting deposits. Competition in originating real 
estate loans comes primarily from other commercial banks, credit unions and 
mortgage bankers making loans secured by real estate located in the Bank's 
market areas. Commercial banks and finance companies provide vigorous 
competition in consumer lending.  The Bank competes for real estate and other 
loans principally on the basis of the quality of services it provides to 
borrowers, interest rates and loan fees it charges and the types of loans it 
originates.

                                       30
<PAGE>

The Bank attracts all of its deposits through its retail banking offices, 
primarily from the communities in which  those retail banking offices are 
located; therefore, competition for those deposits is principally from other 
commercial banks and credit unions located in the same communities.  The Bank 
competes for these deposits by offering a variety of deposit accounts at 
competitive rates, convenient business hours, and convenient branch locations 
with interbranch deposit and withdrawal privileges at each.  There are 
approximately 33 financial institutions which compete for deposits in 
Minnehaha County.  According to information contained in reports prepared by 
Sheshunoff Information Services, a publisher of thrift financial information, 
the Bank is the fourth largest financial institution based on total deposits 
in Minnehaha County, excluding Citibank.  Management estimates that its 
deposit market share in Minnehaha County, where the majority of its deposits 
are located, is approximately 10%.

EMPLOYEES

At June 30, 1997, the Bank had a total of 269 employees including 22 
employees of the Bank's service corporations.  At June 30, the Mortgage Corp. 
had a total of 5 employees, including part-time employees.

The Bank's and Mortgage Corp's employees are not represented by any 
collective bargaining group. Management considers its employee relations to 
be good.

REGULATION

GENERAL.  Home Federal is a federally chartered thrift institution, the 
deposits of which are federally insured and backed by the full faith and 
credit of the United States Government. Accordingly, Home Federal is subject 
to broad federal regulation and oversight extending to all its operations.  
The Association is a member of the FHLB of Des Moines and is subject to 
certain limited regulation by the Federal Reserve Board.  As the savings and 
loan holding company of Home Federal, the Company also is subject to federal 
regulation and oversight.  The purpose of the regulation of the Company and 
other holding companies is to protect subsidiary savings associations where 
deposits are federally insured.

The Bank is a member of the Savings Association Insurance Fund (the "SAIF") 
and the deposits of the Bank are insured by the FDIC. Certain of these 
regulatory requirements and restrictions are discussed below or elsewhere in 
this document.  The following discussion is intended to be a summary of the 
material statutes, regulations and policies applicable to savings 
associations and their holding companies, and it does not purport to be a 
comprehensive discussion.

REGULATION OF FEDERAL SAVINGS ASSOCIATIONS.  As an office of the Department 
of the Treasury, the OTS has extensive authority over the operations of 
federal savings associations, such as the Bank. Pursuant to this authority, 
Home Federal is required to file periodic reports with the OTS and is subject 
to periodic examinations by the OTS and the FDIC.  The last examination of 
the Bank by the OTS concluded on February 3, 1997. Examiners may require a 
federal savings association to provide for higher general or specific loan 
loss-reserves.  Financial institutions in various regions of the United 
States have been called upon by examiners to write down assets and to 
establish increased levels of reserves, primarily as a result of perceived 
weaknesses in real estate values and a more restrictive regulatory climate.

ASSESSMENTS.  The OTS has established a schedule for the assessment of fees 
upon all savings associations to fund the operations of the OTS. A schedule 
of fees has also been established for the various types of applications and 
filings made by savings associations with the OTS.  In addition, the general 
assessment, to be paid on a semi-annual basis, is computed based upon the 
savings association's total assets, including consolidated subsidiaries, as 
reported in the association's latest quarterly thrift financial report.  
Savings associations (unlike the Bank) that are classified as "troubled" are 
required to pay a 50% premium over the standard assessment. The Bank's OTS 
assessment (standard assessment) for the fiscal year ended June 30, 1997 was 
approximately $126,000.

ENFORCEMENT.  The OTS also has extensive enforcement authority over all 
savings associations and their holding companies, including Home Federal and 
the Company.  This enforcement authority includes, among other things, the 
ability to assess civil money penalties, to issue cease-and-desist or removal 
orders and to initiate injunctive actions.  In general, these enforcement 
actions may be initiated for violations of laws and regulations and unsafe or 
unsound practices.  Other actions or inactions may provide the basis for 
enforcement action, including misleading or untimely reports filed with the 
OTS.  Except under certain circumstances, public disclosure of final 
enforcement actions by the

                                       31
<PAGE>

OTS is required.

BUSINESS ACTIVITIES.  The investment and lending authority of the Bank is 
prescribed by federal laws and regulations.  The Bank is prohibited from 
engaging in any activities not permitted by such laws and regulations.  For 
instance, no savings institution may invest in corporate debt securities not 
rated in one of the four highest rating categories by a nationally recognized 
rating organization. In addition, the permissible level of investment by 
federal associations in loans secured by non-residential real property may 
not exceed  400% of regulatory capital, except with approval of the OTS.  
Home Federal is in compliance with each of these restrictions.

Under the Homeowners Loan Act ("HOLA"), savings associations are generally 
subject to the same limits on loans to one borrower as are imposed on 
national banks.  Generally, under these limits, a savings association may not 
make a loan or extend credit to a single or related group of borrowers in 
excess of 15% of the association's unimpaired capital and surplus.  
Additional amounts may be lent, not in excess of 10% of unimpaired capital 
and surplus, if such loans or extensions of credit are fully secured by 
readily-marketable collateral.  Such collateral is defined to include certain 
debt and equity securities and bullion, but generally does not include real 
estate.  At June 30, 1997, the Bank's lending limit under this restriction 
was $7.0 million. In addition, the Bank may provide purchase money financing 
for the sale of any asset without regard to the loans-to-one borrower 
limitation so long as no new funds are advanced and the Bank is not placed in 
a more detrimental position than if it had held the asset.  Home Federal is 
in compliance with the loans-to-one-borrower limitation.

SAFETY AND SOUNDNESS STANDARDS.  Pursuant to the FDI Act, as amended by 
FDICIA and the Riegle Community Development and Regulatory Improvement Act of 
1994 (the "Community Development Act"), the OTS and the federal bank 
regulatory agencies have adopted, effective August 9, 1995, a set of 
guidelines prescribing safety and soundness standards pursuant to FDICIA, as 
amended.  The guidelines establish general standards relating to internal 
controls and information systems, internal audit systems, loan documentation, 
credit underwriting, interest rate exposure, asset growth, asset quality, 
earnings, and compensation, fees and benefits.  In general, the guidelines 
require, among other things, appropriate systems and practices to identify 
and manage the risks and exposures specified in the guidelines.  The 
guidelines prohibit excessive compensation as an unsafe and unsound practice 
and describe compensation as excessive when the amounts paid are unreasonable 
or disproportionate to the services performed by an executive officer, 
employee, director or principal stockholder.  In addition, the OTS adopted 
regulations that authorize, but do not require, the OTS to order an 
institution that has been given notice by the OTS that it is not satisfying 
any of such safety and soundness standards to submit a compliance plan.  If, 
after being so notified, an institution fails to submit an acceptable 
compliance plan or fails in any material respect to implement an accepted 
compliance plan, the OTS must issue an order directing action to correct the 
deficiency and may issue an order directing other actions of the types to 
which an undercapitalized association is subject under the "prompt corrective 
action" provisions of FDICIA.  If an institution fails to comply with such an 
order, the OTS may seek to enforce such order in judicial proceedings and to 
impose civil money penalties.  The OTS and the federal bank regulatory 
agencies also proposed guidelines for asset quality and earnings standards.

ACCOUNTING STANDARDS.  The Financial Institutions Reform, Recovery and 
Enforcement Act of 1989 ("FIRREA") requires the OTS to establish accounting 
standards to be applicable to all savings associations for purposes of 
complying with regulations, except to the extent otherwise specified in the 
capital standards.  Such standards must incorporate generally accepted 
accounting standards to the same degree as is prescribed by federal banking 
agencies for banks, or may be more stringent than such requirements.

INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC.  Home Federal is a member 
of the SAIF, which is administered by the FDIC. Savings deposits are insured 
up to $100,000 per insured member (as defined by law and regulation) by the 
FDIC and such insurance is backed by the full faith and credit of the United 
States Government.  As insurer, the FDIC imposes deposit insurance premiums 
and is authorized to conduct examinations of and to require reporting by 
FDIC-insured institutions.  It also may prohibit any FDIC-insured institution 
from engaging in any activity the FDIC determines by regulation or order to 
pose a serious risk to the FDIC.  The FDIC also has the authority to initiate 
enforcement actions against savings associations, after giving the OTS an 
opportunity to take such action, and may terminate the deposit insurance if 
it determines that the institution has engaged or is engaging in unsafe or 
unsound practices, or is in an unsafe or unsound condition.

The Bank is a member of the Savings Association Insurance fund ("SAIF") and 
the deposits of the Bank are insured

                                       32
<PAGE>

by the Federal Deposit Insurance Corporation ("FDIC").  On September 30, 
1996, Congress passed and President Clinton signed into law legislation to 
resolve the deposit insurance premium disparity. The banking package also 
included extensive regulatory relief for banks and thrifts. The banking 
package included a one-time special assessment on SAIF deposits to be imposed 
to bring the fund's reserve ratio to the statutory required 1.25 percent.  
The assessment rate was 65.7 basis points on deposits as of March 31, 1995 
resulting in an assessment of $2.6 million on the Bank's deposits as recorded 
of March 31, 1995 which was paid on November 29, 1996.  In addition, the 
banking package includes the following items which will affect SAIF members:  
(1) Pro-rata sharing of the Financing Corporation ("FICO") obligation among 
Bank Insurance Fund ("BIF) and SAIF members will begin by January 1, 2000.  
From 1997 through 1999, partial sharing will occur, with SAIF deposits 
assessed 6.44 basis points and BIF deposits 1.29 basis points  (2) Through 
December 31, 1998, the assessment rate for SAIF deposits cannot be lower than 
the rate for BIF deposits  (3) The FDIC is prohibited from setting the 
semi-annual assessment at a rate in excess of that needed to maintain or meet 
the required reserve ratio.  Until the funds are merged, the FDIC is 
permitted to rebate or credit excess premiums to BIF members only  (4) For a 
three- year period, the banking regulators are authorized to prevent SAIF 
insured institutions from "facilitating or encouraging" customers to shift 
their deposits to BlF-insured affiliates for the purpose of evading the SAIF 
premium  (5) The BIF and SAIF insurance funds will merge to form the Deposit 
Insurance Fund on January 1, 1999, if there are no savings associations in 
existence on that date  (6) Pro-rata FICO sharing will begin and the ban on 
deposit shifting will end on the earlier of January 1, 2000 or when the last 
savings association ceases to exist and  (7) The Treasury Department was 
directed to report to Congress by March 31, 1997, with its recommendations on 
a common charter for banks and savings institutions.  The decrease in the 
SAIF deposit assessment from 23 basis points to 6.44 basis points is a 
savings of approximately 72% to the Bank on an annual basis, exclusive of the 
one-time assessment, which will impact net income for the Bank and the 
Company on an ongoing basis in the future.

FDICIA also authorizes the FDIC to implement a risk-based deposit insurance 
assessment system. Pursuant to this requirement, the FDIC adopted a 
transitional risk-based assessment system, effective January 1, 1993, under 
which all insured depository institutions are placed into one of nine 
categories and assessed insurance premiums, ranging from .23% to .31% of 
deposits, based upon their level of capital and supervisory evaluation.  The 
permanent system, adopted in June 1993 and effective January 1, 1994, 
continues the risk classification system established under the transitional 
rule.  Under this system, institutions classified as well capitalized (i.e., 
a core capital ratio of at least 5%, a ratio of Tier 1 or core capital to 
risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a 
risk-based capital ratio of at least 10%) and considered healthy would pay 
the lowest premium while institutions that are less than adequately 
capitalized (i.e., core and Tier 1 risk-based capital ratios of less than 4% 
or a risk-based capital ratio of less than 8%) and considered of substantial 
supervisory concern would pay the highest premium. Risk classification of all 
insured institutions will be made by the FDIC for each semi-annual assessment 
period.

The financing corporations created by FIRREA and the Competitive Equality 
Banking Act of 1987 are also empowered to assess premiums on savings 
associations to help fund the liquidation or sale of troubled savings 
associations.  Such premiums cannot, however, exceed the amount of SAIF 
assessments and are paid in lieu thereof.

The FDIC has proposed regulations that generally prohibit payments to 
directors, officers and employees contingent upon termination of their 
affiliation with an FDIC-insured institution or its holding company (i.e., 
"golden parachute payments") if the payment is received after or in 
contemplation of, among other things, insolvency, or a determination that the 
institution or holding company is in "troubled condition."  Certain types of 
employee benefit plans are not subject to the prohibition.  The proposed 
regulations would also generally prohibit certain indemnification payments 
for civil money penalties or other enforcement action.  No assurance can be 
given as to the final form of any such regulation, the date of its 
effectiveness or its effect on the Bank or the Company. 
REGULATORY CAPITAL REQUIREMENTS.  Federally insured savings associations, 
such as the Bank, are required to maintain a minimum level of regulatory 
capital.  The OTS has established capital standards, including a tangible 
capital requirement, a leverage ratio (or core capital) requirement and a 
risk-based capital requirement applicable to such savings associations.  
These capital requirements must be generally as stringent as the comparable 
capital requirements for national banks.  The OTS is also authorized to 
impose capital requirements in excess of these standards on individual 
associations on a case-by-case basis.

The capital regulations require tangible capital not less than 1.5% of 
adjusted total assets (as defined by regulation).  Tangible capital generally 
includes common stockholders' equity and retained income, and certain 
noncumulative perpetual preferred stock and related earnings on withdrawable 
accounts and deposits that qualify as core capital.  In

                                      33
<PAGE>

addition, all intangible assets, other than a limited amount of purchased 
mortgage servicing rights and other categories must be deducted from tangible 
capital.  The OTS has proposed a rule which would limit the amount of 
purchased mortgage servicing rights, together with purchased credit card 
receivables, includable as tangible and core capital to 50% of such capital.  
No assurance can be given as to the final form of such regulation or the date 
of its effectiveness. At June 30, 1997, Home Federal had $1.1 million of 
unamortized loan servicing rights, none of which were required to be deducted 
from tangible capital.

The OTS regulations establish special capitalization requirements for savings 
associations that own subsidiaries.  Under these regulations certain 
subsidiaries are consolidated for capital purposes and others are excluded 
from assets and capital.  In determining compliance with the capital 
requirements, all subsidiaries engaged solely in activities permissible for 
national banks or engaged in certain other activities solely as agent for its 
customers to solely as mortgage banking activities are "includable" 
subsidiaries that are consolidated for capital purposes in proportion to the 
association's level of ownership, including the assets of includable 
subsidiaries in which the association has a minority interest that is not 
consolidated for GAAP purposes.  All subsidiaries of the Bank are includable 
subsidiaries.

At June 30, 1997, the Bank had Tier I (Leverage) capital equal to $42.5 
million, or 7.57% of adjusted total assets, which is $25.7 million above the 
minimum leverage ratio requirement of 3% as in effect on that date.

The capital standards also require core capital equal to at least 3% of 
adjusted total assets (as defined by  regulation).  Core capital generally 
consists of tangible capital plus certain intangible assets, and up to 25% of 
other intangibles which meet certain separate salability and market valuation 
tests.  At June 30, 1997, the Bank had $1.1 million in intangible assets 
which were subject to these tests.  The amount of servicing rights includable 
as core capital is limited to 50% of such capital.

Effective December 31, 1990, national banks were required to maintain a ratio 
of core capital to adjusted total assets not less than 3%.  Only those 
national banks that receive a composite rating of one (the highest rating) 
under the "CAMEL" rating system for commercial banks and that, in general, 
are considered strong banking organizations will qualify for the 3% 
requirement.  All other national banks must maintain a core capital ratio of 
3% plus an additional 100 to 200 basis points that would be established on a 
case-by-case basis.  As required by federal law, the OTS has proposed a rule 
revising its minimum core capital requirement to be no less stringent than 
that imposed on national banks.  The OTS has proposed that only those savings 
associations rated a composite one (the highest rating) under the MACRO 
rating system for savings associations will be permitted to operate at or 
near the regulatory minimum leverage ratio of 3%. All other savings 
associations will be required to maintain a minimum leverage ratio of 3% plus 
at least an additional 100 to 200 basis points.  The OTS will assess each 
individual savings association through the supervisory process on a 
case-by-case basis to determine the applicable requirement. No assurance can 
be given as to the final form of any such regulation, the date of its 
effectiveness or the requirement applicable to the Bank.

The OTS risk-based capital requirement requires savings associations to have 
total capital of at least 8% of risk-weighted assets. Total capital 
consists of core capital, as defined above, and supplementary capital.  
Supplementary capital consists of certain permanent and maturing capital 
instruments that do not qualify as core capital and general valuation loan 
and lease loss allowances up to a maximum of 1.25% of risk-weighted assets.  
Supplementary capital may be used to satisfy the risk-based requirement only 
to the extent of core capital up to 100% of core capital. At June 30, 1997, 
Home Federal had no capital instruments that qualified as supplementary 
capital and $4.5 million of general loss reserves, which was in excess of 
1.25% of risk-weighted assets by $40,000.

                                          34
<PAGE>

Certain exclusions from capital and assets are required to be made for the 
purpose of calculating total capital, in addition to the adjustments required 
for calculating core capital.  Such exclusions consist of equity investments 
(as defined by regulation) and that portion of land loans and nonresidential 
construction loans in excess of an 80% loan-to-value ratio and reciprocal 
holdings of qualifying capital instruments.  Home Federal had no such 
exclusions from capital and assets at June 30, 1997.

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

On June 30, 1997, the Bank had total capital of $47.0 million (including 
$42.5 million in core capital and $4.5 million in qualifying supplementary 
capital) and risk-weighted assets of $365.2 million (including $1.1 million 
in converted off-balance sheet assets), or total capital of 12.87% of 
risk-weighted assets.  This amount was $17.8 million above the 8.0% 
requirement in effect on that date.

The following table sets forth Home Federal's compliance with its capital 
requirements at June 30, 1997.

                                                           PERCENT OF
                                                           APPLICABLE
                                  AMOUNT                    ASSETS(1)
                                  ------                   ----------
                                        (DOLLARS IN THOUSANDS)

GAAP capital. . . . . . . . . .   $42,254                       7.42%
                                  -------                       -----
                                  -------                       -----
Tier I (Leverage) capital . . .   $42,4957.57%
Required(3) . . . . . . . . . .    16,831                       3.00
                                  -------                       ----
Excess over requirement . . . .   $25,664                       4.57%
                                  -------                       -----
                                  -------                       -----

Risk based capital(4) . . . . .   $47,02112.87%
Required. . . . . . . . . . . .    29,224                       8.00
                                  -------                       ----
Excess over requirement . . . .   $17,7974.87%
                                  ------------
                                  ------------

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

(1) Tier I (Leverage) 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.


                                      35
<PAGE>

(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 $4.5 million.

Under FDICIA all the Federal banking agencies, including the OTS, must revise 
their risk-based capital requirements to ensure that such requirements 
account for interest rate risk, concentration of credit risk and the risks of 
non-traditional activities, and that they reflect the actual performance of 
and expected loss on multi-family loans.

The OTS has adopted a final rule which requires every savings association 
with more than normal interest rate risk to deduct from total capital an 
amount equal to 50% of its interest-rate risk exposure multiplied by the 
market value of its assets.  This exposure is a measure of the potential 
decline in the market value of portfolio equity of a savings association 
greater than 2%, based upon a hypothetical 200 basis point increase or 
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, this rule is not expected to have a material impact on its 
financial condition or results of operations.  The OTS has delayed 
implementation of this Rule as of June 30, 1997.

Pursuant to FDICIA, the federal banking agencies, including the OTS, have 
also proposed regulations authorizing the agencies to require a depository 
institution to maintain additional total capital to account for concentration 
of credit risk and the risk of non-traditional activities.  No assurance can 
be given as to the final form of any such regulation.

The OTS and the FDIC are authorized and, under certain circumstances, 
required to take certain actions against any association that fails to meet 
its capital requirements. The OTS is generally required to take action to 
restrict the activities of an "undercapitalized association" (generally 
defined to be one with less than either a 4% core ratio, a Tier 1 
risked-based capital ratio or an 8% risk-based capital ratio).  Any such 
association must submit a capital restoration plan and until such plan is 
approved by the OTS may not increase its assets, acquire another institution, 
establish a branch or engage in any new activities, and generally may not 
make capital distributions.  The OTS is authorized to impose the additional 
restrictions, discussed below that are applicable to significantly 
undercapitalized associations.

As a condition to the approval of the capital restoration plan, any company 
controlling an undercapitalized association must agree that it will enter 
into a limited capital maintenance guarantee with respect to the 
institution's achievement of its capital requirements.

Any savings association that fails to comply with its capital plan or is 
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital 
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be 
subject to one or more of the additional specified actions and operating 
restrictions mandated by FDICIA.  These actions and restrictions include 
requiring the issuance of additional voting securities; limitations on asset 
growth; mandated asset reduction; changes in senior management; divestiture, 
merger or acquisition of the association; restrictions on executive 
compensation; and any other action the OTS deems appropriate.

An association that becomes "critically undercapitalized" (i.e., a tangible 
capital ratio of 2% or less) is subject to further restrictions on its 
activities in addition to those applicable to significantly undercapitalized 
associations.  The FDIC must restrict the activities of a critically 
undercapitalized association and, among other things, prohibit any material 
transaction outside the ordinary course of business or engaging in certain 
transactions with affiliates, without the approval of the FDIC.  The OTS must 
appoint a receiver (or conservator with the concurrence of the FDIC) for a 
savings association, with certain limited exceptions, within 90 days after it 
becomes critically undercapitalized.

                                      36
<PAGE>

Any undercapitalized association is also subject to other possible 
enforcement actions by the OTS or the FDIC.  Such actions could include a 
capital directive, a cease-and-desist order, civil money penalties, the 
establishment of restrictions on all aspects of the association's operations 
or the appointment of a receiver or conservator or a forced merger into 
another institution.  The grounds for appointment of a conservator or 
receiver include substantially insufficient capital and losses or likely 
losses that will deplete substantially all capital with no reasonable 
prospect for replenishment of capital without federal assistance.

If the OTS determines that an association is in an unsafe or unsound 
condition or is engaged in an unsafe or unsound practice it is authorized to 
reclassify a well-capitalized association as an adequately capitalized 
association and if the association is adequately capitalized, to impose the 
restrictions applicable to an undercapitalized association.

The imposition by the OTS or the FDIC of any of these measures on the Bank 
may have a substantial adverse effect on the Bank's and the Company's 
operations and profitability and the value of the Company's Common Stock.  
The Company's shareholders do not have preemptive rights, and therefore, if 
the Company is directed by the OTS or the FDIC to issue additional shares of 
Common Stock, such issuance may result in the dilution in the percentage of 
ownership of the Company of those persons owning shares of the Company's 
Common Stock.

LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS.  OTS regulations 
impose various restrictions or requirements on associations with respect to 
their ability to pay dividends or make other distributions of capital.  OTS 
regulations prohibit an association from declaring or paying any dividends or 
from repurchasing any of its stock if, as a result, the regulatory capital of 
the association would be reduced below the amount required to be maintained 
for the liquidation account established in connection with its mutual to 
stock conversion.

The OTS utilizes a three-tiered approach to permit associations, based on 
their capital level and supervisory condition, to make capital distributions 
which include dividends, stock redemptions or repurchases, cash-out mergers, 
and other transactions charged to the capital account.  See "-Regulatory 
Capital Requirements".

Generally, Tier I associations, which are associations that before and after 
the proposed distribution meet their fully phased-in capital requirements, 
may make capital distributions during any calendar year equal to the greater 
of 100% of net income for the year-to-date plus 50% of the amount by which 
the lesser of the association's tangible, core or risk-based capital exceeds 
its fully phased-in capital requirement for such capital component, as 
measured at the beginning of the calendar year, or the amount authorized for 
a Tier 2 association.  However, a Tier 1 association deemed to be in need of 
more than normal supervision by the OTS may be downgraded to a Tier 2 or Tier 
3 association as a result of such a determination.

Tier 2 associations, which are associations that before and after the 
proposed distribution meet their current minimum capital requirements, may 
make capital distributions of up to 75% of net income over the most recent 
four-quarter period.

Tier 3 associations (which are associations that do not meet current minimum 
capital requirements) that propose to make any capital distribution and Tier 
2 associations that propose to make a capital distribution in excess of the 
noted safe harbor level must obtain OTS approval written prior to making such 
distribution.  Tier 2 associations proposing to make a capital distribution 
within the safe harbor provisions and Tier 1 associations proposing to make 
any capital distribution need only submit written notice to the OTS 30 days 
prior to such distribution.  The Bank is classified as a Tier I association.

As a subsidiary of the Company, the Bank will also be required to give the 
OTS 30 days' notice prior to declaring any dividend on its stock.  The OTS 
may object to the distribution during that 30-day period based on safety and 
soundness concerns.

The OTS has proposed regulations that would simplify the existing procedures 
governing capital distributions by savings associations.  Under the proposed 
regulations, the approval of the OTS would be required only for capital 
distributions by an association that is deemed to be in troubled condition or 
that is undercapitalized or would be undercapitalized after the capital 
distribution.  A savings association would be able to make a capital 
distribution without notice to or approval of the OTS if it is not held by a 
savings association holding company, is not deemed to be in troubled 
condition, has received either of the two highest composite supervisory 
ratings and would continue to be



                                      37

<PAGE>

in troubled condition, has received either of the two highest composite
supervisory ratings and would continue to be adequately capitalized after such
distribution.  Notice would have to be given to the OTS by any  association that
is held by a savings association holding company or that had received a
composite supervisory rating below the highest two composite supervisory
ratings.  An association's capital rating would be determined under the prompt
corrective action regulations.

LIQUIDITY.  All savings associations, including Home Federal, are required to
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances, specified United State Government, state or federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to a certain percentage of the sum of its
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less.  For a discussion of what the Bank includes in
liquid assets, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources".  This liquid asset
ratio requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings associations.  At the
present time, the minimum liquid asset ratio is 5%.

In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable deposit accounts and current borrowings.  Monetary penalties
may be imposed upon associations for violations of either liquid asset ratio
requirement.  At June 30, 1997, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 11.54% and a short-term
liquid asset ratio of 4.21%.

ACCOUNTING.  An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with Generally
Accepted Accounting Principles "GAAP".  Under the policy statement, management
must support its classification of and accounting for loans and securities
(i.e., whether held for investment, sale or trading) with appropriate
documentation.  The Bank is in compliance with these rules.

The OTS has adopted an amendment to its accounting regulations, which may be
made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.

BRANCHING.  Subject to certain limitations, the HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States.  The authority to establish such branches is
available (a) in states that expressly authorize branches of savings
associations located in another state or (b) to an association that qualifies as
a "domestic building and loan association" under the Internal Revenue Code of
1986, which imposes qualification requirements similar to those for a "qualified
thrift lender" under the HOLA.  See "QTL Test."  The authority for a federal
savings association to establish an interstate branch network would facilitate a
geographic diversification of the association's activities.  This authority
under the HOLA and the OTS regulations preempts any state law purporting to
regulate branching by federal savings associations.

COMMUNITY REINVESTMENT.  Under the Community Reinvestment Act (the "CRA"), as
implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods.  The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA.  The CRA
requires the OTS, in connection with its examination of a savings association,
to assess the association's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such association.  The CRA also requires all institutions to make public
disclosure of their CRA ratings.  The Association received a "Satisfactory" CRA
rating in its most recent examination.

In April 1995, the OTS and the other federal banking agencies adopted amendments
revising their CRA regulations.  Among other things, the amended CRA regulations
substitute for the prior process-based assessment factors a new evaluation
system that would rate an institution based on its actual performance in meeting
community needs.  In


                                          38
<PAGE>

particular, the proposed system would focus on three tests:  (a) a lending test,
to evaluate the institution's record of making loans in its assessment areas;
(b) an investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs benefiting low
or moderate income individuals and businesses; and (c) a service test, to
evaluate the institution's delivery of services through its  branches, ATMs and
other offices.  The amended CRA regulations also clarify how an institution's
CRA performance would be considered in the application process.

QUALIFIED THRIFT LENDER TEST.  All savings associations, including the Bank, are
required to meet a qualified thrift lender ("QTL") test to avoid certain
restrictions on their operations.  This test requires a savings association to
have at least 65% of its portfolio assets (which consists of total assets less
intangibles, properties used to conduct the savings association's business and
liquid assets not exceeding 20% of total assets) in qualified thrift investments
on a monthly average for nine out of every 12 months on a rolling basis.  At
June 30, 1997, the Bank met the test and has always met the test since its
effectiveness.

Loans and mortgage-backed securities secured by domestic residential housing,
FHLB stock, credit card loans, educational loans and certain small business
loans as well as certain obligations of the FSLIC, the FDIC and certain other
related entities may be included in qualifying thrift investments without limit.
FHLMC and FNMA stock and certain other housing-related and non-residential real
estate loans and investments, including loans to develop churches, nursing
homes, hospitals and schools, and consumer loans and investments in subsidiaries
engaged in housing-related activities may also be included, in varying amounts,
to the extent of 20% of portfolio assets.

Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL.  If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the Bank Insurance Fund.  If an association that fails the test has not yet
requalified and has not converted to a national bank, its new investments and
activities are limited to those permissible for both a savings association and a
national bank, and it is limited to national bank branching rights in its home
state.  In addition, the association is immediately ineligible to receive any
new FHLB borrowings and is subject to national bank limits for payment of
dividends.  If such association has not requalified or converted to a national
bank within three years after the failure, it must divest of all investments and
cease all activities not permissible for a national bank.  In addition, it must
repay promptly any outstanding FHLB borrowings, which may result in prepayment
penalties.  If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies.  See "- Holding Company Regulation."

TRANSACTIONS WITH AFFILIATES.  The Association's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act (the "FRA").  In general, an
affiliate of the Association is any company that controls the Association or any
other company that is controlled by a company that controls the Association,
excluding the Association's subsidiaries other than those that are insured
depository institutions.  The OTS regulations prohibit a savings association (a)
from lending to any of its affiliates that is engaged in activities that are not
permissable for bank holding companies under Section 4(c) of the BHS Act and (b)
from purchasing the securities of any affiliate other than a subsidiary.
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings association and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings association's capital and surplus.  Extensions of credit to affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A, and the purchase of low quality assets from affiliates is generally
prohibited.  Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the association as those prevailing at the time for comparable
transactions with non-affiliated companies.  In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to non-affiliated companies.

The Association's authority to extend credit to its directors, executive
officers, and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the FRA and Regulation O of the FRB thereunder.  Among other things, these
provisions require that extensions of credit to insiders (a) be made on terms
that are substantially the same as, and follow credit underwriting procedures
that are not


                                          39
<PAGE>

less stringent than, those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (b) not exceed certain
limitations on the amount of the association's capital.  In addition, extensions
of credit in excess of certain limits must be approved by the association's
board of directors.

Certain transactions with directors, officers or controlling persons are also
subject to conflict of  interest regulations enforced by the OTS.  These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests.  Among other things, such
loans must be made on terms substantially the same as those for loans to
unaffiliated individuals.

REAL ESTATE LENDING STANDARDS.  The OTS and the other federal banking agencies
adopted regulations to prescribe standards for extensions of credit that (a) are
secured by real estate or (b) are made for the purpose of financing the
construction of improvements on real estate.  The OTS regulations require each
savings association to establish and maintain written internal real estate
lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its real
estate lending activities.  The standards also must be consistent with
accompanying OTS guidelines, which include loan-to-value ratios for the
different types of real estate loans.  Associations are also permitted to make a
limited amount of loans that do not conform to the proposed loan-to-value
limitations so long as such exceptions are reviewed and justified appropriately.
The guidelines also list a number of lending situations in which exceptions to
the loan-to-value standards are justified.

HOLDING COMPANY REGULATION.  The Company is a unitary savings and loan holding
company subject to regulatory oversight by the OTS.  As such, the Company is
registered with and files reports with the OTS and is subject to regulation and
examination by the OTS.  In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries which also permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings association.

As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions.  If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.

If the Bank fails the QTL test, the Company must obtain the approval of the OTS
prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries.  In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies.  The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company.  See "-
Qualified Thrift Lender Test."

The Company must obtain approval from the OTS before acquiring control of any
other SAIF-insured association.  Such acquisitions are generally prohibited if
they result in a multiple savings and loan holding company controlling savings
associations in more than one state.  However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.

FEDERAL SECURITIES LAW.  The stock of the Company is registered with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended (the "Exchange Act").  The Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.

Company stock held by persons who are affiliates (generally officers, directors
and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions.  If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.

FEDERAL RESERVE SYSTEM.  The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW


                                          40
<PAGE>

checking accounts).  The FRB regulations generally require that reserves be
maintained in the amount of 3% of the aggregate of transaction accounts up to
$49.3 million.  The amount of aggregate transaction accounts in excess of $49.3
million are currently subject to a reserve ratio of 10%, which ratio the FRB may
adjust between 8% and 12%.  The FRB regulations currently exempt $4.4 million of
otherwise reservable balances from the reserve requirements, which exemption is
adjusted by the FRB at the end of each year.  At June 30, 1997, the Bank was in
compliance with these reserve requirements.  The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS. See "- Liquidity."

Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.

FEDERAL HOME LOAN BANK SYSTEM.  The Bank is a member of the FHLB of Des Moines,
which is one of 12 regional FHLBs, that administers the home financing credit
function of savings associations.  Each FHLB serves as a reserve or central bank
for its members within its assigned region.  It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes loans to members (i.e., advances) in accordance with policies and
procedures established by the board of directors of the FHLB.  These policies
and procedures are subject to the regulation and oversight of the Federal
Housing Finance Board.  All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB.  In addition, all
long-term advances are required to provide funds for residential home financing.

As a member, Home Federal is required to purchase and maintain stock in the FHLB
of Des Moines.  At June 30, 1997, Home Federal had $5.2 million in FHLB stock,
which was in compliance with this requirement.  In past years, the Bank has
received substantial dividends on its FHLB stock.  Over the past five fiscal
years such dividends have averaged 7.60% and were 7.05% for fiscal year 1997.

Under federal law, the FHLBs are required to provide funds for the resolution of
troubled savings associations and to contribute to low and moderately-priced
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects.  These
contributions have affected adversely the level of FHLB dividends paid and could
continue to do so in the future.  These contributions could also have an adverse
effect on the value of FHLB stock in the future. A reduction in value of the
Bank's FHLB stock may result in a corresponding reduction in Home Federal's
capital.

For the fiscal year ended June 30, 1997, dividends paid by the FHLB of Des
Moines to Home Federal totalled approximately $368,000, which constitute a
$4,000 increase in the amount of dividends received in fiscal 1996.  The $92,000
dividend received for the quarter ended June 30, 1997 reflects an annualized
rate of 7.05% or 9.3% increase from the rate for the same period in fiscal 1996.

FEDERAL AND STATE TAXATION

During fiscal year 1997, the Small Business Job Protection Act of 1996 was
signed into law which repealed the percentage of taxable income method of
computing the bad debt deduction for savings institutions for tax years
beginning after December 31, 1995.  Beginning in fiscal year 1997, the Bank is
required to recapture into income the excess of its June 30, 1996 loan loss
reserves for "qualifying"  and "nonqualifying" loans over its June 30, 1988 loan
loss reserves for "qualifying" and "nonqualifying" loans.  This excess which was
$720 at June 30, 1997, is required to be recaptured ratably over a six year
period.  The onset of recapture can be delayed for one or two years if the Bank
meets a residential loan originations requirement.  To qualify for a deferral
each year, the Bank will be required to lend as much in dollar terms on
residential real estate as in the average of the most recent six years.  The
residential loan calculation does not include refinancings and home equity
loans.  At June 30, 1997, the Bank's recorded deferred tax liability of $245
provides for the recapture of the loan loss reserves.

In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax.  An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption.  The alternative minimum tax is imposed to the extent it exceeds the


                                          41
<PAGE>

corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.  For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.

To the extent earnings appropriated to a savings association's bad debt reserves
for "qualifying real property loans" and deducted for federal income tax
purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses).  As of June 30, 1997, the Bank's Excess for tax purposes totalled
approximately $4.8 million.

The Company, the Bank and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis  using the accrual method of accounting.  Savings
associations, such as the Bank, that file federal income tax returns as part of
a consolidated group are required by applicable Treasury regulations to reduce
their taxable income for purposes of computing the percentage bad debt deduction
for losses attributable to activities of the non-savings association members of
the consolidated group that are functionally related to the activities of the
savings association member.

The Bank and its consolidated subsidiaries have been audited by the IRS with
respect to consolidated federal income tax returns through 1985. With respect to
years examined by the IRS, either all deficiencies have been satisfied or
sufficient reserves have been established to satisfy asserted deficiencies.  In
the opinion of management, any examination of still open returns (including
returns of subsidiaries and predecessors of, or entities merged into, the Bank)
would not result in a deficiency which could have a material adverse effect on
the financial condition of the Bank and its consolidated subsidiaries.

SOUTH DAKOTA TAXATION.  The Bank is subject to the South Dakota franchise tax to
the extent that such corporations are engaged in business in the state of South
Dakota. South Dakota does not have a corporate income tax.  The franchise tax
will be imposed at a rate of 6% on franchise taxable income which is computed in
the same manner as federal taxable income with some minor variations to comply
with South Dakota law, other than the carryover of net operating losses which is
not permitted under South Dakota law.  A South Dakota return of franchise tax
must be filed annually.

NEBRASKA TAXATION.  The Mortgage Corp. is subject to the Nebraska Corporate
Income tax to the extent that such corporations are engaged in business in the
state of Nebraska.  The Corporate Income tax is imposed at rates of 5.58% to
7.81% on corporate taxable income which is computed in the same manner as
federal taxable income with some minor variations to comply with Nebraska law.
A Nebraska return of Corporate Income tax must be filed annually.

DELAWARE TAXATION.  As a Delaware holding company, the Company is exempted from
Delaware corporate income tax but is required to file an annual report with and
pay an annual fee to the State of Delaware.  The Company is also subject to an
annual franchise tax imposed by the State of Delaware.

EXECUTIVE OFFICERS OF THE COMPANY
The following information as to the business experience during the past five
years is supplied with respect to executive officers of the Company and the
Bank.

CURTIS L. HAGE - Mr. Hage, age 51, is Chairman, President and Chief Executive
Officer of the Bank.  He was elected Chairman of the Board of Directors of the
Bank in September 1996 and has held the position of President and Chief
Executive Officer of the Bank since February 1991.  Prior to such time, Mr. Hage
served as Executive Vice President of the Bank since 1986.  Since joining the
Association in 1968, he served in various capacities prior to being elected
Executive Vice President.  Mr. Hage received his M.B.A. from the University of
South Dakota and attended the Graduate School of Savings Institution Management
at the University of Texas.

GENE F. UHER - Mr. Uher, age 50, is Executive Vice President/Chief Operations
Officer, a position he has held since March 1997.  He was employed as Executive
Vice President for Packers Bank, Omaha, Nebraska from 1996 until joining Home
Federal.  Prior to that time, he was employed as Executive Vice President/Chief
Operating Officer for


                                          42
<PAGE>

Conservative Savings Bank, F.S.B., Omaha, Nebraska from 1989 to 1996.  Mr. Uher
received his B.A. degree from Lincoln School of Commerce, Lincoln, Nebraska.  He
is a graduate of the School of Executive Development at University of
Connecticut.

DONALD F. BERTSCH - Mr. Bertsch, age 58,  is Senior Vice President/Chief
Financial Officer, a position he has held since January 1991.  Prior to joining
Home Federal, Mr. Bertsch was employed for 27 years by First Bank System, a bank
holding company located in Minneapolis, Minnesota, in a variety of management
positions including Vice President/Administrative Services from 1984 to 1990.
He also served as Senior Vice President and Cashier of the National Bank of
South Dakota from 1972 to 1979.  Mr. Bertsch has over 33 years experience in the
banking industry and is a graduate of the University of Wisconsin Graduate
School of Banking and holds a Bachelor of Science from Northern State
University.

MICHAEL R. BREIDENBACH - Mr. Breidenbach, age 50, is Senior Vice
President/Retail Banking, a position he has held since October 1993.  Mr.
Breidenbach joined Home Federal in February 1992.  Prior to that time, he was
employed by the Resolution Trust Corporation from 1990 to February 1992 and by
Metropolitan Federal Bank as Regional Sales Manager from 1979 to 1990.  He is a
graduate of the School for Executive Development at Arizona State University and
holds a Bachelor of Science from Northern State University.

MARY F. HITZEMANN - Ms. Hitzemann, age 45, is Senior Vice President/Human
Resources, a position she has held since October 1993.  Ms. Hitzemann joined
Home Federal in January 1993.  Prior to that time, she was employed as Vice
President of Human Resources for Rapid City Regional Hospital from May 1989 to
May 1992.  Ms.  Hitzemann received her B.A. degree from Augustana College.

JOHN B. "JACK" NEUROTH - Mr. Neuroth, age 62, is Senior Vice President/Senior
Commercial Lending Officer, a position he has held since September 1996.  Mr.
Neuroth joined Home Federal in 1966.  He is responsible for commercial real
estate lending.  Mr. Neuroth received his B.S. from the University of South
Dakota.

JOHN E. ROERS - Mr. Roers, age 50, is Senior Vice President/Agricultural
Lending, a position he has held since joining Home Federal on October 31, 1995.
Prior to that time, he was employed as Agricultural Loan Officer and Department
Manager for Western Bank, Sioux Falls (then First Bank) from June 1981 to
October 1996 and for Western Bank, Marshall, Minnesota from February 1974 to May
1981.  Mr. Roers received his Bachelor of Science and Masters of Science from
North Dakota State University.

MARK S. SIVERTSON - Mr. Sivertson, age 39, is Senior Vice President/Trust
Officer, a position he has held since July 1996.  He joined Home Federal in
February 1995 as Vice President/Trust Officer.  Prior to joining Home Federal,
Mr. Sivertson was Vice President and Trust Officer in charge of the Investment
Management and Trust Department at Western Bank.  He holds a law degree from the
University of North Dakota and the Certified Trust Financial Advisor designation
from the American Bankers Association.

MICHAEL H. ZIMMERMAN - Mr. Zimmerman, age 44, 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 Vice President/Mortgage
Loan Manager for First Trust and Savings Bank, Cedar Rapids, Iowa from October
1995 to August 1996 and as Vice President/Eastern Regional Manager for Homeland
Savings Bank FSB, Waterloo, Iowa from May 1995 to October 1995; 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.

RICHARD H.C. BEVERLEY - Mr. Beverley, age 54, is Vice President/Sales, a
position he has held since joining the Bank in June 1996.  Prior to that time,
he was employed by Hauge Associates, Inc. as Director of Sales from September
1993 to May 1996 and Sears Roebuck and Co. as Store General Manager - Empire
Mall from May 1966 to June 1993.  Mr. Beverley attended Bradley University,
Peoria, Illinois.

CARTER V. BROTON - Mr. Broton, age 43, is Vice President/General Auditor, a
position he has held since joining the Bank in February 1993.  Prior to that
time he was employed by Norwest Corporation as Professional Practices Manager of
the Audit Department from 1990 to 1993, and by Citibank from 1983 to 1990.  Mr.
Broton received his


                                          43
<PAGE>

MBA degree from the University of South Dakota.

MICHAEL J. ECHOLS - Mr. Echols, age 53, is Vice President/Loan Service, a
position he has held since joining the Bank in June 1996.  Prior to that time he
was employed by South Dakota Housing Development Authority as Executive Director
from 1974 to 1996.

TED ELLINGER - Mr. Ellinger, age 49, is Vice President/Bank Coordinator.  He
joined Home Federal in July 1974 and was promoted to his present position in
October 1993.  Mr. Ellinger is responsible for the Brookings, Dell Rapids,
Canton, Freeman, Lennox and Parker branches.

RANDY FINK - Mr. Fink, age 43, is Vice President/Construction Lending, a
position he has held since October 1995.  In January 1983, Mr. Fink joined Home
Federal and in 1989 was promoted to Vice President/Single Family Lending.

IRA D. FRERICKS - Mr. Frericks, age 37, is Vice President/Controller of the
Bank.  He joined Home Federal in 1988 as an Internal Auditor and was promoted to
Assistant Vice President/Internal Auditor in January 1990, Assistant Vice
President/Controller in March 1991 and Vice President in January 1992.  Prior to
joining Home Federal, Mr. Frericks was employed by McGladrey & Pullen, a public
accounting firm, from 1984 to 1988.  He is a certified public accountant.  Mr.
Frericks received his B.S. Degree from the University of South Dakota and is a
graduate of the University of Wisconsin Graduate School of Banking.

HUGH R. FULLERTON, JR. - Mr. Fullerton, age 48, is Vice President/Credit Card
Services, a position he has held since joining the Bank in November 1996.  Prior
to that time, he was employed by First Premier as Vice President-Merchant
Services from 1992 to 1996 and by Citibank as Senior Account Manager from 1986
to 1992.  He was employed by US West as Director of Credit Services from 1971 to
1986.  Mr. Fullerton received his BS and MBA degrees from the University of
South Dakota.

JOANNE M. HAASE - Ms. Haase, age 34, is Vice President/Marketing, a position she
has held since joining the Bank in August 1996.  Prior to that time, she was
employed by University of Sioux Falls as Director of Adult Learner Services from
January 1992 to August 1996 and has a combined six years as Investment Executive
and Residential Real Estate Appraiser.  Ms. Haase received her MBA degree from
University of Sioux Falls, Sioux  Falls, South Dakota and BA from University of
San Diego, San Diego, California.

DIANE HOVDA - Ms. Hovda, age 52, is Vice President/Private Banking, a position
she has held since June of 1997.  She joined Home Federal in May 1995 as Vice
President/Bank Coordinator.  Prior to that time, she was employed by Western
Bank, Sioux Falls from 1974 to 1995, and for First National Bank and National
Bank of South Dakota from 1966 to 1974.

KEITH HURLEY - Mr. Hurley, age 35, is Vice President/Bank Coordinator.  He
joined Home Federal in January 1989 and was promoted to his present position in
October 1993.  Mr. Hurley is responsible for the two Aberdeen banks, the
Mobridge, Pierre, Redfield and the Winner banks.

SHARON MANUEL - Ms. Manuel, age 47, is Vice President/Electronic Banking.  She
joined Home Federal in April 1994.  Ms. Manuel is responsible for managing
technology-oriented projects such as automated telephone banking, debit card,
bill payment services and home banking.  Prior to joining Home Federal, she was
employed by Citibank for 13 years.

GARY L. SMITH - Mr. Smith, age 43, is Vice President/Information Systems.  He
joined Home Federal in 1979 and was promoted to his present position in 1988.

NATALIE SOLBERG - Ms. Solberg, age 34, is Vice President/ Retail Support, a
position she has held since 1997.  She joined Home Federal in February 1994 and
was promoted to Vice President/In-Touch Banking in October 1995.  Prior to
joining Home Federal, she was the Customer Service Manager and various other
positions for Bank of New York from October 1989 to October 1993.  She received
her BS from Northern State University.

                                          44
<PAGE>

MARK SWENSON - Mr. Swenson, age 34, is Vice President/Bank Manager, a position
he has held since joining Home Federal in May 1995.  Prior to that time, he was
employed as Managing Officer, Senior Personal Banking Officer, Marketing
Specialist for Western Bank Northeast, Sioux Falls from 1986 to May 1996.  Mr.
Swenson received his BS from South Dakota State University and his MBA from the
University of South Dakota.

KENT WIGG - Mr. Wigg, age 50, is Vice President/Personal Banking, a position he
has held since joining Home Federal in September 1995.  Prior to that time, he
was employed by Western Bank, Sioux Falls (then First Bank) from August 1985 to
September 1995.  And for First National Bank, Sioux City, Iowa from May 1974 to
August 1985.  He received his BS from Iowa State University and his MBA from
University of South Dakota.  Additionally, he is a Graduate of Colorado School
of Banking, a Certified Trust Specialist (CTS), a Certified Investment
Specialist (CIS) and a Certified Financial Planner (CFS).

ITEM 2.  PROPERTIES

The Company and the Bank conduct their business at their main office located at
225 S. Main at llth, Sioux Falls, South Dakota 57102.  The Bank also conducts
business from 18 other retail banking locations located in its primary market
area.  The Mortgage Corp. conducts business in Omaha, Nebraska.

The Bank owns each of its offices, except for three offices that it leases.  The
Mortgage Corp. leases office space.  The total net book value of the Company's
premises and equipment (including land, building and leasehold improvements and
furniture, fixtures and equipment) at June 30, 1997 was $15.1 million.  See Note
6 of Notes to Consolidated Financial Statements.

ITEM 3.  LEGAL PROCEEDINGS

The Company, Home Federal and its subsidiaries are involved as plaintiff or
defendant in various legal actions arising in the normal course of their
businesses.  While the ultimate outcome of these proceedings cannot be predicted
with certainty, it is the opinion of management, after consultation with counsel
representing Home Federal and the Company in the proceedings, that the
resolution of these proceedings should not have a material effect on the
Company's consolidated financial position or results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended June 30, 1997.

                                       PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

STOCK LISTING

The Company's Common stock is traded under the symbol "HFFC" on the NASDAQ
National Market System.

The following table sets forth the range of high and low sale prices for the
Company's Common Stock for each of  the fiscal quarters of the two years ended
June 30, 1997 and 1996.  Quotations for such periods are as reported by NASDAQ
for National Market System issues.  On December 20, 1995, the Company declared a
two-for-one stock split in the form of a stock dividend on one share of common
stock for each one share outstanding, payable to shareholders of record on
January 10, 1996.  The quotations for the periods listed below have been
retroactively adjusted based upon the new shares outstanding after the effect of
the two-for-one stock split for all periods presented.

                        FISCAL 1997       HIGH      LOW
                        ----------------------------------
                        1st Quarter       $16.00    $15.00
                        2nd Quarter       $17.50    $14.75
                        3rd Quarter       $20.50    $16.75


                                          45
<PAGE>

                        4th Quarter       $21.50    $18.75

                        FISCAL 1996       HIGH      LOW
                        ----------------------------------
                        1st Quarter       $16.88    $14.09
                        2nd Quarter       $15.44    $15.25
                        3rd Quarter       $16.75    $14.00
                        4th Quarter       $15.50    $13.25

As of September 15, the Company had 653 holders of record of its Common Stock.

The transfer agent for the Company's Common Stock is Chemical Bank, Bank Window
Church Street Station, New York, NY, 10015-4000.

DIVIDENDS

HF Financial Corp. paid quarterly cash dividends of $0.09 per share throughout
fiscal year 1997.  In addition, HF Financial Corp. paid quarterly cash dividends
of $0.825 throughout fiscal year 1996.  The Board of Directors intends to
continue the payment of quarterly cash dividends, dependent on the results of
operations and financial condition of HF Financial Corp., tax considerations,
industry standards, economic conditions, general business practices and other
factors the board of directors deems relevant.  HF Financial Corp.'s ability to
pay dividends is dependent on the dividend payments it receives from its
subsidiary, Home Federal Savings Bank (the "Bank"), which are subject to federal
and state regulations.

SALES OF UNREGISTERED STOCK
The Company has had no sales of unregistered stock within the last three fiscal
years.


                                          46
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA
The following table sets forth selected financial data with respect to the
Company for the periods indicated.  This information should be read in
conjunction with the Financial Statements and related notes appearing elsewhere
herein and "Management's Discussion and Analysis of Financial Condition and
results of Operations and Financial Conditions."  The Company's selected
financial statement and operations data for each of the years set forth below
have been derived from financial statements which have been audited by McGladrey
& Pullen LLP, independent public accountants.

 
<TABLE>
<CAPTION>
                                                                                At  June 30,
                                                    --------------------------------------------------------------------
                                                      1997           1996           1995           1994           1993
                                                    --------------------------------------------------------------------
                                                                           (Dollars in Thousands)
<S>                                                <C>            <C>            <C>            <C>            <C>
Selected Financial Statement Data:
Total assets                                       $562,114       $554,659       $535,682       $491,325       $482,541
Loan receivable, net                                440,019        413,143        360,007        306,306        279,350
Loans held for sale                                   3,483          7,280          4,139          2,042         25,679
Mortgage-backed securities                          - - - -        - - - -         83,384         74,894         62,254
Mortgage-backed securities available for sale        30,340         59,495        - - - -        - - - -        - - - -
Investment securities                               - - - -         - - --         28,932         74,737         68,623
Securities available or held for sale                46,940         41,168         33,402          6,459         14,009
Deposits                                            418,186        398,166        400,675        392,415        413,078
Advances from FHLB of Des Moines
 and other borrowings                                74,743         90,123         73,695         42,860         21,625
Stockholders' equity                                 52,974         51,263         48,354         46,022         40,735

</TABLE>

<TABLE>
<CAPTION>
                                                                                       Year Ended June 30,
                                                             ---------------------------------------------------------------------
                                                               1997           1996           1995           1994           1993
                                                             ---------------------------------------------------------------------
                                                                                     (Dollars in Thousands)
<S>                                                          <C>            <C>            <C>            <C>            <C>
Selected Operations Data:
Interest and dividend income                                 $ 44,012       $ 43,465       $ 38,126       $ 36,692       $ 40,816
Interest expense                                               24,832         25,761         24,008         20,221         23,372
                                                             --------       --------       --------       --------       --------
 Net interest income                                           19,180         17,704         14,118         16,471         17,444
 Provision (recoveries) for losses on loans                       693            590           (515)           275          1,110
                                                             --------       --------       --------          -----         ------
 Net interest income after provision (recoveries)
  for losses on loans                                          18,487         17,114         14,633         16,196         16,334
Loan servicing income                                           1,150            689            754            564            526
Loan fees and service charges                                     946            791            586            879            699
Gain (loss) on mortgage-backed securities, and securities
 available or held for sale, net                                  150            500            164           (156)            55
Other non-interest income                                       4,226          3,668          2,626          2,879          1,937
Noninterest expense                                           (19,703)       (15,147)       (13,855)       (14,072)       (12,478)
                                                             --------       --------       --------       --------       --------
 Income before income taxes and cumulative
  effect of accounting changes                                  5,256          7,615          4,908          6,290          7,073
Income tax expense                                              1,582          2,893          1,803          2,465          2,333
                                                             --------       --------       --------       --------       --------
 Income before cumulative effect of
  accounting changes                                            3,674          4,722          3,105          3,825          4,740
Cumulative effect of accounting changes                       - - - -        - - - -             93          2,000          - - -
                                                             --------       --------       --------       --------       --------
 Net income                                                  $  3,674       $  4,722       $  3,198       $  5,825       $  4,740
                                                             --------       --------       --------       --------       --------
                                                             --------       --------       --------       --------       --------
Earnings per share: (4)
 Income before cumulative effect of
  accounting changes                                         $   1.19       $   1.49       $   0.99       $   1.23       $   1.53
 Cumulative effect of accounting changes                      - - - -        - - - -           0.03           0.64        - - - -
                                                             --------       --------       --------       --------       --------
 Net Income                                                  $   1.19       $   1.49       $   1.02       $   1.87       $   1.53
                                                             --------       --------       --------       --------       --------
                                                             --------       --------       --------       --------       --------

Dividends per share (5)                                      $   0.36        $  0.33       $   0.30       $   0.25       $   0.20
Dividends payout ratio                                          29.48%         21.41%         29.41%         13.40%         13.11%

</TABLE>

                                        47
<PAGE>

<TABLE>
<CAPTION>
                                                                                     Year Ended June 30,
                                                                    ----------------------------------------------
                                                                     1997      1996     1995       1994      1993
                                                                    ----------------------------------------------
                                                                                    (Dollars in Thousands)
<S>                                                                  <C>       <C>      <C>        <C>       <C>

Other Data:
Interest rate spread information:
 Average during period                                              3.24%     2.88%     2.40%     3.21%     3.49%
 End of period                                                      3.36      3.01      2.36      3.15      3.56
Net interest margin (1)                                             3.64      3.31      2.80      3.55      3.75
Average interest-earning assets to average
 interest-bearing liabilities                                       1.08      1.09      1.08      1.08      1.05
Equity to total assets (end of period)                              9.42      9.24      9.03      9.37      8.44
Equity-to-assets ratio (ratio of average equity
 to average total assets)                                           9.25      8.97      8.94      9.10      7.80
Nonperforming assets to total assets
 (end of period) (2)                                                0.33      0.41      0.57      0.89      1.29
Allowance for losses on loans to non-performing
 loans (end of period) (3)                                        361.50    200.15    141.08    163.74    144.49
Allowance for losses on loans to total loans
 (end of period)                                                    1.02      0.98      1.11      1.59      1.58
Nonperforming loans to total loans
 (end of period)(3)                                                 0.28      0.49      0.79      0.97      1.10
Other noninterest expense to average total assets                   3.55      2.71      2.64      2.89      2.54
Net interest income after provision (recoveries) for losses on
 loans to noninterest expense (end of period)                      93.83    112.99    105.62    115.09    130.90
Return on assets  (ratio of net income to average
 total assets)                                                      0.66      0.85      0.61      1.20      0.97
Return on equity (ratio of net income to average
 equity)                                                            7.17%     9.43%     6.81%    13.14%    12.37%
Number of full-service offices                                       19        19        18        16        16

</TABLE>

1)  Net Interest income divided by average interest-earning assets.
2)  Nonperforming assets include non-accruing loans, accruing loans delinquent
    more than 90 days and foreclosed assets.
3)  Nonperforming loans include non-accruing loans and accruing loans
    delinquent more than 90 days.
4)  Earnings per share are retroactively adjusted for the  two-for-one stock
    split in the form of a stock dividend payable to shareholders of record on
    January 10, 1996.
5)  Dividends per  share are retroactively adjusted for the  two-for-one stock
    split in the form of a stock dividend payable to shareholders of record on
    January 10, 1996.


                                          48
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

GENERAL

HF Financial Corp. ("Company") was incorporated under the laws of the State of
Delaware in November 1991 for the purpose of owning all of the outstanding stock
of Home Federal Savings Bank ("Bank") issued in the mutual to stock conversion
of the Bank.  The Company acquired all of the stock of the Bank on April 8,
1992.  In October 1994, the Company acquired and began operating a new mortgage
subsidiary as HomeFirst Mortgage Corp. ("Mortgage Corp."), which has assets of
approximately $547,000 at June 30, 1997.  In May, 1996 the Company formed a
Limited Liability Company named HF Card Services L.L.C. ("HF Card Services") and
became the owner of 51% of this entity. The activities of the Company itself
have no significant impact on the results of operations on a consolidated basis.
Unless otherwise indicated, all activities discussed herein relate to the
Company, and its direct and indirect subsidiaries, including without limitation,
the Bank, HF Card Services and the Mortgage Corp.

Home Federal has been, and intends to continue to be, a financial institution
that offers a variety of financial services to meet the needs of families in the
communities it serves.  The Bank has focused on serving families located in its
market area, generally defined as eastern South Dakota and including the cities
and the communities surrounding the cities of Sioux Falls, Brandon, Pierre,
Winner, Freeman, Dell Rapids, Canton, Parker, Lennox, Aberdeen, Mobridge,
Brookings, Hartford and Redfield, South Dakota.  The Bank attracts deposits from
the general public and uses such deposits, together with borrowings and other
funds, to originate one- to four- family residential, consumer, multi-family,
commercial real estate, agricultural, construction and commercial business
loans.  The Bank's consumer loan portfolio includes, among other things, mobile
home loans, automobile loans, home equity loans, credit card loans, loans
secured by deposit accounts and student loans.

The Bank also purchases mortgage-backed securities and invests in U.S.
Government and agency obligations and other permissible investments.  Home
Federal does not rely on any brokered deposits and does not hold any
non-investment grade bonds (i.e. "junk bonds").  The Bank also receives loan
servicing income on loans serviced for others.  Home Federal, through its
wholly-owned subsidiaries, offers annuities, credit-life, health, life, hazard
and other insurance products and appraisal services.

HomeFirst Mortgage Corp. is a South Dakota Corporation with an office in Omaha,
Nebraska.  The Mortgage Corp. is a mortgage banking operation that originates
one-to-four family residential loans which are sold into the secondary market
and to the Bank.  The Company will cease operation of HomeFirst Mortgage Corp.
during the first quarter of fiscal 1998.

HF Card Services was established to provide secured, partially-secured and
unsecured credit cards nationwide.  The target market for HF Card Services is
sub-prime credit customers who have either an insufficient credit history or a
negative credit history and are unable to obtain a credit card from more
traditional card issuers.

The Company's net income is primarily dependent upon the difference (or
"spread") between the average yield earned on loans, mortgage-backed securities
and investments and the average rate paid on deposits and borrowings, as well as
the relative amounts of such assets and liabilities.  The interest rate spread
is affected by regulatory, economic and competitive factors that influence
interest rates, loan demand and deposit flows.  The Company, like other
financial institutions, is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest-earning assets.  To better insulate itself
from such risk, the Company has, over the last few years, attempted to increase
both numerically and on a percentage basis its holding of consumer and
commercial loans.  The Company has also decreased its ratio of fixed-rate to
adjustable-rate loans. The Company's net income is also affected by, among other
things, gains and losses on sales of foreclosed property, loans, mortgage-backed
securities and securities available for sale, provisions for loan losses,
service charge fees, subsidiary activities, operating expenses and income taxes.

This discussion and analysis contains certain forward-looking terminology such
as "believes," "anticipates," "will," and "intends," or comparable terminology.
Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected.  Potential purchasers
of the Company's securities are cautioned not to place undue reliance on such
forward-looking statements which are qualified in their entirety by the cautions
and risks described herein and in other reports filed by the Company with the
Securities and Exchange Commission.


FINANCIAL CONDITION DATA


                                          49
<PAGE>

At June 30, 1997, the Company had total assets of $562.1 million, an increase of
$7.5 million from the level at June 30, 1996.  The increase in assets was due
primarily to an increase in loans receivable of $26.9 million, in cash and cash
equivalents of $6.8 million and in securities available for sale of $5.8
million.  The increase in loans receivable, cash and cash equivalents and
securities available for sale was funded primarily by a decrease in
mortgage-backed securities of $29.2 million and an increase in deposits of $20.0
million from the levels at June 30, 1996.  The remaining excess funds received
from the mortgage-backed securities and deposits were used to paydown advances
from Federal Home Loan Bank and other borrowings by $15.4 million from levels at
June 30, 1996.  In addition, stockholders' equity increased from $51.3 million
at June 30, 1996 to $53.0 million at June 30, 1997, primarily due to net income
of $3.7 million and the change in the net unrealized loss on securities
available for sale of $400,000, which was offset by the payment of cash
dividends of $1.1 million to the Company's stockholders and treasury stock
purchases of $1.6 million.

The increase in loans receivable of $26.9 million was due primarily to
originations exceeding amortizations and  prepayments of principal.  Loans held
for sale include loans receivable that management intends to use as part of its
asset/liability strategy, or that may be sold in response to changes in interest
rate, changes in prepayment risk or other similar factors.

The decrease in mortgage-backed securities of $29.2 million was primarily the
result of sales of $12.2 million and  amortizations and prepayments of principal
exceeding purchases.  The Bank had no purchases of mortgage-backed securities in
fiscal year 1997.  The Bank's sales of mortgage-backed securities were for
liquidity management.

The increase in securities available for sale of $5.8 million from the level at
June 30, 1996 is primarily due to purchases of $20.0 million exceeding sales and
maturities of securities available for sale of $15.1 million during the year
ended June 30, 1997.

The $20.0 million increase in deposits was primarily due to an increase in
checking accounts of $12.3 million and an increase in certificates of deposit of
$10.2 million which were offset by a decrease in savings accounts of $2.5
million.

Advances from the FHLB and other borrowings decreased $15.4 million for the year
ended June 30, 1997 primarily due to the Company obtaining $34.0 million of
advances and borrowings for liquidity management and to fund loans.  These
advances were offset by the payment of $49.4 million on advances and other
borrowings during the year ended June 30, 1997.


                                          50
<PAGE>

ANALYSIS OF NET INTEREST INCOME

Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities.  Net interest income depends
upon the volume of interest-earning assets and interest-bearing liabilities and
the interest rate earned or paid on them.

AVERAGE BALANCES, INTEREST RATES AND YIELDS.  The following table presents for
the periods indicated the total dollar amount of interest income from average
interest-earning assets and the resulting yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates, and the net interest margin.  The table does not reflect any effect of
income taxes.  All average balances are monthly average balances and include the
balances of non-accruing loans.  The yields and costs for the years ended June
30, 1997, 1996 and 1995 include fees which are considered adjustments to yield.


<TABLE>
<CAPTION>

                                                                       Year Ended June 30,
                                        --------------------------------------------------------------------------------------
                                                         1997                                          1996
                                        --------------------------------------------------------------------------------------
                                           Average      Interest                       Average        Interest
                                         Outstanding      Earned/        Yield/      Outstanding        Earned/       Yield/
                                           Balance        Paid           Rate          Balance          Paid          Rate
                                         --------        --------       --------      --------        --------      --------
                                                                     (Dollars in Thousands)
<S>                                      <C>            <C>            <C>            <C>            <C>            <C>
Interest-earning assets:
  Loans receivable (1)                   $437,230       $ 38,596          8.83%       $404,622       $ 35,628          8.81%
  Mortgage-backed securities               41,119          2,668          6.49%         74,853          4,918          6.57%
  Other investment securities (2)          42,953          2,380          5.54%         49,859          2,555          5.12%
  FHLB stock                                5,222            368          7.05%          5,051            364          7.21%
                                         --------       --------       --------       --------       --------       --------

Total interest-earning assets            $526,524       $ 44,012          8.36%       $534,385       $ 43,465          8.13%
                                                        --------       --------                      --------       --------
  Non-interest earning assets.             27,762                                       24,054
                                         --------                                     --------
Total assets                             $554,286                                     $558,439
                                         --------                                     --------
                                         --------                                     --------

Interest-bearing liabilities:
Deposits:
  Now and money market accounts          $ 71,323       $  1,794          2.52%      $  61,466       $  1,646          2.68%
  Savings accounts                         30,227            626          2.07%         33,140            699          2.11%
  Certificates of deposit                 306,085         17,969          5.87%        307,586         18,370          5.97%
                                         --------       --------       --------       --------       --------       --------
    Total deposits                       $407,635       $ 20,389          5.00%       $402,192       $ 20,715          5.15%
FHLB Advances & other borrowings           77,644          4,443          5.72%         88,129          5,046          5.73%
                                         --------       --------       --------       --------       --------       --------

Total interest-bearing liabilities       $485,279       $ 24,832          5.12%       $490,321       $ 25,761          5.25%
                                                        --------       --------                      --------       --------
  Other liabilities                        17,740                                       18,021
                                         --------                                     --------
Total liabilities                         503,019                                      508,342
  Equity                                   51,267                                       50,097
                                         --------                                     --------
Total liabilities and equity             $554,286                                     $558,439
                                         --------                                     --------
                                         --------                                     --------

Net interest income; interest rate spread
                                                        $ 19,180          3.24%                      $ 17,704          2.88%
                                                        --------       --------                      --------       --------

Net interest margin (3)                                                   3.64%                                        3.31%
                                                                       --------                                     --------
                                                                       --------                                     --------



<CAPTION>

                                                   Year Ended June 30,
                                        ----------------------------------------
                                                          1995
                                        ----------------------------------------
                                           Average      Interest
                                         Outstanding     Earned/         Yield/
                                           Balance        Paid           Rate
                                         --------        --------       --------
                                                 (Dollars in Thousands)

<S>                                      <C>            <C>            <C>
Interest-earning assets:
  Loans receivable (1)                   $343,679       $ 28,728          8.36%
  Mortgage-backed securities               83,277          5,097          6.12%
  Other investment securities (2)          73,044          3,995          5.47%
  FHLB stock                                3,993            306          7.66%
                                         --------       --------       --------

Total interest-earning assets            $503,993       $ 38,126          7.56%
                                                        --------       --------
  Non-interest earning assets.             21,383
                                         --------
Total assets                             $525,376
                                         --------
                                         --------

Interest-bearing liabilities:
Deposits:
  Now and money market accounts          $ 56,816       $  1,579          2.78%
  Savings accounts                         32,094            760          2.37%
  Certificates of deposit                 299,385         17,342          5.79%
                                         --------       --------       --------
    Total deposits                       $388,295       $ 19,681          5.07%
FHLB Advances & other borrowings           76,604          4,327          5.65%
                                         --------       --------       --------

Total interest-bearing liabilities       $464,899       $ 24,008          5.16%
                                                        --------       --------
  Other liabilities                        13,521
                                         --------
Total liabilities                        $478,420
  Equity                                   46,956
                                         --------
Total liabilities and equity             $525,376
                                         --------
                                         --------

Net interest income; interest rate spread
                                                        $ 14,118          2.40%
                                                        --------       --------

Net interest margin (3)                                                   2.80%
                                                                       --------
                                                                       --------


</TABLE>
 
--------------------------------------------------------------------------------

(1) Includes interest on accruing loans past due 90 days or more.
(2) Includes primarily U.S. government securities.
(3) Net interest margin is net interest income divided by average
    interest-earning assets.


                                          51
<PAGE>

RATE/VOLUME ANALYSIS OF NET INTEREST INCOME

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


<TABLE>
<CAPTION>
 
                                                Year Ended June 30,                       Year Ended June 30,
                                     ------------------------------------------------------------------------------------
                                                   1997 vs 1996                               1996 vs 1995
                                     ------------------------------------------------------------------------------------
                                                                    (Dollars in Thousands)

                                     Increase                                     Increase
                                     (Decrease)                    Total          (Decrease)                     Total
                                      Due to        Due to        Increase         Due to        Due to         Increase
                                      Volume         Rate         (Decrease)       Volume         Rate         (Decrease)
                                     -------        -------        -------        -------        -------        -------
<S>                                  <C>            <C>            <C>            <C>            <C>            <C>
Interest-earning assets:
  Loans receivable (1)               $ 2,878        $    90        $ 2,968        $ 5,366        $ 1,534        $ 6,900
  Mortgage-backed securities          (2,189)           (61)        (2,250)          (553)           374           (179)
  Other investment securities (2)       (383)           208           (175)        (1,188)          (252)        (1,440)
  FHLB stock                              12             (8)             4             76            (18)            58
                                     -------        -------        -------        -------        -------        -------

Total interest-earning assets        $   318        $   229        $   547        $ 3,701        $ 1,638        $ 5,339
                                     -------        -------        -------        -------        -------        -------
                                     -------        -------        -------        -------        -------        -------

Interest-bearing liabilities:
Deposits:
  Now and money markets              $   159        $   (11)       $   148        $   125        $   (58)       $    67
  Savings accounts                       (60)           (13)           (73)            22            (83)           (61)
  Certificates of deposit                (88)          (313)          (401)           490            538          1,028
                                     -------        -------        -------        -------        -------        -------
   Total Deposits                         11           (337)          (326)           637            397          1,034
                                     -------        -------        -------        -------        -------        -------
FHLB Advances and other borrowings      (600)            (3)          (603)           660             59            719
                                     -------        -------        -------        -------        -------        -------

Total Interest-bearing liabilities   $  (589)       $  (329)       $  (929)       $ 1,297        $   456        $ 1,753
                                     -------        -------        -------        -------        -------        -------
                                     -------        -------        -------        -------        -------        -------


Net interest income increase

                                                                   $ 1,476                                      $ 3,586
                                                                   -------                                      -------
                                                                   -------                                      -------

</TABLE>

--------------------------------------------------------------------------------
(1)  Includes interest on loans past due 90 days or more
(2)  Includes primarily U. S. Government Securities


                                          52
<PAGE>

The following table presents the yields received on loans, investments, and
other interest-earning assets, the rates paid on savings deposits and borrowings
and the resultant rate spreads at the dates indicated.

                                                At June 30,
                                          --------------------------
                                          1997      1996     1995
                                          --------------------------

Weighted average yield on:
Loans receivable                           8.85%     8.53%   8.47%
Mortgage-backed securities                 6.32      6.32    6.61
Other investment securities (1)            5.82      5.40    5.55
FHLB stock                                 6.75      7.00    7.96

Combined weighted average yield on
 Interest-earning assets                   8.45      8.04    7.81


Weighted average rate paid on:
Deposits                                   4.99      4.92    5.33
FHLB advances                              5.69      5.53    6.03

Combined weighted average rate paid on
 interest-bearing liabilities              5.09      5.03    5.45

Spread                                     3.36%     3.01%   2.36%


(1) Includes primarily U.S. government and agency securities



ASSET QUALITY

In accordance with the Bank's internal classification of assets policy,
management evaluates the loan portfolio on a monthly basis to identify loss
potential and determine the adequacy of the allowance for loan losses.  The
following table sets forth the amounts and categories of the Bank's
nonperforming assets for the periods indicated.


<TABLE>
<CAPTION>
 
                                                                              At June 30,
                                                              --------------------------------------
                                                                 1997           1996        1995
                                                              --------------------------------------
                                                                          (Dollars in Thousands)

<S>                                                          <C>            <C>            <C>
Total Nonaccruing loans                                      $  1,252       $  2,063       $  2,711
Total accruing loans delinquent more than 90 days (1)         - - - -        - - - -            152
Total foreclosed assets                                           593            228            203
                                                             --------       --------       --------
Total nonperforming assets                                   $  1,845       $  2,291       $  3,066
                                                             --------       --------       --------
                                                             --------       --------       --------

Ratio of nonperforming assets to total assets                   0.33%          0.41%          0.57%
                                                             --------       --------       --------
                                                             --------       --------       --------

Ratio of nonperforming loans to total loans (2)                 0.28%          0.49%          0.79%
                                                             --------       --------       --------
                                                             --------       --------       --------

</TABLE>
 
--------------------------------------------------------------------------------


                                          53
<PAGE>

(1) During fiscal year 1996, the Company changed its policy to provide that when
a loan becomes 90 days delinquent the loan will be placed on a nonaccrual
status.

(2) Nonperforming loans includes nonaccruing loans and loans delinquent more
than 90 days.

As of June 30, 1996, when a loan becomes 90 days delinquent, the Bank places the
loan on a non-accrual status and, as a result, accrued interest income on the
loan is taken out of income.  Future interest income is recognized on a cash
basis.  The loan will remain on a nonaccrual status until the borrower has
brought the loan current.

Nonperforming assets decreased to $1.8 million at June 30, 1997 from $2.3
million at June 30, 1996, a decrease of  $446,000.  In addition, the ratio of
nonperforming assets to total assets, which is one indicator of credit risk
exposure, decreased to 0.33% at June 30, 1997 from 0.41% at June 30, 1996.

Nonaccruing loans decreased to $1.3 million at June 30, 1997 from $2.1 million
at June 30, 1996, a decrease of $811,000. Included in nonaccruing loans at June
30, 1997 were 15 loans totaling $618,000 secured by one- to four-family real
estate, one loan in the amount of $154,000 secured by commercial real estate,
five mobile home loans totaling $52,000, and thirty-eight consumer loans
totaling $428,000.  For the year ended June 30, 1997, gross interest income of
$266,000 would have been recognized on loans accounted for on a nonaccrual basis
had such loans been current in accordance with their original terms.  Gross
interest income of $178,000 was recognized as income on loans accounted for on a
nonaccrual basis.

Foreclosed assets increased to $593,000 at June 30, 1997 from $228,000 at June
30, 1996, an increase of $365,000.

At June 30, 1997, the Bank had approximately $8.1 million of other loans of
concern that management has determined need to be closely monitored because of
possible credit problems of the borrowers or the cash flows of the secured
properties.  These loans were considered in determining the adequacy of the
allowance for loan losses.  The allowance for loan losses is established based
on management's evaluation of the risks inherent in the loan portfolio and
changes in the nature and volume of loan activity.  Such evaluation, which
includes a review of all 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 that warrant recognition in providing for an adequate loan loss
allowance.  Although the Bank's management believes that the June 30, 1997
recorded allowance for loan losses was adequate to provide for potential losses
on the related loans, there can be no assurance that the allowance existing at
June 30, 1997 will be adequate in the future.


                                          54
<PAGE>

The following table sets forth information with respect to activity in the
Bank's allowance for loan losses during the periods indicated.

<TABLE>
<CAPTION>
 
                                                                                 Year Ended June 30,
                                                                       ---------------------------------------
                                                                           1997          1996           1995
                                                                       ---------------------------------------
                                                                               (Dollars In Thousands)
<S>                                                                    <C>            <C>            <C>
Balance at beginning of period                                         $  4,129       $  4,039       $  4,899
Total Charge-offs                                                        (1,121)          (850)          (963)
Total Recoveries                                                            825            350            618
                                                                       ---------      ---------      ---------
Net (Charge-offs)                                                          (296)          (500)          (345)
Additions (recoveries) charged to operations                                693            590           (515)
                                                                       ---------      ---------      ---------

Balance at end of period                                               $  4,526       $  4,129       $  4,039
                                                                       ---------      ---------      ---------
                                                                       ---------      ---------      ---------

Ratio of net (charge-offs) during the period to average loans
 outstanding during the period                                            (0.07)%        (0.12)%        (0.10)%
                                                                       ---------      ---------      ---------
                                                                       ---------      ---------      ---------

Ratio of allowance for loan losses to total loans at end of period         1.02%          0.98%          1.11%
                                                                       ---------      ---------      ---------
                                                                       ---------      ---------      ---------

Ratio of allowance for loan losses to nonperforming loans at end of
 period                                                                  361.50%        200.15%        141.08%
                                                                       ---------      ---------      ---------
                                                                       ---------      ---------      ---------

</TABLE>
 

The allowance for loan losses was $4.5 million at June 30, 1997 as compared to
$4.1 million at June 30, 1996.  The ratio of the allowance for loan losses to
total loans was 1.02% at June 30, 1997 and 0.98% at June 30, 1996.  The Bank's
management has considered nonperforming assets and other assets of concern in
establishing the allowance for loan losses.  The Bank will continue to monitor
its allowance for loan losses and make future additions or reductions in light
of the level of loans in its portfolio and as economic conditions dictate.

The allowance for loan losses is maintained at a level which is considered by
management to be adequate to absorb loan losses on existing loans that may
become uncollectible, based on an evaluation of the collectability of loans and
prior loan loss experience.  The evaluation takes into consideration such
factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrower's ability to pay.  The allowance for
loan losses is established through a provision for loan losses charged to
expense.  During fiscal 1995, the Company had recoveries of prior provisions of
$515,000 which are not expected to occur in the future.


                                          55
<PAGE>

COMPARISON OF THE YEARS ENDED JUNE 30, 1997 AND JUNE 30, 1996

GENERAL.  The Company's net income decreased $1.0 million from $4.7 million for
the year ended June 30, 1996 to $3.7 million for the year ended June 30, 1997.
As discussed in more detail below, this decrease was due primarily to the
increase in noninterest expense of $4.6 million (including the $2.6 million SAIF
assessment discussed below under the heading "Noninterest Expense" section) and
an increase in the provision for loan losses of $103,000 which were partially
offset by an increase in net interest income of $1.4 million, an increase in
noninterest income of $824,000 and a decrease in income tax expense of $1.3
million.

INTEREST INCOME.  Interest income increased $547,000 from $43.5 million for the
year ended June 30, 1996 to $44.0 million for the year ended June 30, 1997.
This increase was primarily due to an increase in interest earned on loans.  The
average yield on loans increased from 8.81%  to 8.83% while the average balance
of loans increased $32.6 million during this period due to originations and
purchases exceeding amortizations, prepayments and sales during the year ended
June 30, 1997.  The increase in interest earned on loans was partially offset by
a decrease in interest earned on mortgage-backed securities and investment
securities primarily due to a decrease in the average balances of $33.7 million
and $6.9 million, respectively from the prior fiscal year.

INTEREST EXPENSE.  Interest expense decreased $929,000 from $25.8 million for
the year ended June 30, 1996 to $24.8 million for the year ended June 30, 1997.
This decrease was largely attributable to a decrease in average rates paid on
deposits and a decrease in the average balance of FHLB Advances.  The average
rates on deposits decreased from 5.15% for the year ended June 30, 1996 to 5.00%
for the year ended June 30, 1997.  The average balance of FHLB Advances
decreased $10.5 million for the year ended June 30, 1997 as compared to the
prior fiscal year.  These decreases were partially offset by an increase in the
average balance of deposits of $5.4 million for the year ended June 30, 1997 as
compared to the same period in the prior fiscal year.

NET INTEREST MARGIN. The Company's net interest margin for the year ended June
30, 1997 as compared to June 30, 1996 increased 33 basis points to 3.64%.  As
discussed above, the yields on interest-earning assets increased and the rates
paid on interest-bearing liabilities decreased, resulting in an increase in net
interest margin.  Because the Company's interest-bearing liabilities reprice
faster than its interest-earning assets, when interest rates decrease, the
Company generally experiences an increase in its net interest margin.  The
opposite is generally true during a period of increasing interest rates.

PROVISION FOR LOSSES ON LOANS. The allowance for loan losses is maintained at a
level which is considered by management to be adequate to absorb loan losses on
existing loans that may become uncollectible, based on an evaluation of the
collectability of loans and prior loan loss experience.  The evaluation takes
into consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay.  The
allowance for possible loan losses is established through a provision for loan
losses charged to expense.

During the year ended June 30, 1997, the Company recorded a provision for losses
on loans of $693,000 as compared to $590,000 for the year ended June 30, 1996.
The provision for loan losses of $693,000  for the year ended June 30, 1997
compared to the same period in fiscal  1996 is primarily related to management's
continued evaluation of the loan portfolio in light of general economic
conditions.  See "Asset Quality" for further discussion.

The allowance for loan losses at June 30, 1997 was $4.5 million.  The allowance
increased $397,000 from the June 30, 1996 balance primarily as a result of the
provision for loan losses of $693,000 exceeding net charge-offs of $296,000. The
ratio of allowance for loan losses to nonperforming loans at June 30, 1997 was
361.50% compared to 200.15% at June 30, 1996.  The allowance for loan losses
loans to total loans at June 30, 1997 was 1.02% compared to 0.98% at June 30,
1996.  The Bank's management believes that the June 30, 1997 recorded allowance
for loan losses was adequate to provide for potential losses on the related
loans, based on its evaluation of the collectability of loans and prior loss
experience.

NONINTEREST INCOME.  Noninterest income was $6.5 million for the year ended June
30, 1997 as compared to $5.6 million for the year ended June 30, 1996, an
increase of $824,000.

Loan servicing income increased $461,000 for the year ended June 30, 1997 as
compared to the same period in fiscal 1996.  This increase was primarily due to
the adoption of SFAS No. 122, "Accounting for Mortgage Servicing Rights" as of
July 1, 1996.  The Company recorded $200,000 of income as a result of adopting
SFAS No. 122.  In addition, the Company was able


                                          56
<PAGE>

to reduce the amortization of loan servicing rights as a result of an increase
in market rates during the first three quarters of fiscal 1997.

Loan fees and service charges increased by $155,000 for the year ended June 30,
1997 as compared to the same period in the prior fiscal year.  This increase was
primarily due to an increase in late charge income of $175,000 as compared to
the same period in the prior fiscal year.  The majority of the increase was from
late charges on credit card loans of $143,000.

Gain on the sale of loans decreased $483,000 to $352,000 for the year ended June
30, 1997 from $835,000 for the year ended June 30, 1996. Loans originated for
resale and sales of participation interest in loans that were sold during the
year ended June 30, 1997 were $53.3 million as compared to $55.1 million in the
year ended June 30, 1996.

Fees on deposits increased $445,000 for the year ended June 30, 1997 as compared
to the same period in the prior fiscal  year.  This increase was due to an
increase in the number of transaction accounts that customers have with the
bank.  See "Financial Condition Data" for further discussion.

Gain on sale of securities, net decreased $350,000 for the year ended June 30,
1997 as compared to the same period in fiscal 1996. This decrease is due to the
Company selling $12.2 million of securities available for sale and
mortgage-backed securities available for sale during fiscal 1997 as compared to
$33.6 million during the same period in the prior fiscal year  which resulted in
fewer gains on sales of securities.

The increase in credit card income of  $613,000 for the year ended June 30, 1997
as compared to the same period in fiscal 1996 is primarily due to an increase in
fees received on unsecured credit cards of $613,000.  This represents processing
fees, interchange fees, annual fees and other miscellaneous fees. This unsecured
credit card program is new in fiscal 1997.

NONINTEREST EXPENSE.  Noninterest expense increased $4.6 million from $15.1
million for the year ended June 30, 1996 to $19.7 million for the year ended
June 30, 1997.  This increase resulted primarily from an increase in
compensation and employee benefits of $834,000, an increase in federal insurance
premiums of $2.3 million, an increase in occupancy and equipment of $203,000 and
an increase in other general and administrative expense of $840,000.

The increase in compensation and employee benefits was due primarily to an
increase in compensation paid to employees during the year ended June 30, 1997
as compared to the same period in the prior fiscal year of $738,000.  The
increase was primarily due to the number of employees for the Company increasing
to 274 at June 30, 1997 from 246 at June 30, 1996.

The increase in the federal insurance premiums of $2.3 million is the result of
the passage by Congress and the President of the United States of the Savings
Association Insurance Fund "SAIF" legislation which assessed a one time charge
of $2.6 million to the Bank in order to recapitalize the SAIF. See "Liquidity
and Capital Resources " for further discussion.

The increase in occupancy and equipment costs is due primarily to depreciation
of the computer hardware and software system that was placed in operation in
May, 1996.

The increase of $840,000 in other general and administrative expenses was due
primarily to an increase in the cost of third party processors of credit cards
of $465,000. This represents costs for processing of applications, collecting
loans, and marketing costs for the acquisition of credit cards for the unsecured
credit card program which was new in fiscal 1997. In addition, there was an
increase in amortization of intangible assets of $121,000.  This increase was
primarily the result of the write off of the intangible asset relating to the
purchase of HomeFirst Mortgage Corp.  This write off occurred in the fourth
quarter of fiscal 1997.  The write off was based upon the Company's intention to
cease the operation of HomeFirst Mortgage Corp in the first quarter of fiscal
1998.

The increase in net losses, provision for losses and expenses on foreclosed real
estate and other properties is primarily due to the Bank recording a gain of
approximately $355,000 on the disposal of one property during the fourth quarter
of fiscal 1996.  The Bank did not have such a gain during fiscal 1997.

INCOME TAX EXPENSE.  The Company's income tax expense for the year ended June
30, 1997 was  $1.6 million compared to $2.9 million for the year ended June 30,
1996, a decrease of $1.3 million. This decrease was proportionate to the
decrease in the Company's income before income tax and due to the decrease in
the effective tax rate to 30% for the year ended June 30, 1997 as compared to
38% for the same period in the prior fiscal year.  In fiscal 1997, the Company
realized tax deductions


                                          57
<PAGE>

related to stock compensation for which it was not required to record an expense
in its financial statements.  These deductions will not recur and the effective
tax rate will increase in fiscal 1998.


COMPARISON OF THE YEARS ENDED JUNE 30, 1996 AND JUNE 30, 1995

GENERAL.  The Company's net income increased $1.5 million from $3.2 million for
the year ended June 30, 1995 to $4.7 million for the year ended June 30, 1996.
As discussed in more detail below, this increase was primarily due to the
increase in net interest income of $3.6 million and an increase in noninterest
income of $1.5 million which were partially offset by an increase in noninterest
expense of $1.3 million, an increase in the provision for loan losses of $1.1
million and an increase in income tax expense of $1.1 million.

INTEREST INCOME.  Interest income increased $5.3 million from $38.1 million for
the year ended June 30, 1995 to $43.5 million for the year ended June 30, 1996.
This increase was primarily due to the increase in interest earned on loans.
The average yield on loans increased from 8.36% to 8.81%, while the average
balance of loans increased $60.9 million during this period due to loan
originations exceeding loan amortizations and prepayments by customers during
the year ended June 30, 1996. The increase in the average yield earned on loans
was due to current market rates being at a higher rate on loan originations as
compared to the rates on loans having amortizations and prepayments of principal
during the period.  The increase in interest earned on loans was partially
offset by a decrease in interest earned on investment securities primarily due
to a decrease in the average balance of investment securities of $23.2 million.
During this period the average yield on investment securities decreased from
5.47% to 5.12% due to current market rates being at a lower rate on new
purchases as compared to the rates of matured investment securities.

INTEREST EXPENSE.  Interest expense increased $1.8 million from $24.0 million
for the year ended June 30, 1995 to $25.8  million for the year ended June 30,
1996.  This increase was largely attributable to the increase in the average
balance of deposits and FHLB Advances of $13.9 million and $11.5 million
respectively for the year ended June 30, 1996 as compared to the prior fiscal
year.  In addition, the weighted average rate paid on deposits increased from
5.07% for the year ended June 30, 1995 to 5.15% for the year ended June 30, 1996
and the weighted average rate paid on FHLB Advances increased from 5.65% for the
year ended June 30, 1995 to 5.73% for the year ended June 30, 1996.

NET INTEREST MARGIN. The Company's net interest margin for the year ended June
30, 1996 as compared to June 30, 1995 increased 51 basis points to 3.31%.  As
discussed above, the yields on interest earning assets increased and the rates
paid on interest-bearing liabilities decreased, resulting in an increase in net
interest margin.  During the third quarter of fiscal 1996, market rates of
interest decreased.  Because the Company's interest-bearing liabilities reprice
faster than its interest-earning assets, when interest rates decrease, the
Company generally experiences an increase in its net interest margin.  The
opposite is generally true during a period of increasing interest rates.

PROVISION FOR LOSSES ON LOANS.  During the year ended June 30, 1996, the Company
recorded a provision for losses on loans of $590,000 as compared to a recovery
of $515,000 for year ended June 30, 1995.  The provision for loan losses of
$590,000  for the year ended June 30, 1996 is primarily related to management's
continued evaluation of the loan portfolio in light of general economic
conditions.

NONINTEREST INCOME.  Noninterest income was $5.6 million for the year ended June
30, 1996 as compared to $4.1 million for the year ended June 30, 1995 an
increase of $1.5 million.

Gain on the sale of loans increased $516,000 to $835,000 for the year ended June
30, 1996 from $319,000 for the year ended June 30, 1995.  Loans originated for
resale and sales of participation interest in loans that were sold during the
year ended June 30, 1996 were $55.0 million as compared to $31.9 million in the
year ended June 30, 1995.

Gain on sale of securities, net increased $336,000 for the year ended June 30,
1996 as compared to the same period in fiscal 1995.  This increase was due
primarily to the sale of $12.5 million of securities and $20.6 million of
mortgage-backed securities during the year ended June 30, 1996 as compared to
sales of $10.1 million during the year ended June 30, 1995.  See "Financial
Condition Data" for further discussion.

Loan fees and service charges increased by $205,000 for the year ended June 30,
1996 as compared to the same period in the prior fiscal year.  This increase was
primarily due to an increase in the initial service charge collected of $114,000
on the


                                          58
<PAGE>

origination of mortgage loans which are not subject to amortization.  In
addition, there was an increase in late charge income of $66,000 which was
primarily due to the increase in the loan portfolio for fiscal 1996 as compared
to fiscal 1995.

Appraisal and inspection fee income increased $210,000 for the year ended June
30, 1996 as compared to the same period in the prior fiscal year.  This increase
was due primarily to an increase in appraisal activity of Mid-America Service
Corporation.

Fees on deposits increased $245,000 for the year ended June 30, 1996 as compared
to the same period in fiscal 1995.  This increase was due to an increase in the
fees on transaction accounts that was implemented in July 1995.

NONINTEREST EXPENSE.  Noninterest expense increased $1.3 million from $13.9
million for the year ended June 30, 1995 to $15.2 million for the year ended
June 30, 1996.  This increase resulted primarily from an increase in
compensation and employee benefits of $1.8 million, and an increase in occupancy
and equipment of $148,000 which were partially offset by a decrease in the
reduction in cost of intangible assets of $465,000 and a decrease in losses,
provision for losses and expenses on foreclosed real estate and other properties
of $148,000.

The increase in compensation and employee benefits was due primarily to an
increase of $1.5 million in compensation paid to employees during the year ended
June 30, 1996 as compared to the same period in the prior fiscal year an
increase in health insurance premiums of $239,000 and an increase in payroll
taxes of $84,000. The increase in compensation was primarily due to the number
of employees for the Company increasing to 246 at June 30, 1996 from 228 at June
30, 1995 which resulted in an increase of $900,000 in compensation paid as
compared to the prior fiscal year and  the Company paid incentive compensation
to employees in the amount of $483,000 in fiscal 1996 as compared to no
incentive compensation in the prior fiscal year.  In addition, an increase in
overtime of $133,000 was due primarily to the Company installing a new data
processing hardware and software system in the third and fourth quarters of
fiscal 1996.

The increase of $148,000 in occupancy and equipment cost was due primarily to an
increase in maintenance agreements of $133,000, building insurance of $95,000
and computer expense of $173,000 which were partially offset by a decrease in
depreciation on the mainframe computer system of $329,000 which was replaced in
May 1996.

The decrease in net losses, provision for losses and expenses on foreclosed real
estate and other properties is primarily due to the Bank recording a gain of
approximately $355,000 on the disposal of one property during the fourth quarter
of fiscal 1996.

INCOME TAX EXPENSE.  The Company's  income tax expense for the year ended June
30, 1996 was $2.9 million compared to $1.8 million for the  year ended June 30,
1995, an increase of $1.1 million.   This increase was proportionate to an
increase in the Company's income before income tax.


LIQUIDITY AND CAPITAL RESOURCES

The Bank's primary sources of funds are deposits, amortization and prepayments
of loan principal (including mortgage- backed securities) and, to a lesser
extent, sales of mortgage loans, sales and/or maturities of securities,
mortgage-backed securities, and short-term investments.  While scheduled loan
payments and maturing securities are relatively predictable, deposit flows and
loan prepayments are more influenced by interest rates, general economic
conditions, and competition. The Bank attempts to price its deposits to meet its
asset/liability objectives consistent with local market conditions.  Excess
balances are invested in overnight funds.

Mortgage Corp.'s primary source of funds was a line of credit of $843,750 from
the Bank and a line of credit from the Company of $300,000.  Mortgage Corp.
originates loans and sells them either to the Bank or to secondary market
investors.  The line of credit is drawn upon to fund the loans that Mortgage
Corp. makes to its customers.  The line of credit is reduced when Mortgage Corp.
receives funds from the investors who have purchased the loan.  Mortgage Corp.
originated approximately $10.6 million of loans during the year ended June 30,
1997.

Federal regulations have historically required the Bank to maintain minimum
levels of liquid assets.  The required percentage has varied from time to time
based upon economic conditions and savings flows and is currently 5% of net
withdrawable savings deposits and current borrowings.  Liquid assets for
purposes of this ratio include cash, certain time deposits, U. S.  Government
and corporate securities and other obligations generally having remaining
maturities of less than five years.  The


                                          59
<PAGE>

Bank has historically maintained its liquidity ratio at a level in excess of
that required by these regulations.  At June 30, 1997, the Bank's regulatory
liquidity ratio was 11.54%.

Liquidity management is both a daily and long-term responsibility of management.
The Bank adjusts its investments in liquid assets based upon management's
assessment of (i) expected loan demand, (ii) projected loan sales, (iii)
expected deposit flows, (iv) yields available on interest-bearing deposits, and
(v) the objectives of its asset/liability management program. Excess liquidity
is invested generally in interest-bearing overnight deposits and other
short-term government and agency obligations.  During fiscal 1997, the Bank
acquired funds internally that allowed it to reduce its borrowings with the FHLB
by $15.4 million.  See "Financial Condition Data" for further discussion.  The
Bank renewed its open line of credit with the FHLB in January 1997 at an amount
of $20.0 million which will expire in January 1998. Management expects this line
of credit to be renewed at that time. There were no outstanding advances on
this line of credit at June 30, 1997.

The Bank and Mortgage Corp. anticipate that they will have sufficient funds
available to meet current loan commitments.  At June 30, 1997, the Bank and
Mortgage Corp. had outstanding commitments to originate or purchase loans of
$27.3 million and to sell loans of $17.4 million.  There was no commitment to
purchase or sell mortgage-backed securities, securities available for sale or
securities to be held to maturity.

Although deposits are the Bank's primary source of funds, the Bank's policy has
been to utilize borrowings where the funds can be invested in either loans or
securities at a positive rate of return or to use the funds for short term
liquidity purposes.  See "Financial Condition Data" for further analysis.

In April of 1996, the Company initiated a stock buy back program in which up to
10% of the common stock of the Company may be acquired beginning May 1, 1996
through April 30, 1997, 138,315 shares of common stock were purchased pursuant
to this program.  In April of 1997, the Company initiated another stock buy back
program in which up to 10% of the common stock of the Company may be acquired
beginning May 1, 1997 through April 30, 1998.  In accordance with the provisions
of the current stock buy back program, the Company had purchased 10,000 shares
of common stock as of June 30, 1997.

On December 20, 1995, the Company declared a two-for-one stock split in the form
of a stock dividend of one share of common stock for each one share outstanding,
payable to shareholders of record on January 10, 1996.  Earnings and dividends
per share have been retroactively adjusted based upon the new shares outstanding
after the effect of the two-for-one stock split for all periods presented.  The
stockholders' equity of the Company was adjusted for the effect of the
two-for-one stock split and $16 was transferred from additional paid-in capital
to common stock.

Savings institutions insured by the Federal Deposit Insurance Corporation are
required by the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") to meet three regulatory capital requirements.  If a requirement
is not met, regulatory authorities may take legal or administrative actions,
including restrictions on growth or operations or, in extreme cases, seizure.
Institutions not in compliance may apply for an exemption from the requirements
and submit a recapitalization plan.  Under these capital requirements, at June
30, 1997 the Bank met all current capital requirements.

The Office of Thrift Supervision ("OTS") has adopted a core capital requirement
for savings institutions comparable to the requirement for national banks.  The
OTS core capital requirement is 3% of total adjusted assets for thrifts that
receive the highest supervisory rating for safety and soundness.  The Bank had
core capital of 7.57% at June 30, 1997.

Pursuant to FDICIA, the federal banking agencies, including the OTS, have also
proposed regulations authorizing the agencies to require a depository
institution to maintain additional total capital to account for concentration of
credit risk and the risk of non-traditional activities.  No assurance can be
given as to the final form of any such regulation.

During the first quarter of fiscal 1997, the Small Business Job Protection Act
of 1996 was signed into law which repealed the percentage of taxable income
method of computing the bad debt deduction for savings institutions for tax
years beginning after December 31, 1995.  Beginning in fiscal year 1997, the
Bank is required to recapture into income the excess of its June 30, 1996 loan
loss reserves for "qualifying" and "nonqualifying" loans over its June 30, 1988
loan  loss reserves for "qualifying" and "nonqualifying" loans.  This excess
which was $720,000 at June 30, 1997, is required to be recaptured ratably over a
six year period.  The onset of recapture can be delayed for one or two years if
the Bank meets a residential loan originations requirements.  At June 30, 1997,
the Bank's recorded deferred tax liability of $245,000 provides for the
recapture of the loan loss reserves.


                                          60
<PAGE>

At June 30, 1997 and 1996, securities with a fair value of $35.5 million and
$36.6 million, respectively, were pledged as collateral for public deposits and
other purposes.  Additionally, in July 1997, the Bank received deposits of
approximately $36.0 million from a local governmental entity which requires a
pledge of collateral of 110% of the deposits.  The Bank subsequently pledged
debt and mortgage-backed securities to meet this requirement.


IMPACT OF INFLATION AND CHANGING PRICES

The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation.  The impact of inflation is reflected
in the increased cost of the Bank's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Bank are monetary in
nature.  As a result, interest rates have a greater impact on the Bank's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.


EFFECT OF NEW ACCOUNTING STANDARDS

The Financial Accounting Standards Board ("FASB") issued Statement No. 128,
"Earnings Per Share".  This Statement establishes standards for computing and
presenting earnings per share ("EPS").  It replaces the presentation of primary
EPS with a presentation of basic EPS.  It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.  This Statement is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted.  This Statement requires restatement of
all prior-period EPS data presented.

The FASB issued SFAS No. 130, "Reporting Comprehensive Income".  This Statement
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses)  in a full set of
general-purpose financial statements.  This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.  This Statement requires that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.  This
Statement is effective for fiscal years beginning after December 15, 1997.

The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information".  This Statement establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders.  It also establishes standards for related disclosures about
products and services, geographic areas, and major customers.  This Statement
supersedes FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise", but retains the requirement to report information about
major customers.  It amends SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries", to remove the special disclosure requirements for previous
unconsolidated subsidiaries.  This Statement does not apply to nonpublic
business enterprises or to not-for-profit organizations.  This Statement is
effective for financial statements for periods beginning after December 15,
1997.

In the first quarter of fiscal 1997, the Company adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights".  This Statement requires that a
mortgage banking enterprise that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and then sells or
securitizes those loans with servicing rights retained should allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans based
on their relative fair values if it is practicable to estimate those fair
values.

In the third quarter of fiscal year 1997, the Company adopted SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities".  This Statement establishes basic principles that state that an
entity should recognize only assets it controls and liabilities it has incurred.
Assets should be "derecognized" only when control has been surrendered,
liabilities should be "derecognized" only when they have been extinguished, and
recognition of financial


                                          61
<PAGE>

assets and liabilities should not be affected by the sequence of transactions
unless the effect of the transactions is to maintain effective control over a
transferred financial asset.  Statement No. 125 also continues the recognition
of mortgage servicing rights on sold loans and supersedes Statement No. 122 for
transactions after January 1, 1997.

In accordance with the provisions of Statement Nos. 122 and 125, mortgage
servicing rights in the amount of $200,000 were capitalized during the year
ended June 30, 1997.  The fair value of capitalized mortgage servicing rights
was  $174,000 at June 30, 1997.  The fair value of the mortgage servicing rights
was estimated as the present value of the expected future cash flows using a
discount rate of 15.0% at June 30, 1997.  The Company recognized expense for
amortization of the cost of mortgage servicing rights in the amount of $19,000
for the year ended June 30, 1997.  The effect of adopting Statement Nos. 122 and
125 increased net income by $181,000 for the year ended June 30, 1997.


YEAR 2000

The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches.  The "Year 2000" problem
will affect virtually every computer operation in some way by the rollover of
the two digit value to 00.  The issue is whether computer systems will properly
recognize date-sensitive information when the year changes to 2000.  Systems
that do not properly recognize such information could generate erroneous data or
cause a system to fail.

The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures.  The Company is establishing the
process for evaluating and managing the risks associated with this problem.  The
financial impact to the Company and its financial position or results of
operations can be not be estimated as of June 30, 1997.


ASSET/LIABILITY MANAGEMENT

Home Federal, like other thrift institutions, is subject to interest rate risk
to the extent that its interest-bearing liabilities with short- and medium-term
maturities mature or reprice more rapidly than its interest-earning assets.  As
a continuing part of its financial strategy, the Bank considers methods of
managing this asset/liability mismatch consistent with maintaining acceptable
levels of net interest income.

In order to properly monitor interest rate risk, the Board of Directors has
created an Asset/Liability Committee composed principally of its President,
Executive Vice President, Senior Vice Presidents, Vice President/Marketing and
Vice President/Controller.  The principal responsibilities of this Committee are
to assess Home Federal's asset/liability mix and recommend strategies to the
Board that will enhance income while managing the Bank's vulnerability to
changes in interest rates.

In managing the asset/liability mix, Home Federal has placed its emphasis on
developing a portfolio in which, to the extent practicable, assets and
liabilities reprice within similar periods. The effect of this policy will
generally be to reduce the Bank's one-year gap.  The goal of this policy is to
provide a relatively consistent level of net interest income in varying interest
rate cycles and to minimize the potential for significant fluctuations from
period to period.

At June 30, 1997, the Bank's cumulative one-year gap as a percentage of total
assets was a negative 5.87% and its one- to three-year gap as a percentage of
total assets was a positive 1.97%.

The following table sets forth the scheduled repricing or maturity of the Bank's
assets and liabilities which mature or reprice within one year based on various
assumptions on rates of repricing/prepayment that have been determined by the
OTS and published in "Selected Asset and Liability Price Tables as of June 30,
1997".  In preparing the following table, it has been assumed, consistent with
the assumptions used by the OTS in assessing the interest rate sensitivity of
savings institutions, that:  (i) adjustable-rate first mortgage loans will
prepay at a rate of 10% per year; (ii) fixed-maturity deposits will not be
withdrawn prior to maturity; and (iii) escrow accounts are assumed to reprice or
be withdrawn in the first three month period.  Savings accounts and transaction
accounts are expected to reprice 100% within the first year.

Using these classifications, fixed-rate mortgage loans and mortgage-backed
securities are assumed to prepay annually as follows:


                                          62
<PAGE>

              Weighted Average         Prepayment
              Interest Rate            Assumption
               ----------------         ----------

              Less than 7.00%            8.00%
               7.00 to 7.99%             9.00
               8.00 to 8.99%            12.00
               9.00 to 9.99%            14.00
              10.00% and over           22.00


                                          63
<PAGE>

The effect of these assumptions is to quantify the dollar amount of items that
are interest-sensitive and can be repriced within each of the periods specified.
Such repricing can occur in one of three ways:  (i) the rate of interest to be
paid on an asset or liability may adjust periodically on the basis of an index;
(ii) an asset or liability such as a mortgage loan may amortize, permitting
reinvestment of cash flows at the then-prevailing interest rates; or (iii) an
asset or liability may mature, at which time the proceeds can be reinvested at
current market rates.  The following table does not necessarily indicate the
impact of general interest rate movements on the Bank's net interest yield
because the repricing of certain categories of assets and liabilities is subject
to competitive and other pressures beyond the Bank's control.  As a result,
certain assets and liabilities indicated as maturing or otherwise repricing
within a stated period, may, in fact, mature or reprice at different times and
at different volumes. The table does not include redeployment of funds from
contractual amortization and the possible impact of annual ceilings on
adjustable-rate loans and securities.


<TABLE>
<CAPTION>
 
                                                                                  Maturing or Repricing
                                                             ---------------------------------------------------------------------
                                                               Within         Over 1-3     Over 3-5         Over
                                                              One Year          Years        Years         5 Years        Total
                                                             ---------------------------------------------------------------------
                                                                                   (Dollars in Thousands)
<S>                                                         <C>            <C>            <C>            <C>           <C>
Interest -earning assets:


Real estate loans (including mortgage backed
     securities)                                            $ 214,151      $  14,112      $  24,154      $  39,782     $  242,199
Consumer loans                                                 54,872         84,507         10,442          2,921        152,742
Commercial business loans                                      23,838          7,916          2,411          1,630         35,795
Investment securities and other                                31,803         19,873         ------            385         52,061
                                                             ----------     ----------     ----------     ----------     ----------
Total interest-earning assets                                 324,664        126,108         37,007         44,718        532,797
                                                             ----------     ----------     ----------     ----------     ----------

Interest-bearing liabilities:

Transaction accounts                                        $  89,562       $   ----      $    ----      $    ----     $   89,562
Savings accounts                                               28,968           ----           ----           ----         28,968
Certificates of deposit                                       188,609         61,150         59,451           ----        309,210
Other borrowings                                                  453           ----            524           ----            977
FHLB advances                                                  50,000         21,000          1,000          2,219         74,219
                                                             ----------     ----------     ----------     ----------     ----------

Total interest-bearing liabilities                            357,592         82,150         60,975          2,219        502,936
                                                             ----------     ----------     ----------     ----------     ----------

Interest-earning assets less interest-bearing liabilities     (32,928)        43,958        (23,968)        42,499         46,747
                                                             ----------     ----------     ----------     ----------     ----------

Cumulative interest rate sensitivity gap                      (32,928)        11,030        (12,938)        29,561
                                                             ----------     ----------     ----------     ----------

Cumulative gap as a percent of  interest-earning
assets                                                         (6.18)%          2.07%         (2.43)%         5.55%
                                                             ----------     ----------     ----------     ----------
                                                             ----------     ----------     ----------     ----------

Cumulative gap as a percent of total assets                    (5.87)%          1.97%         (2.31)%         5.27%
                                                             ----------     ----------     ----------     ----------
                                                             ----------     ----------     ----------     ----------

</TABLE>

                                          64
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements of the Company as of June 30, 1997, and 1996
together with the Independent Auditor's Report are included in this
Form 10-K on the pages indicated below.


                             HF FINANCIAL CORP.
                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                  Contents
                                -----------

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

    INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . 66

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

    CONSOLIDATED FINANCIAL STATEMENTS

    Statements of financial condition  . . . . . . . .67-68

    Statements of income . . . . . . . . . . . . . . .69-70

    Statements of stockholders' equity . . . . . . . . . 71

    Statements of cash flows . . . . . . . . . . . . .72-74

    Notes to consolidated financial statements . . . 75-105


                                     65
<PAGE>

                          MCGLADREY & PULLEN, LLP


                        INDEPENDENT AUDITOR'S REPORT



To the Board of Directors and Stockholders
HF Financial Corp.
Sioux Falls, South Dakota

We have audited the accompanying consolidated statements of financial
condition of HF Financial Corp. and subsidiaries as of June 30, 1997
and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the
period ended June 30, 1997.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement.  An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of HF Financial Corp. and subsidiaries as of June 30, 1997 and 1996,
and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for debt and marketable
equity securities in 1995.


                                              McGladrey & Pullen, LLP


Sioux Falls, South Dakota
August 15, 1997


                                     66
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
 
ASSETS                                                                           1997         1996
----------------------------------------------------------------------------------------------------
<S>                                                                        <C>            <C>
Cash and cash equivalents                                                  $  17,957      $  11,145
Securities available for sale (Note 2)                                        46,940         41,168
Mortgage-backed securities available for sale (Note 2)                        30,340         59,495
Loans receivable (Notes 3 and 8)                                             440,019        413,143
Loans held for sale (Note 3)                                                   3,483          7,280
Accrued interest receivable (Note 5)                                           4,136          4,002
Foreclosed real estate and other properties                                      593            228
Office properties and equipment, at cost, net of
  accumulated depreciation (Note 6)                                           15,070         15,046
Prepaid expenses and other assets                                                870            510
Mortgage servicing rights (Note 4)                                             1,134            938
Deferred income taxes (Note 9)                                                 1,569          1,552
Intangible assets                                                                  3            152
                                                                            ------------------------




                                                                           $ 562,114      $ 554,659
                                                                            ------------------------
                                                                            ------------------------

</TABLE>
 
See Notes to Consolidated Financial Statements.

                                     67
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED)
JUNE 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>

LIABILITIES AND STOCKHOLDERS' EQUITY                                            1997          1996
----------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C>
Liabilities
  Deposits (Note 7)                                                       $  418,186     $  398,166
  Advances from Federal Home Loan Bank and other borrowings (Note 8)          74,743         90,123
  Advances by borrowers for taxes and insurance                                4,074          4,667
  Accrued interest payable                                                     6,560          5,853
  Other liabilities                                                            5,577          4,587
                                                                           -------------------------
    Total Liabilities                                                        509,140        503,396
                                                                           -------------------------
Commitments and Contingencies (Note 18)

Stockholders' Equity (Notes 10, 11, 12, 15 and 16)
  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, 5,000,000 shares
    authorized, 2,986,215 and 3,051,738
    shares outstanding at June 30, 1997 and 1996                                  31             31
  Additional paid-in capital                                                  14,695         14,480
  Retained earnings, substantially restricted                                 41,336         38,745
  Unearned compensation                                                         (453)          (569)
  Net unrealized loss on securities available for sale                          (222)          (622)
  Less cost of treasury stock, 1997 148,315 shares,
    1996 53,015 shares                                                        (2,413)          (802)
                                                                           -------------------------
                                                                              52,974         51,263
                                                                           -------------------------
                                                                          $  562,114     $  554,659
                                                                           -------------------------
                                                                           -------------------------

</TABLE>
                                      68
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
 
                                                                1997           1996           1995
----------------------------------------------------------------------------------------------------
<S>                                                         <C>            <C>            <C>
Interest and dividend income:
  Loans receivable                                          $  38,596      $  35,628      $  28,728
  Mortgage-backed securities                                    2,668          4,918          5,097
  Investment securities and interest-bearing deposits           2,748          2,919          4,301
                                                             ---------------------------------------
                                                               44,012         43,465         38,126
                                                             ---------------------------------------
Interest expense:
  Deposits                                                     20,389         20,715         19,681
  Advances from Federal Home Loan Bank and other borrowings     4,443          5,046          4,327
                                                             ---------------------------------------
                                                               24,832         25,761         24,008
                                                             ---------------------------------------
    Net interest income                                        19,180         17,704         14,118
Provision (recoveries) for losses on loans                        693            590           (515)
                                                             ---------------------------------------
    Net interest income after provision (recoveries) for
      losses on loans                                          18,487         17,114         14,633
                                                             ---------------------------------------
Noninterest income:
  Loan servicing income                                         1,150            689            754
  Loan fees and service charges                                   946            791            586
  Fees on deposits                                              1,633          1,188            943
  Commission and insurance income                                 699            780            769
  Appraisal and inspection fees                                   461            576            366
  Gain on sale of loans                                           352            835            319
  Gain on sale of securities, net                                 150            500            164
  Trust income                                                    112             70            ---
  Credit card fee income                                          613            ---            ---
  Other                                                           356            219            229
                                                             ---------------------------------------
                                                                6,472          5,648          4,130
                                                             ---------------------------------------
</TABLE>

 
See Notes to Consolidated Financial Statements.

                                          69
<PAGE>


HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

                                                                 1997           1996           1995
----------------------------------------------------------------------------------------------------
<S>                                                          <C>            <C>            <C>
Noninterest expense:
  Compensation and employee benefits                         $  9,658       $  8,824       $  7,069
  Occupancy and equipment                                       2,705          2,502          2,354
  Federal insurance premiums (Note 7)                           3,199            931            914
  Advertising                                                     398            531            596
  Credit card processing expense                                  465          - - -          - - -
  Other general and administrative expenses                     2,923          2,536          2,486
  (Gains) losses and provision for losses and expenses
    on foreclosed real estate and other properties, net           206           (205)           (57)
  Reduction in cost of intangible assets                          149             28            493
                                                              --------------------------------------
                                                               19,703         15,147         13,855
                                                              --------------------------------------
    Income before income taxes and cumulative effect
      of accounting change                                      5,256          7,615          4,908
Income tax expense (Note 9)                                     1,582          2,893          1,803
                                                              --------------------------------------
Income before cumulative effect of accounting change            3,674          4,722          3,105
Cumulative effect of accounting change (Note 1)                   ---            ---             93
                                                              --------------------------------------
    Net Income                                                $ 3,674        $ 4,722        $ 3,198
                                                              --------------------------------------
                                                              --------------------------------------
Earnings per share (Note 12):
Income before cumulative effect of accounting change          $  1.19        $  1.49        $  0.99
Cumulative effect of accounting change                            ---            ---           0.03
                                                              --------------------------------------
    Net Income Per Share                                      $  1.19        $  1.49        $  1.02
                                                              --------------------------------------
                                                              --------------------------------------


</TABLE>
                                           70
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
 <TABLE>
<CAPTION>

                                                                1997            1996          1995
----------------------------------------------------------------------------------------------------
<S>                                                          <C>            <C>            <C>
Common stock:
  Balance at beginning of year                               $     31       $     15       $     15
  Exercise of stock options (Note 16)                              --             --             --
  Stock split in the form of a stock dividend (Note 12)            --             16             --
                                                             --------------------------------------
  Balance at end of year                                     $     31       $     31       $     15
                                                             --------------------------------------
                                                             --------------------------------------
Additional paid-in capital:
  Balance at beginning of year                               $ 14,480       $ 14,209       $ 14,154
  Additional paid-in capital from exercise of stock options
    (Note 16)                                                     215            287             55
  Stock split in the form of a stock dividend (Note 12)      $     --       $   (16)       $     --
                                                             --------------------------------------
  Balance at end of year                                     $ 14,695       $ 14,480       $ 14,209
                                                             --------------------------------------
                                                             --------------------------------------
Retained earnings:
  Balance at beginning of year                               $ 38,745       $ 35,034       $ 32,750
  Net income                                                    3,674          4,722          3,198
  Cash dividends paid ($.36, $.33 and $.30 per share
    in 1997, 1996 and 1995, respectively) (Note 12)           (1,083)        (1,011)          (914)
                                                             --------------------------------------
  Balance at end of year                                     $ 41,336       $ 38,745       $ 35,034
                                                             --------------------------------------
                                                             --------------------------------------
Unearned compensation:
  Balance at beginning of year                               $  (569)       $  (719)       $  (897)
  Restricted stock awards                                         --             --            (14)
  Amortization of unearned compensation (Note 15)                 116           150            192
                                                             --------------------------------------
  Balance at end of year                                     $  (453)       $  (569)       $  (719)
                                                             --------------------------------------
                                                             --------------------------------------
Net unrealized loss on securities available for sale:
  Balance at beginning of year                               $  (622)       $  (185)       $    --
  Unrealized loss on date of adoption of Statement
    No. 115, net of related deferred taxes                         --            --           (233)
  Change in unrealized loss during the year, net of
    related deferred taxes                                        400          (437)            48
                                                             --------------------------------------
  Balance at end of year                                     $  (222)       $  (622)       $  (185)
                                                             --------------------------------------
                                                             --------------------------------------
Treasury stock:
  Balance at beginning of year                               $  (802)       $    --       $     --
  Purchase of treasury stock (Note 11)                        (1,611)          (802)            --
                                                             --------------------------------------
  Balance at end of year                                     $(2,413)       $  (802)            --
                                                             --------------------------------------
                                                             --------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.


                                          71
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>

                                                                1997            1996          1995
----------------------------------------------------------------------------------------------------
<S>                                                         <C>            <C>             <C>
Cash Flows From Operating Activities
  Net income                                                $   3,674      $   4,722       $  3,198
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Cumulative effect of accounting change                         --             --           (93)
    Provision (recoveries) for losses on loans                    693            590          (515)
    Depreciation                                                1,378            721          1,037
    Amortization of premiums and discounts, net:
       Securities available for sale                               68            218             80
       Mortgage-backed securities available for sale               41             10            152
    Reduction in cost of intangible assets                        149             28            493
    Reduction in mortgage servicing rights                        139            360            330
    Amortization of unearned compensation                         116            150            192
    FHLB stock dividends                                           --          (102)             --
    Increase in deferred loan fees                                282            570            451
    Loans originated for resale                              (45,553)       (47,675)       (20,677)
    Proceeds from the sale of loans                            45,905         48,510         20,996
    (Gain) on sale of loans                                     (352)          (835)          (319)
    Mortgage servicing rights capitalized (Note 4)              (200)            --             --
    (Gain) on sale of securities, net                           (150)          (500)          (164)
    (Gains) losses and provision for losses on sales of
       foreclosed real estate and other properties, net            53          (345)          (311)
    (Gain) loss on disposal of office properties and
       equipment, net                                              22            (1)            (1)
    Change in other assets and liabilities (Note 19)            1,659          1,886          2,755
                                                              --------------------------------------
         Net cash provided by operating activities              7,924          8,307          7,604
                                                              --------------------------------------

</TABLE>
See Notes to Consolidated Financial Statements.

                                          72
<PAGE>


HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>

                                                               1997           1996           1995
---------------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>            <C>
Cash Flows From Investing Activities
  Loans purchased                                         $   (13,813)    $  (23,886)    $  (15,120)
  Loans made to customers                                    (149,718)      (124,090)      (123,654)
  Principal collected on loans                                130,717         81,308         71,231
  Sale of participation interests in loans                      7,697          7,375         11,266
  Purchase of mortgage-backed securities available
    for sale                                                       --        (20,162)       (18,623)
  Proceeds from sale of mortgage-backed securities
    available for sale                                         12,184         20,978             --
  Repayments on mortgage-backed securities available
    for sale                                                   17,234         23,050          9,981
  Securities available for sale:
    Sales and maturities                                       15,056         32,257         20,620
    Purchases                                                 (20,446)       (11,355)        (5,961)
  Securities to be held to maturity:
    Maturities                                                     --             30          5,000
    Purchases                                                      --             --         (1,000)
  Proceeds from sale of office properties and equipment           709              2            23
  Purchase of office properties and equipment                  (2,133)        (2,827)        (2,097)
  Purchase of mortgage servicing rights                          (135)           (95)          (126)
  Purchase of intangible assets                                    --         
     --           (155)
   Proceeds from sale of foreclosed real estate and
     other properties, net                                         645          2,176          2,033
                                                            ----------------------------------------
        Net cash (used in) investing activities                (2,003)       (15,239)        (46,582)
                                                            ----------------------------------------
Cash Flows From Financing Activities
  Net increase (decrease) in demand deposit, NOW,
    savings accounts and certificates of deposit               20,020         (2,509)          6,973
  Proceeds of advances from Federal Home Loan Bank and
    other borrowings                                           34,000         90,582         222,100
  Payments on advances from Federal Home Loan Bank
    and other borrowings                                      (49,380)       (74,154)       (191,265)
  Increase (decrease) in advances by borrowers for
    taxes and insurance                                         (593)            199             723
  Payment on other liabilities for purchase of property
    and equipment                                               (677)             --              --
  Payment received on purchase of branch deposits, net            --              --             912 
  Purchase of treasury stock                                   (1,611)          (802)             --
  Proceeds from issuance of common stock                          215            287              55
  Purchase of common stock for management recognition and
    retention  plan                                                --             --             (14)
  Cash dividends paid                                          (1,083)        (1,011)           (914)
                                                            ----------------------------------------
        Net cash provided by financing activities                 891         12,592          38,570
                                                            ----------------------------------------

</TABLE>

                                                                     73
<PAGE>
 
HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
 <TABLE>
<CAPTION>


                                                               1997            1996          1995
----------------------------------------------------------------------------------------------------
<S>                                                         <C>            <C>            <C>
    Increase (decrease) in cash and cash equivalents        $   6,812      $   5,660      $   (408)

Cash and Cash Equivalents
  Beginning                                                    11,145          5,485          5,893
                                                             ---------------------------------------
  Ending                                                    $  17,957      $  11,145      $   5,485
                                                             ---------------------------------------
                                                             ---------------------------------------
Supplemental Disclosures of Cash Flows Information
  Cash payments for:
    Interest                                                $  24,125      $  24,331      $  21,747
    Income and franchise taxes, net                             1,576          1,839          1,842

Supplemental Schedule of Noncash Investing and
  Financing Activities
  Property and equipment additions included in
    other liabilities                                              --            677             --
  Foreclosed real estate and other properties acquired
    in settlement of loans                                      1,295          2,878          2,388
  Loans made in connection with the sale of foreclosed
    real estate and other properties                               41             54            125
  Transfer of securities classified as held to maturity
    to securities available for sale                               --        100,667             --
  Transfer of investment securities to securities
    available for sale                                             --             --         41,725
  Transfer of investment securities to securities
    classified as held to maturity                                 --             --         33,012
  Transfer of securities held for sale to securities
    available for sale                                             --             --          6,459
  Stock split in the form of a stock dividend                      --             16             --
  Change in unrealized loss on securities available
    for sale                                                      604           (631)          (287)
  Deferred income taxes related to change in unrealized
    loss on securities available for sale                        (204)           194            102

Payment received on purchase of branch deposits, net:
  Deposits assumed                                           $     --       $     --       $ (1,287)
  Less:
    Premium on deposits                                            --             --             58
    Property and equipment purchased                               --             --            317
                                                              --------------------------------------
    Payment received on purchase of branch deposits, net     $     --       $     --       $   (912)
                                                              --------------------------------------
                                                              --------------------------------------
</TABLE>
 
See Notes to Consolidated Financial Statements.


                                          74
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

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

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of HF Financial Corp. (the Company) and
subsidiaries conform to generally accepted accounting principles and to general
practice within the industry.  The following is a description of the more
significant of those policies that the Company follows in preparing and
presenting its consolidated financial statements.

PRINCIPLES OF CONSOLIDATION:  The accompanying consolidated financial statements
include the accounts of the Company, its 51% owned subsidiary, HF Card Services,
L.L.C., and its wholly-owned subsidiaries, HomeFirst Mortgage Corp. and Home
Federal Savings Bank (the Bank) and the Bank's subsidiaries, Hometown Insurors,
Inc., Mid-America Service Corporation and PMD, Inc.  All intercompany balances
and transactions have been eliminated in consolidation.

The Company has committed to a plan to cease the operations of HomeFirst
Mortgage Corp. (HFMC).  The HFMC office is scheduled to close on August 31,
1997.

BASIS OF FINANCIAL STATEMENT PRESENTATION:  The financial statements have been
prepared in conformity with generally accepted accounting principles.  In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the statement of financial condition and revenues and expenses for the
year.  Actual results could differ significantly from those estimates.  Material
estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the allowance for loan losses.

Management believes that the allowance for loan losses is adequate.  While
management uses available information to recognize possible losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions.

In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examination.

CASH AND CASH EQUIVALENTS:  For purposes of reporting the statements of cash
flows, the Company includes as cash equivalents all cash accounts, which are not
subject to withdrawal restrictions or penalties and time deposits with original
maturities of 90 days or less.  The Company had $6,000 of cash equivalents at
June 30, 1997 and no cash equivalents at June 30, 1996.

TRUST ASSETS:  Assets of the trust department, other than trust cash on deposit
at the Bank, are not included in these financial statements because they are not
assets of the Bank.

                                          75
<PAGE>


HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES AND ACCOUNTING CHANGE:  The Company adopted the provisions of
Financial Accounting Standards Board (FASB) Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", as of July 1, 1994.
Statement No. 115 requires that management determine the appropriate
classification of securities at the date of adoption, and thereafter at the date
individual securities are acquired, and that the appropriateness of such
classification be reassessed at each reporting date.

Securities classified as held to maturity are those debt securities that the
Company has both the positive intent and ability to hold to maturity regardless
of changes in market condition, liquidity needs, or changes in general economic
conditions.  These securities are stated at amortized cost.  Securities
available for sale are those debt or equity securities that the Company intends
to hold for an indefinite period of time but not necessarily to maturity.  Any
decision to sell a security classified as available for sale would be based on
various factors, including significant movements in interest rates, changes in
the maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors.  Securities
available for sale are carried at market value.  Unrealized gains or losses are
reported as increases or decreases in stockholders' equity, net of the related
deferred tax effect.

Premiums and discounts on securities are amortized over the contractual lives of
those securities, except for mortgage-backed securities, for which prepayments
are probable and predictable, which are amortized over the estimated expected
repayment terms of the underlying mortgages.  The method of amortization results
in a constant effective yield on those securities (the interest method).
Interest on debt securities is recognized in income as accrued.  Gains and
losses on the sale of securities are determined using the specific
identification method.

The effect of the adoption of Statement No. 115 on July 1, 1994 was to decrease
securities by $353, increase deferred tax assets by $120, and decrease equity by
$233.  The cumulative effect on net income as a result of adopting the statement
was $93 ($.03 per share).

LOANS HELD FOR SALE:  Loans receivable which the Bank may sell or intends to
sell prior to maturity are carried at the lower of net book value or market
value on an aggregate basis.  Such loans held for sale include loans receivable
that management intends to use as part of its asset/liability strategy, or that
may be sold in response to changes in interest rates, changes in prepayment risk
or other similar factors.

LOANS RECEIVABLE:  Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses, and net of deferred loan origination fees,
costs and discounts.

Discounts and premiums on loans are amortized to income using the interest
method over the remaining period to contractual maturity, adjusted for
prepayments.
                                          76

<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

-------------------------------------------------------------------------------
NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LOANS RECEIVABLE (CONTINUED):  Uncollectible interest on loans that are impaired
or contractually past due is charged off based on management's periodic
evaluation.  The charge to interest income is equal to all interest previously
accrued, and income is subsequently recognized only to the extent cash payments
are received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is no longer in doubt, in which case
the loan is returned to accrual status.

The Company includes all loans considered impaired under FASB Statement No. 114
in its evaluation of the adequacy of the allowance for loan losses.  A loan is
impaired when it is probable the Bank will be unable to collect all contractual
principal and interest payments due in accordance with the terms of the loan
agreement.  Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent.  The amount of impaired
loans was not material at June 30, 1997 and 1996.

The allowance for loan losses is increased by provisions charged to income and
reduced by charge-offs, net of recoveries.  Management's periodic evaluation of
the adequacy of the allowance for loan losses is based on the Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.

LOAN ORIGINATION FEES AND RELATED DISCOUNTS:  Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for prepayments.  Commitment fees and costs relating
to commitments, the likelihood of exercise of which is remote, are recognized
over the commitment period on a straight-line basis.  If the commitment is
subsequently exercised during the commitment period, the remaining unamortized
commitment fee at the time of exercise is recognized over the life of the loan
as an adjustment of yield.

LOAN SERVICING:  The cost allocated to mortgage servicing rights purchased or
retained has been recognized as a separate asset and is being amortized in
proportion to and over the period of estimated net servicing income.  Mortgage
servicing rights are periodically evaluated for impairment based on the fair
value of those rights.  Fair values are estimated using discounted cash flows
based on current market rates of interest.  For purposes of measuring
impairment, the rights are stratified by one or more predominant risk
characteristics of the underlying loans.  The Bank stratifies its capitalized
mortgage servicing rights based on the interest rate of the underlying loans.
The amount of impairment recognized is the amount, if any, by which the
amortized cost of the rights for each stratum exceed their fair value.


                                          77
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FORECLOSED REAL ESTATE AND OTHER PROPERTIES:  Real estate and other properties
acquired through, or in lieu of, loan foreclosure are initially recorded at
lower of cost or fair value less estimated costs to sell at the date of
foreclosure.  Costs relating to improvement of property are capitalized, whereas
costs relating to the holding of property are expensed.

Valuations are periodically performed by management, and charge-offs to
operations are made if the carrying value of a property exceeds its estimated
fair value less estimated costs to sell.

OFFICE PROPERTIES AND EQUIPMENT:  Land is carried at cost.  All other office
properties and equipment are carried at cost, less accumulated depreciation and
amortization.  Buildings and improvements and leasehold improvements are
depreciated primarily on the straight-line method over the estimated useful
lives of the assets which is five to fifty years.  Furniture, fixtures,
equipment, data processing equipment and automobile are depreciated using both
the straight-line and declining balance methods over the estimated useful lives
of the assets which is five to twelve years.

LONG-LIVED ASSETS AND ACCOUNTING CHANGE:  In the first quarter of fiscal year
1997, the Company adopted FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".  This
Statement requires long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset is not recoverable.  There was no
cumulative effect on the financial statements as a result of the adoption of
Statement No. 121.

INCOME TAXES:  Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences.  Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases.  Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.  Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.


STOCK-BASED COMPENSATION:  In the first quarter of fiscal year 1997, the Company
adopted FASB Statement No. 123, "Accounting for Stock-Based Compensation".  The
Company has elected to measure compensation cost using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees".  Note 16 to the consolidated financial statements contains
a summary of the disclosures of pro forma net income and earnings per share as
if the fair value based method of accounting as defined in Statement No. 123 had
been applied.


                                          78
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS:  FASB Statement No. 107, "Disclosures about
Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statements of financial condition, for which it is practicable to estimate that
value.  In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques.  Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows.  In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument.  Statement No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.  Accordingly, the
aggregate fair value amounts presented in Note 17 do not represent the
underlying value of the Company.

The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:

    CASH AND CASH EQUIVALENTS:  The carrying amounts reported in the statements
    of financial condition for cash and cash equivalents approximate their fair
    values.

    SECURITIES:  Fair values for investment securities are based on quoted
    market prices, except for stock in the Federal Home Loan Bank for which
    fair value is assumed to equal cost.

    LOANS:  Approximately 51% and 49% of loans at June 30, 1997 and 1996,
    respectively, are variable-rate loans that reprice frequently and have no
    significant change in credit risk.  Fair values on these loans are based on
    carrying values.  The fair values for fixed-rate loans are estimated using
    discounted cash flow analyses, using interest rates currently being offered
    for loans with similar terms to borrowers with similar credit quality or
    from market quotes from the Federal Home Loan Mortgage Corporation for
    fixed-rate mortgage loans.

    ACCRUED INTEREST RECEIVABLE:  The carrying value of accrued interest
    receivable approximates its fair value.

    OFF-STATEMENT-OF-FINANCIAL-CONDITION INSTRUMENTS: Fair values for the
    Company's off-statement-of-financial-condition instruments (unused lines
    of credit and letters of credit), which are based upon fees currently
    charged to enter into similar agreements taking into account the remaining
    terms of the agreements and counterparties' credit standing, are not
    significant.


                                          79
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    DEPOSITS:  The fair values for savings, NOW and money market accounts equal
    their carrying amounts which represent the amount payable on demand.
    Statement No. 107 prohibits adjusting fair value for any value derived from
    retaining those deposits for an expected future period of time.  Fair
    values for fixed-rate certificates of deposit are estimated using a
    discounted cash flow calculation that applies interest rates currently
    being offered on certificates to a schedule of aggregated expected monthly
    maturities on certificates of deposit.

    BORROWED FUNDS:  The carrying amounts reported for variable rate advances
    approximate their fair values.  Fair values for fixed-rate advances and
    other borrowings are estimated using a discounted cash flow calculation
    that applies interest rates currently being offered on advances and
    borrowings with corresponding maturity dates.

    ACCRUED INTEREST PAYABLE AND ADVANCES BY BORROWERS FOR TAXES AND INSURANCE:
    The carrying values of accrued interest payable and advances by borrowers
    for taxes and insurance approximate their fair values.


                                          80
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 2.  INVESTMENTS IN SECURITIES

The amortized cost and fair values of investments in securities at June 30, 1997
are as follows:
<TABLE>
<CAPTION>
 
                                                         Gross          Gross
                                        Amortized     Unrealized     Unrealized         Fair
                                           Cost          Gains        (Losses)          Value
-----------------------------------------------------------------------------------------------
<S>                                     <C>           <C>            <C>              <C>
Securities available for sale:
  Debt securities:
    U.S. Treasury issues                 $  7,019       $      9        $   (10)      $  7,018
    U.S. government agencies and
      corporations                         21,428             10           (102)        21,336
    Federal Home Loan Bank                 11,999          - - -            (49)        11,950
    Municipal bond                            385             18          - - -            403
                                         -----------------------------------------------------
                                           40,831             37           (161)        40,707
                                         -----------------------------------------------------
  Equity securities:
    FHLMC preferred stock                     500              5          - - -            505
    Stock in Federal Home Loan
      Bank of Des Moines                    5,222          - - -          - - -          5,222
    Common stock:
        FNMA                                    8          - - -          - - -              8
        Other                                 462             36          - - -            498
                                         -----------------------------------------------------
                                            6,192             41          - - -          6,233
                                         -----------------------------------------------------

Mortgage-backed securities:
  GNMA                                        140             11          - - -            151
  REMIC                                    10,061          - - -           (478)         9,583
  FHLMC                                     6,565            155            (29)         6,691
  Resolution Trust Corporation                989             11          - - -          1,000
  FNMA                                      6,976            173             (4)         7,145
  FNMA REMIC                                  250          - - -             (1)           249
  Other triple A rated mortgage-
    backed securities                       5,590          - - -            (69)         5,521
                                         -----------------------------------------------------
                                           30,571            350           (581)        30,340
                                         -----------------------------------------------------
                                         $ 77,594       $    428        $  (742)      $ 77,280
                                         -----------------------------------------------------
                                         -----------------------------------------------------

</TABLE>
 

                                          81
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 2.  INVESTMENTS IN SECURITIES (CONTINUED)

The amortized cost and fair values of debt securities as of June 30, 1997, by
contractual maturity, are shown below.  Expected maturities will differ from
contractual maturities because the borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.

                                                  Amortized        Fair
                                                     Cost          Value
                                                  ------------------------
    Due in one year or less                       $  10,000      $   9,946
    Due after one year through five years            30,446         30,358
    Due after ten years                                 385            403
                                                  ------------------------
                                                     40,831         40,707
    Mortgage-backed securities                       30,571         30,340
                                                  ------------------------
                                                  $  71,402      $  71,047
                                                  ------------------------
                                                  ------------------------


Equity securities have been excluded from the maturity table above because they
do not have contractual maturities associated with debt securities.  The Bank,
as a member of the Federal Home Loan Bank system, is required to maintain an
investment in capital stock of the Federal Home Loan Bank in an amount equal to
1% of its outstanding home loans.  No ready market exists for the Bank stock,
and it has no quoted market value.  For disclosure purposes, such stock is
assumed to have a fair value which is equal to cost.

Proceeds from the sale of securities available for sale were $56, $12,644 and
$10,120 and resulted in a net gain of $8, $140 and $164 in fiscal years 1997,
1996 and 1995, respectively.

Proceeds from the sale of mortgage-backed securities available for sale were
$12,184 and $18,161 and resulted in a net gain of $142 and $302 in fiscal years
1997 and 1996, respectively.  In fiscal year 1996, the Bank sold held to
maturity mortgage-backed securities resulting in proceeds of $2,817 and a net
gain of $58.  In connection therewith, all remaining securities classified as
held to maturity securities with an amortized cost of $100,667 and a net
unrealized loss of $193 were transferred to the available for sale
classification in fiscal year 1996 to comply with the provisions of Statement
No. 115.  There were no sales of mortgage-backed securities in fiscal year 1995.

At June 30, 1997 and 1996, securities with a fair value of $35,526 and $36,609,
respectively, were pledged as collateral for public deposits and other purposes.
Additionally, in July 1997, the Bank received deposits of approximately $36,000
from a local governmental entity which requires a pledge of collateral of 110%
of the deposits.  The Bank subsequently pledged debt and mortgage-backed
securities to meet this requirement.


                                          82
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 2.  INVESTMENTS IN SECURITIES (CONTINUED)

The amortized cost and fair values of investments in securities at June 30, 1996
are as follows:
<TABLE>
<CAPTION>
 
                                                        Gross          Gross
                                        Amortized     Unrealized     Unrealized
                                           Cost          Gains          (Losses)    Fair Value
                                        ------------------------------------------------------
<S>                                     <C>           <C>            <C>            <C>
Securities available for sale:
  Debt securities:
    U.S. Treasury issues                 $  9,060       $      5       $    (18)      $  9,047
    U.S. government agencies and
      corporations                         21,005          - - -           (457)        20,548
    Federal Home Loan Bank                  5,000          - - -            (34)         4,966
    Municipal bond                            385              4          - - -            389
                                        ------------------------------------------------------
                                           35,450              9           (509)        34,950
                                        ------------------------------------------------------
Equity securities:
  FHLMC preferred stock                       500          - - -             (2)           498
  Stock in Federal Home Loan Bank
    of Des Moines                           5,222          - - -          - - -          5,222
  Common stock:
    FNMA                                        8          - - -          - - -              8
    Other                                     510          - - -            (20)           490
                                        ------------------------------------------------------
                                            6,240          - - -            (22)         6,218
                                        ------------------------------------------------------

Mortgage-backed securities:
  GNMA                                        246             19          - - -            265
  REMIC                                    18,124          - - -           (489)        17,635
  FHLMC                                    11,682            182            (97)        11,767
  Resolution Trust Corporation             10,664          - - -             (1)        10,663
  FNMA                                     11,615            155            (43)        11,727
  FNMA REMIC                                2,687          - - -          - - -          2,687
  Other triple A rated mortgage-
    backed securities                       4,873             16           (138)         4,751
                                        ------------------------------------------------------
                                           59,891            372           (768)        59,495
                                        ------------------------------------------------------
                                        $ 101,581      $     381     $   (1,299)     $ 100,663
                                        ------------------------------------------------------
                                        ------------------------------------------------------

</TABLE>
 

                                          83
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 3.  LOANS RECEIVABLE AND LOANS HELD FOR SALE

Loans receivable at June 30, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
 
                                                                        1997           1996
                                                                    ----------------------------
<S>                                                                  <C>            <C>
Loans secured by real estate:
  Residential:
    One-to-four family                                               $  162,090     $  170,918
    Multi-family                                                         59,971         62,932
  Commercial                                                             34,252         26,130
  Construction and development                                            5,315         20,823
Consumer and other loans:
  Automobile                                                             66,483         48,181
  Junior liens on mortgages                                              36,779         23,152
  Commercial                                                             27,534         13,913
  Other loans                                                            20,934         25,505
  Mobile homes                                                           15,571         20,031
  Agriculture                                                             8,261          5,431
  Education loans                                                         6,409          5,729
  Credit card loans                                                       2,310          - - -
  Loans on savings accounts                                               2,299          2,210
  Home improvement loans                                                  1,957          1,146
                                                                    ----------------------------
                                                                        450,165        426,101
Less:
  Undisbursed portion of loans in process                                 4,272          7,349
  Deferred loan fees and unearned discounts and premiums, net             1,348          1,480
  Allowance for loan losses                                               4,526          4,129
                                                                    ----------------------------
                                                                     $  440,019     $  413,143
                                                                    ----------------------------
                                                                    ----------------------------

</TABLE>
 
Loans held for sale totaling $3,483 and $7,280 at June 30, 1997 and 1996,
respectively, consist of one-to-four family fixed-rate loans.


                                          84
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 3.  LOANS RECEIVABLE AND LOANS HELD FOR SALE (CONTINUED)

Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:

                                 1997           1996           1995
                              ----------------------------------------
Balance, beginning             $  4,129       $  4,039       $  4,899
  Provision (recoveries)
    charged to income               693            590           (515)
  Charge-offs                    (1,121)          (850)          (963)
  Recoveries                        825            350            618
                              ----------------------------------------
Balance, ending                $  4,526       $  4,129       $  4,039
                              ----------------------------------------
                              ----------------------------------------


Nonaccrual loans for which interest has been reduced totaled approximately
$1,252, $2,063 and $2,711 at June 30, 1997, 1996 and 1995, respectively.
Interest income that would have been recorded under the original terms of such
loans and the interest income actually recognized for the years ended June 30
are summarized below:

                                  1997            1996           1995
                              ----------------------------------------
Interest income that would
  have been recorded           $    266       $    457       $    227
Interest income recognized          (88)          (379)           (30)
                              ----------------------------------------
Interest income foregone       $    178       $     78       $    197
                              ----------------------------------------
                              ----------------------------------------


                                          85
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 4.  LOAN SERVICING

Mortgage loans serviced for others (primarily the South Dakota Housing
Development Authority) are not included in the accompanying consolidated
statements of financial condition.  The unpaid principal balances of mortgage
loans serviced for others was $322,058 and $315,704 at June 30, 1997 and 1996,
respectively.

Custodial balances maintained in connection with the foregoing loan servicing,
and included in deposits, were approximately $1,848 and $2,488 at June 30, 1997
and 1996, respectively.

In the first quarter of fiscal year 1997, the Company adopted FASB Statement No.
122, "Accounting for Mortgage Servicing Rights".  This Statement requires that a
mortgage banking enterprise that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and then sells or
securitizes those loans with servicing rights retained should allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans based
on their relative fair values if it is practicable to estimate those fair
values.

In the third quarter of fiscal year 1997, the Company adopted FASB Statement No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities".  This Statement establishes basic principles
that state that an entity should recognize only assets it controls and
liabilities it has incurred.  Assets should be "derecognized" only when control
has been surrendered, liabilities should be "derecognized" only when they have
been extinguished, and recognition of financial assets and liabilities should
not be affected by the sequence of transactions unless the effect of the
transactions is to maintain effective control over a transferred financial
asset.  Statement No. 125 also continues the recognition of mortgage servicing
rights on loans sold and supersedes Statement No. 122 for transactions after
January 1, 1997.

In accordance with the provisions of Statement Nos. 122 and 125, mortgage
servicing rights in the amount of $200 were capitalized during the year ended
June 30, 1997.  The fair value of capitalized mortgage servicing rights was $174
at June 30, 1997.  The fair value of the mortgage servicing rights was estimated
as the present value of the expected future cash flows using a discount rate of
15.0% at June 30, 1997.  The Company recognized expense for amortization of the
cost of mortgage servicing rights in the amount of $19 for the year ended June
30, 1997.  The effect of adopting Statement Nos. 122 and 125 increased net
income by $181 for the year ended June 30, 1997.


No valuation allowance was provided for mortgage servicing rights capitalized
during the year ended June 30, 1997.


                                          86
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 5.  ACCRUED INTEREST RECEIVABLE
The following is a summary of accrued interest receivable at June 30, 1997 and
1996 by asset type:

                                                         1997          1996
                                                      -----------------------
    Loans receivable and loans held for sale           $  3,215      $  3,144
    Securities available for sale                           737           482
    Mortgage-backed securities available for sale           184           376
                                                      -----------------------
                                                       $  4,136      $  4,002
                                                      -----------------------
                                                      -----------------------


Dividends receivable on investments are included with accrued interest
receivable.


NOTE 6.  OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at June 30, 1997 and 1996 consist of the
following:


                                                         1997          1996
                                                      -----------------------
Land                                                   $  1,852      $  1,917
Buildings and improvements                               14,836        13,996
Leasehold improvements                                      303           458
Furniture, fixtures, equipment and automobile             7,929         9,200
                                                      -----------------------
                                                         24,920        25,571
Less accumulated depreciation and amortization           (9,850)      (10,525)
                                                      -----------------------
                                                       $ 15,070      $ 15,046
                                                      -----------------------
                                                      -----------------------


                                          87
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 7.  DEPOSITS

Deposits at June 30, 1997 and 1996 consist of the following:

                                                1997           1996
                                            --------------------------
Savings accounts                             $  28,968      $  31,445
NOW accounts                                    26,924         22,030
Noninterest bearing accounts                    18,663         11,293
Money market accounts                           34,421         34,339
Certificates                                   309,210        299,059
                                            --------------------------
                                             $ 418,186      $ 398,166
                                            --------------------------
                                            --------------------------



A summary of savings certificates by maturity at June 30, 1997 is as follows:

Maturity in:
-----------------------------------------------------------------------
6 months or less                                            $  98,249
More than 6 months through 1 year                              66,884
More than 1 year through 3 years                              138,129
More than 3 years through 5 years                               5,890
Thereafter                                                         58
                                                           -----------
                                                           $  309,210
                                                           -----------
                                                           -----------


Eligible savings accounts are insured up to $100 by the Savings Association
Insurance Fund (SAIF) under management of the Federal Deposit Insurance
Corporation (FDIC).  The aggregate amount of jumbo certificates of deposit with
a minimum denomination of $100 was approximately $66,742 and $62,266 at June 30,
1997 and 1996, respectively.


On September 30, 1996, the President signed into law Savings Association
Insurance Fund legislation which assessed a one time charge of approximately
$2,600 to the Bank.  An assessment was imposed on the Bank and other member
institutions of the SAIF in order to recapitalize the SAIF and facilitate the
future merger of the Bank Insurance Fund (BIF) and SAIF into the Deposit
Insurance Fund.


                                          88
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 8.  ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS

Maturities of advances from the Federal Home Loan Bank of Des Moines at June 30,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
 
                                                                         1997           1996
                                                                     --------------------------
<S>                                                                   <C>            <C>
Fixed rate advances (with rates ranging from 4.5% to 6.6%):
  Due in one year or less                                             $  33,000      $  29,200
  Due after one through two years                                        16,000         15,000
  Due after two years through five years                                  6,000         13,000
  Due after five years                                                    2,224          3,328
                                                                     --------------------------
    Total fixed rate advances                                            57,224         60,528
                                                                     --------------------------
Variable rate advances (with rates ranging from 5.6% to 5.7%):
  Due in one year or less                                                12,995         17,995
  Due after one year through two years                                    4,000          7,000
  Due after two years through five years                                  - - -          4,000
                                                                     --------------------------
    Total variable rate advances                                         16,995         28,995
                                                                     --------------------------
                                                                      $  74,219      $  89,523
                                                                     --------------------------
                                                                     --------------------------

</TABLE>
 

Aggregate maturities of advances are as follows:  1998 $45,995; 1999 $20,000;
2000 $5,000; 2001 $0; 2002 $1,000; and thereafter $2,224.

The Bank has a $20,000 open line of credit with the Federal Home Loan Bank of
Des Moines which expires January 2, 1998.  There were no advances outstanding on
this line of credit at June 30, 1997.

Advances, including amounts advanced on the open line of credit, are secured by
stock in the Federal Home Loan Bank of Des Moines and first mortgage loans with
balances exceeding 150% of the amount of the advances.


Other borrowings consist of a note payable to the South Dakota Housing
Development Authority (SDHDA) which had balance of $524 and $600 at June 30,
1997 and 1996, respectively.  The SDHDA loaned $600 to the Bank at 0% interest
rate per annum.  The funds are to be used by the Bank to originate $600 in
qualified home improvement loans.  The note is due on August 31, 2000 and
includes a demand feature which may be exercised if certain restrictions are not
met.  On August 8, 1996, the SDHDA exercised the demand feature on a portion of
the note and requested payment of $76.


                                          89
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 9.  INCOME TAX MATTERS

The Company and subsidiaries file a consolidated federal income tax return on a
fiscal year basis.  In fiscal years prior to the 1997 fiscal year, the Bank was
allowed a special bad debt deduction based on 8 percent of taxable income, or on
specified experience formulas.  The Bank used the percentage of taxable income
method in 1996 and the specified experience formula in 1995.  Effective for
fiscal year 1997, federal income tax laws have changed to eliminate the
percentage of taxable income and experience formulas for the Company and only
allow bad debt deductions based on actual charge offs.  The Bank is required to
recapture into income the excess of its June 30, 1996 loan loss reserves for
"qualifying" and "nonqualifying" loans over its June 30, 1988 loan loss reserves
for "qualifying" and "nonqualifying" loans.  This excess, which was $720 at June
30, 1997, is required to be recaptured ratably over a six year period.  The
onset of recapture can be delayed for up to two years if the Bank meets
residential loan origination requirements.  At June 30, 1997, the Bank's
recorded deferred tax liability of $245 provides for the recapture of the loan
loss reserves and is netted against the deferred tax asset.

The consolidated provision for income taxes consists of the following for the
years ended June 30:
<TABLE>
<CAPTION>
 
                                                          1997           1996           1995
                                                       ----------------------------------------
<S>                                                     <C>            <C>            <C>
Current:
  Federal                                               $  1,577       $  2,134       $    898
  State                                                      226            379            247
Deferred:
  Federal (benefit)                                         (221)           380            658
                                                       ----------------------------------------
                                                        $  1,582       $  2,893       $  1,803
                                                       ----------------------------------------
                                                       ----------------------------------------

</TABLE>
 
Income tax expense is different from that calculated at the statutory federal
income tax rate.  The reasons for this difference in the tax expense are as
follows:
<TABLE>
<CAPTION>
 
                                                          1997           1996           1995
                                                       ----------------------------------------
<S>                                                     <C>            <C>            <C>
Computed "expected" tax expense                         $  1,840       $  2,665       $  1,718
Increase (decrease) in income taxes resulting from:
  Goodwill amortization                                    - - -          - - -            156
  Tax exempt interest income                                 (58)           (67)           (48)
  Stock compensation deductible for tax                     (155)           (33)           (20)
  State taxes, net of federal benefit                        149            250            163
  Other, net                                                (194)            78           (166)
                                                       ----------------------------------------
                                                        $  1,582       $  2,893       $  1,803
                                                       ----------------------------------------
                                                       ----------------------------------------

</TABLE>
 

                                          90
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 9.  INCOME TAX MATTERS (CONTINUED)

The components of the net deferred tax asset as of June 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
 
                                                               1997           1996
                                                            -------------------------
<S>                                                          <C>            <C>
Deferred tax assets:
  Allowance for loan losses                                  $  1,294       $  1,160
  Deferred loan fees                                              323            399
  Deferred credit card fees                                       193          - - -
  Discounts on loans from acquired associations                   193            252
  Accrued expenses                                                111             74
  Net unrealized loss on securities available for sale             92            296
  Other                                                            27          - - -
                                                            -------------------------
                                                                2,233          2,181
  Less valuation allowance                                       (239)          (239)
                                                            -------------------------
                                                                1,994          1,942
                                                            -------------------------

Deferred tax liabilities:
  FHLB stock dividends                                            234            234
  Office properties and equipment                                 185             56
  Other                                                             6            100
                                                            -------------------------
                                                                  425            390
                                                            -------------------------
                                                             $  1,569       $  1,552
                                                            -------------------------
                                                            -------------------------

</TABLE>
 

Retained earnings at June 30, 1997 and 1996, include approximately $4,805
related to the pre-1987 allowance for loan losses for which no deferred federal
income tax liability has been recognized.  These amounts represent an allocation
of income to bad debt deductions for tax purposes only.  Reduction of amounts so
allocated for purposes other than tax bad losses or adjustments arising from
carryback of net operating losses would create income for tax purposes only,
which would be subject to the then current corporate income tax rate.  The
unrecorded deferred income tax liability on the above amounts for financial
statement purposes was approximately $1,634 at June 30, 1997 and 1996.


                                          91
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 10. REGULATORY CAPITAL

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

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined).  Management
believes, as of June 30, 1997, that the Bank meets all capital adequacy
requirements to which it is subject.

As of September 30, 1996, the most recent examination by the Office of Thrift
Supervision categorized the Bank as "well capitalized" under the regulatory
framework for Prompt Corrective Action.  To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios.  There are no conditions or events since that notification that
management believes have changed the Bank's category.

The following table summarizes the Bank's compliance with its regulatory capital
requirements at June 30, 1997:
<TABLE>
<CAPTION>
 
                                    Bank's Capital               Required Capital              Excess Capital
                             --------------------------------------------------------------------------------------
                                Amount         Percent        Amount         Percent        Amount         Percent
                             --------------------------------------------------------------------------------------
<S>                           <C>              <C>          <C>              <C>          <C>              <C>
Tier I (leverage) capital     $  42,495          7.57%      $  16,832          3.00%      $  25,663          4.57%
Total risk-based capital         47,021         12.87%         29,224          8.00%         17,797          4.87%

</TABLE>


                                          92
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 11. STOCKHOLDERS' EQUITY AND DIVIDENDS RESTRICTIONS

In April of 1996, the Company approved a stock buy back program in which up to
10% of the common stock of the Company may be acquired beginning May 1, 1996
through April 30, 1997.  In April of 1997, the Company renewed the stock buy
back program in which up to an additional 10% of the common stock of the Company
may be acquired from May 1, 1997 through April 30, 1998.  In accordance with the
provisions of its stock buy back program, the Company purchased 95,300 shares of
treasury stock during fiscal year 1997 and 53,015 shares of treasury stock
during fiscal year 1996.

On October 23, 1996, the Company approved the creation of 50,000 shares of
Preferred Stock, designated as "Series A Junior Participating Preferred Stock"
with a stated value of $1.00 per share.  Outstanding shares of the Junior
Preferred Stock are entitled to cumulative dividends.  Such shares have voting
rights of 100 votes per share and a preference in liquidation.  The shares are
not redeemable after issuance.

On October 23, 1996, the Company also declared a dividend of one preferred share
purchase right (Right) for each outstanding share of common stock of the
Company.  The dividend was paid on November 13, 1996 to the stockholders of
record on such date.  Each Right entitles the registered holder to purchase from
the Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock at a price of $65 per one-hundredth of a preferred share,
subject to the complete terms as stated in the Rights Agreement.  The Rights
become exercisable immediately after the earlier of (i) ten business days
following a public announcement that a person or group has acquired beneficial
ownership of 20% or more of the outstanding common shares of the Company
(subject to certain exclusions), (ii) ten business days following the
commencement or announcement of an intention to make a tender offer or exchange
offer, the consummation of which would result in the beneficial ownership by a
person or group of 20% or more of such outstanding common shares.  The Rights
expire on October 22, 2006, which date may be extended subject to certain
additional conditions.

Under current regulations, the Bank is not permitted to pay dividends on its
stock if its regulatory capital would reduce below (i) the amount required for
the liquidation account established to provide a limited priority claim to the
assets of the Bank to qualifying depositors (Eligible Account Holders) at March
31, 1992 who continue to maintain deposits at the Bank after its conversion from
a Federal mutual savings and loan association to a Federal stock savings bank
pursuant to its Plan of Conversion (Plan) adopted August 21, 1991, or (ii) the
Bank's regulatory capital requirements.  As a "Tier 1" institution (an
institution with capital in excess of its capital requirements, both immediately
before the proposed capital distribution and after giving effect to such
distribution), the Bank may make capital distributions without the prior consent
of the Office of Thrift Supervision (OTS) in any calendar year.  The capital
distribution is equal 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
or risk-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 income over the most recent four quarter period.  On July 22, 1997, the Bank
mailed written notification to the OTS of its intention to pay $1,117 in
dividends to the Company.


                                          93
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 12. EARNINGS PER SHARE

Earnings per share is calculated by dividing net income by the weighted average
number of common and common equivalent shares outstanding, including shares
issuable upon exercise of dilutive options outstanding.  The weighted number of
common and common equivalent shares outstanding for the year ended June 30, 1997
and 1996 and as retroactively adjusted for the year ended June 30, 1995 were
3,087,940, 3,152,652 and 3,134,652, respectively.

On December 20, 1995, the Company declared a two-for-one stock split in the form
of a stock dividend of one share of common stock for each one share outstanding,
payable to shareholders of record on January 10, 1996.  Earnings and dividends
per share have been retroactively adjusted based upon the new shares outstanding
after the effect of the two-for-one stock split for all periods presented.  The
stockholders' equity of the Company was adjusted for the effect of the
two-for-one stock split and $16 was transferred from additional paid-in capital
to common stock.

NOTE 13. FASB STATEMENTS

The FASB issued Statement No. 128, "Earnings Per Share".  This Statement
establishes standards for computing and presenting earnings per share (EPS).  It
replaces the presentation of primary EPS with a presentation of basic EPS.  It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation.  This Statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted.  This
Statement requires restatement of all prior-period EPS data presented.

The FASB issued Statement No. 130, "Reporting Comprehensive Income".  This
Statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements.  This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.  This Statement requires that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.  This
Statement is effective for fiscal years beginning after December 15, 1997.


                                          94
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 13. FASB STATEMENTS (CONTINUED)

The FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information".  This Statement establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders.  It also establishes standards for related disclosures about
products and services, geographic areas and major customers.  This Statement
supersedes FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise", but retains the requirement to report information about
major customers.  It amends FASB Statement No. 94, "Consolidation of All
Majority-Owned Subsidiaries", to remove the special disclosure requirements for
previous unconsolidated subsidiaries.  This Statement is effective for financial
statements for periods beginning after December 15, 1997.

NOTE 14. DEFINED BENEFIT PLAN

The Company has a noncontributory defined benefit pension plan covering all
employees of the Company and its wholly-owned subsidiaries who have attained the
age of twenty-one and have completed one year of service.  The benefits are
based on years of service and the employee's compensation of the highest five
out of the past ten years.  The Company's funding policy is to make the minimum
annual required contribution plus such amounts as the Company may determine to
be appropriate from time to time.  One hundred percent vesting occurs after five
years, and retirement with age 65.

The components of pension cost for the years ended June 30 consist of the
following:

                                                     1997      1996      1995
                                                   ----------------------------
Service cost                                        $  193    $  162    $  139
Interest cost on projected benefit obligation          102        96        77
Actual return on plan assets                          (176)     (105)      (82)
Net amortization and deferral                           55        (2)      (21)
                                                   ----------------------------
                                                    $  174    $  151    $  113
                                                   ----------------------------
                                                   ----------------------------


                                          95
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 14. DEFINED BENEFIT PLAN (CONTINUED)

The following table sets forth the plan's funded status as of June 30, 1997 and
1996, respectively, and the amounts recognized in the accompanying statements of
financial condition:
<TABLE>
<CAPTION>
 
                                                                    1997           1996
                                                                 -------------------------
<S>                                                               <C>             <C>
Actuarial present value of benefit obligations:
  Vested benefits                                                 $  1,337       $  1,309
                                                                 -------------------------
                                                                 -------------------------

  Accumulated benefits                                            $  1,419       $  1,385
                                                                 -------------------------
                                                                 -------------------------

Projected benefit obligation for services rendered to date        $ (1,742)      $ (1,535)
Plan assets at fair value                                            1,651          1,501
                                                                 -------------------------
Projected benefit obligation (in excess of) plan assets                (91)           (34)
Unrecognized net loss                                                  691            623
Unrecognized prior service cost (benefit)                             (362)          (411)
Unrecognized transitional obligation                                   109            121
                                                                 -------------------------
Prepaid pension cost                                              $    347       $    299
                                                                 -------------------------
                                                                 -------------------------

</TABLE>
 
The weighted-average post-retirement and pre-retirement discount rates used in
determining the actuarial present value of the benefit obligations were 6.0% and
7.5% for both fiscal years 1997 and 1996.  The rate of increase in future
compensation levels used to determine the actuarial present value of the benefit
obligations was 5.50% and 4.75% for fiscal years 1997 and 1996, respectively.
The expected long-term rate of return on plan assets was 8.0% for both fiscal
years 1997 and 1996.

During 1995, lump sum payments totaling $781 were paid to terminated
participants, constituting a settlement which resulted in a loss of $196 for the
year ending June 30, 1995.


                                          96
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 15. EMPLOYEE STOCK OWNERSHIP PLAN

The Company has an employee stock ownership plan (ESOP) covering all full-time
employees of the Company who have attained age 21 and completed one year of
service during which they work at least 1,000 hours.  The ESOP includes an
employee savings plan feature which provides for voluntary contributions by
eligible employees on a tax-deferred basis with no matching contribution by the
Company.  All shares owned by the ESOP are included in earnings per share
computations, with shares being allocated to eligible employees as the
corresponding ESOP debt is repaid.  At June 30, 1997, the ESOP holds 194,070
shares comprised of 110,807 shares which have been allocated to eligible
employees and 83,263 shares remaining unallocated.  Dividends on unallocated
shares are used to fund the release of unallocated shares annually.  Annual
contributions are limited to the maximum tax-deductible amount and amounts
necessary to ensure continued compliance with the Bank's regulatory capital
requirements.  During 1994, HF Financial Corp. made payments to the ESOP trust
in the amount of $906 to enable the trust to pay off the ESOP debt.  HF
Financial Corp. recorded a receivable equal to the amounts paid which is
reflected as a deduction from stockholders' equity (unearned compensation) in
the accompanying consolidated statements of financial condition.  The receivable
is reduced as the Bank makes contributions to the Plan which in turn are used to
repay the Company and the corresponding compensation expense is recorded.

For financial statement purposes, expense for the ESOP is determined on the
percentage of shares allocated to participants each period (allocations are
based on principal and interest payments) times the original amount of the debt
plus the interest incurred.  The compensation cost charged to expense was $129,
$122 and $161 for 1997, 1996 and 1995, respectively.

The Company has elected not to adopt the accounting treatment for the ESOP
shares provided by AICPA Statement of Position 93-6, "Employers' Accounting for
Employee Stock Ownership Plans", as all ESOP shares were held by the ESOP as of
December 31, 1992 and are allowed to be accounted for under previously existing
accounting standards.


                                          97
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 16. STOCK-BASED COMPENSATION PLANS

The Company has stock-based compensation plans which are described below.  The
Company applies APB Opinion No. 25 and related interpretations in accounting for
its plans.  Accordingly, no compensation cost has been recognized for grants
under the fixed stock option plan.  Had compensation cost for the Company's
stock-based compensation plans been determined based on the grant date fair
values of awards (the method described in FASB Statement No. 123), reported net
income and earnings per common share would have been reduced to the pro forma
amounts shown below:

                                           1997           1996
                                        -------------------------
Net income:
  As reported                            $  3,674       $  4,722
  Pro forma                                 3,630          4,721

Earnings per share:
  As reported                                1.19           1.49
  Pro forma                                  1.18           1.49


The pro forma effects of applying Statement No. 123 are not indicative of future
amounts since, among other reasons, the pro forma requirements of the Statement
have been applied only to options granted after June 30, 1995.

Under the Company's stock option and incentive plan (Option Plan), stock options
of 552,000 common shares may be granted to directors and officers of the Bank.
Options granted under the Option Plan may be either options that qualify as
Incentive Stock Options, as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the Code), or options that do not qualify.  The Option Plan
also provides for the award of stock appreciation rights, limited stock
appreciation rights and restricted stock.  In fiscal year 1997, the Option Plan
was amended to increase the number of shares of the Company's common stock
reserved for issuance under the Option Plan from 302,000 to 552,000.

At June 30, 1997, 437,470 shares of common stock were reserved for issuance
under the Option Plan.  The options granted under the Option Plan expire ten
years from the date of grant.

The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in fiscal years 1997 and 1996, respectively:  a dividend
rate as a percentage of stock price of 1.85% for both years; price volatility of
12% for both years, risk-free interest rates of 6.79% and 6.89%; and expected
lives of seven years for both years.


                                          98
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 16. STOCK-BASED COMPENSATION PLANS (CONTINUED)

A summary of the status of the plan and changes during the years ended June 30
are as follows:
<TABLE>
<CAPTION>
 
                                                     1997                          1996
                                        -----------------------------------------------------------
                                                         Weighted                      Weighted
                                                          Average                       Average
    Fixed Options                          Shares     Exercise Price     Shares     Exercise Price
---------------------------------------------------------------------------------------------------
<S>                                     <C>           <C>             <C>           <C>
Outstanding at beginning of year          131,880     $         7.70    191,426     $         7.07
    Granted                                36,485              16.13        624              15.55
    Forfeited                               - - -              - - -     (4,988)             11.98
    Exercised                             (29,776)              7.24    (55,182)              5.21
                                        -----------------------------------------------------------
Outstanding at end of year                138,589     $        10.02    131,880     $         7.70
                                        ---------                     ---------
                                        ---------                     ---------

</TABLE>
 
Options for 96,650, 113,866 and 81,376 were exercisable at June 30, 1997, 1996
and 1995, respectively.  The weighted average fair value of options granted were
$8.38 and $8.46 for the fiscal years ended June 30, 1997 and 1996, respectively.

Fixed options outstanding at June 30, 1997 are summarized as follows:

             Options Outstanding         Options Exercisable
        -------------------------------------------------------
                                        Remaining
           Number         Number       Contractual    Exercise
         Outstanding    Exercisable       Life         Price
        -------------------------------------------------------

              58,040         58,040         4         $   5.00
               6,794          6,794         5             7.56
               5,000          4,000         6            11.00
              24,852         14,912         7            12.25
               6,794          6,794         6            13.13
                 400            160         8            14.88
              29,305          5,860         8            15.31
                 224             90         8            16.75
               7,180          - - -         9            19.50
            ------------------------
             138,589         96,650
            ------------------------
            ------------------------


                                          99
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 16. STOCK-BASED COMPENSATION PLANS (CONTINUED)

Under the Management Recognition and Retention Plan (MRP), restricted stock
awards covering shares representing an aggregate of up to two and one-half
percent of outstanding common shares may be granted to directors and officers of
the Bank.  Further information concerning the MRP restricted stock awards is as
follows:

                                                                  Outstanding
                                                                     Awards
                                                                  ------------
June 30, 1995                                                          49,752
  Awards granted                                                        - - -
  Awards canceled                                                       - - -
  Awards vested                                                       (46,752)
                                                                  ------------
June 30, 1996                                                           3,000
  Awards granted                                                        - - -
  Awards canceled                                                       - - -
  Awards vested                                                        (2,500)
                                                                  ------------
June 30, 1997                                                             500
                                                                  ------------
                                                                  ------------


Awards vest at the rate of 25% per year of continuous service with the Bank.
The unearned compensation under the MRP is recorded as a reduction of
stockholders' equity and is amortized to operations as the shares vest.

During the year ended June 30, 1997, the Company approved a Director Restricted
Stock Plan (Plan) which provides that awards of restricted shares of the
Company's common stock be made to outside directors of the Company.  The Plan is
designed to allow for payment of the annual retainer fee in shares of the
Company's common stock, with the inclusion of an annual cost of living
adjustment based on the Consumer Price Index.  Each outside director is entitled
to all voting, dividend and distribution rights until the expiration of the
award.  The effective date of the Plan is July 1, 1997.  The Plan has 50,000
shares allocated to it and is in effect for a period of ten years.  On July 1,
1997, 3,050 shares were awarded under the Plan as the annual retainer for the
Company's Board of Directors for the year ending June 30, 1998.


                                         100
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS

Estimated fair values of the Company's financial instruments are as follows:

<TABLE>
<CAPTION>
 
                                                                   June 30,
                                            --------------------------------------------------------
                                                       1997                         1996
                                            --------------------------------------------------------
                                              Carrying                      Carrying
                                               Amount      Fair Value        Amount      Fair Value
                                            --------------------------------------------------------
<S>                                           <C>           <C>             <C>           <C>
Financial Assets
  Cash and cash equivalents                  $  17,957      $  17,957      $  11,145      $  11,145
  Securities                                    77,280         77,280        100,663        100,663
  Loans                                        443,502        446,009        420,423        421,443
  Accrued interest receivable                    4,136          4,136          4,002          4,002

Financial Liabilities
  Deposits                                     418,186        416,145        398,166        401,235
  Borrowed funds                                74,743         74,200         90,123         89,285
  Accrued interest payable and advances
    by borrowers for taxes and insurance        10,634         10,634         10,520         10,520

</TABLE>
 

                                         101
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 18. COMMITMENTS, CONTINGENCIES AND CREDIT RISK

The Bank originates first mortgage and consumer loans primarily in eastern South
Dakota and holds residential and commercial real estate loans which were
purchased from other originators of loans located throughout the United States.
Mobile home loans are concentrated primarily in the upper midwest states.
Collateral for substantially all consumer loans are security agreements and/or
Uniform Commercial Code (UCC) filings on the purchased asset.  At June 30, 1997
and 1996, the Bank has approximately $428 and $585 of loans sold with recourse
to the Federal National Mortgage Association (FNMA).  The collateral securing
these loans are one-to-four family mortgage loans which are seasoned.  Unused
lines of credit and letters of credit amounted to $32,943 and $718 at June 30,
1997 and $23,000 and $184 at June 30, 1996, respectively, and are collateralized
in substantially the same manner as loans receivable.

The Company had outstanding commitments to originate or purchase and sell loans
of approximately $27,254 and $17,425, respectively, at June 30, 1997.  The
portion of commitments to originate fixed rate loans totaled $13,694 with a
range in interest rates of 4.9% to 10.0%.  No losses are expected to be
sustained in the fulfillment of any of these commitments.

The Company is involved in various claims and legal actions arising in the
ordinary course of business.  In the opinion of management, based upon
consultation with legal counsel, the ultimate disposition of these matters will
not have a material adverse effect on the Company's consolidated financial
position.

NOTE 19. CASH FLOW INFORMATION
Changes in other assets and liabilities at June 30, 1997, 1996 and 1995 consist
of:

                                                1997       1996        1995
                                             ---------------------------------
(Increase) in accrued interest receivable     $   (134)  $   (466)   $   (308)
(Increase) decrease in prepaid expenses and
  other assets                                    (360)       699          62
(Increase) decrease in deferred income taxes      (221)       380         794
Increase in accrued interest payable and
  other liabilities                              2,374      1,273       2,207
                                             ---------------------------------
                                              $  1,659   $  1,886    $  2,755
                                             ---------------------------------
                                             ---------------------------------


                                         102
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 20. FINANCIAL INFORMATION OF HF FINANCIAL CORP. (PARENT ONLY)

The Company's condensed balance sheets as of June 30, 1997 and 1996 and related
condensed statements of income and cash flows for each of the years in the three
year period ended June 30, 1997 are as follows:

                               CONDENSED BALANCE SHEETS


                                                        1997        1996
                                                    -----------------------
Assets
  Cash, all with Home Federal Savings Bank           $   9,295   $   7,563
  Investments, marketable securities                     1,003       1,988
  Investment in Home Federal Savings Bank               42,707      41,439
  Investment in HomeFirst Mortgage Corp.                   244         475
  Investment in HF Card Services, L.L.C.                    60           3
  Other                                                    114         237
                                                    -----------------------
                                                     $  53,423   $  51,705
                                                    -----------------------
                                                    -----------------------

Liabilities                                          $     449   $     442
Stockholders' equity                                    52,974      51,263
                                                    -----------------------
                                                     $  53,423   $  51,705
                                                    -----------------------
                                                    -----------------------


                            CONDENSED STATEMENTS OF INCOME


                                           1997         1996        1995
                                        -----------------------------------
Interest income                          $    495     $    543    $    439
Equity in earnings of subsidiaries          3,531        4,683       3,224
Other income                                   58        - - -          10
Expenses                                     (314)        (486)       (534)
Income tax benefit (expense)                  (96)         (18)         59
                                        -----------------------------------
    Net income                           $  3,674     $  4,722    $  3,198
                                        -----------------------------------
                                        -----------------------------------


                                         103
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 20. FINANCIAL INFORMATION OF HF FINANCIAL CORP. (PARENT ONLY) (CONTINUED)

                          CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
 
                                                          1997           1996           1995
                                                       ----------------------------------------
<S>                                                     <C>            <C>            <C>
Cash Flows From Operating Activities
  Net income                                            $  3,674       $  4,722       $  3,198
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Amortization of unearned compensation                    116            150            178
    Equity in earnings of subsidiaries                    (3,531)        (4,683)        (3,224)
    Cash dividends received from subsidiary                2,839          3,307          2,673
    Increase in liabilities                                    7            175            135
    Other, net                                                93            (92)          (126)
                                                       ----------------------------------------
      Net cash provided by operating activities            3,198          3,579          2,834
                                                       ----------------------------------------

Cash Flows From Investing Activities
  Purchase of investment securities                        - - -         (5,507)         - - -
  Proceeds from maturities and sales of securities         1,056          5,200          3,500
  Investment in HF Card Services, L.L.C.                     (43)            (8)         - - -
  Investment in HomeFirst Mortgage Company                 - - -           (250)          (500)
                                                       ----------------------------------------
      Net cash provided by (used in) investing
        activities                                         1,013           (565)         3,000
                                                       ----------------------------------------

Cash Flows From Financing Activities
  Purchase of treasury stock                              (1,611)          (802)         - - -
  Cash dividends paid                                     (1,083)        (1,011)          (914)
  Proceeds from issuance of common stock                     215            287             55
                                                       ----------------------------------------
      Net cash (used in) financing activities             (2,479)        (1,526)          (859)
                                                       ----------------------------------------
      Increase in cash                                     1,732          1,488          4,975

Cash at Beginning of Period                                7,563          6,075          1,100
                                                       ----------------------------------------
Cash at End of Period                                   $  9,295       $  7,563       $  6,075
                                                       ----------------------------------------
                                                       ----------------------------------------

</TABLE>

                                         104
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
NOTE 21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(Dollars in thousands except earnings per share)

                                           Year Ended June 30, 1997
                              -------------------------------------------------
                                 First        Second      Third        Fourth
                              -------------------------------------------------
Total interest income          $  11,147    $  10,956   $  10,813    $  11,096
Net interest income                4,865        4,766       4,687        4,862
Provision for losses on loans         90           64         166          373
Net income (loss)                   (378)       1,265       1,308        1,479

Earnings (loss) per share          (0.12)        0.42        0.42         0.48


                                           Year Ended June 30, 1996
                              -------------------------------------------------
                                 First        Second      Third        Fourth
                              -------------------------------------------------
Total interest income          $  10,483    $  10,887   $  11,020    $  11,075
Net interest income                3,910        4,162       4,729        4,903
Provision for losses on loans      - - -        - - -         120          470
Net income                         1,008        1,189       1,431        1,094

Earnings per share                  0.32         0.39        0.45         0.35


                                         105
<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There has been no Current Report on Form 8-K filed within 24 months prior to 
the date of the most recent financial statements reporting a change of 
accountants and/or reporting disagreements on any matter of accounting 
principle or financial statement disclosure.

                                       PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding untimely filings pursuant to Section 16 of the 
Securities Exchange Act of 1934, as amended, is incorporated herein by 
reference from the Company's definitive Proxy Statement for the Annual 
Meeting of Stockholders to be held in 1997, a copy of which will be filed not 
later than 120 days after the close of the fiscal year.

DIRECTORS

Information concerning Directors of the Company is incorporated herein by 
reference from the definitive Proxy Statement for the Annual Meeting of 
Stockholders to be held in 1997, a copy of which will be filed not later than 
120 days after the close of the fiscal year.

EXECUTIVE OFFICERS

Information regarding the business experience of the executive officers of 
the Company and the Bank contained in Part I of this Form 10-K is 
incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

Information concerning executive compensation is incorporated herein by 
reference from the definitive Proxy Statement for the Annual Meeting of 
Stockholders to be held in 1997, except for information contained under the 
headings "Board Compensation Committee Report on Executive Compensation" and 
"Stockholder Return Performance Presentation", a copy of which will be filed 
not later than 120 days after the close of the fiscal year.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information concerning security ownership of certain beneficial owners and 
management is incorporated herein by reference from the definitive Proxy 
Statement for the Annual Meeting of Stockholders to be held in 1997, a copy 
of which will be filed not later than 120 days after the close of the fiscal 
year.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information concerning certain relationships and related transactions is 
incorporated herein by reference from the definitive Proxy Statement for the 
Annual Meeting of Stockholders to be held in 1997, except for information 
contained under the headings "Board Compensation Committee Report on 
Executive Compensation" and "Stockholder Return Performance Presentation", a 
copy of which will be filed not later than 120 days after the close of the 
fiscal year.

                                       PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  Documents filed with this report.
(1)  See index to consolidated financial statements on page 65 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.


                                         106
<PAGE>

    (a) (3) EXHIBITS
<TABLE>
<CAPTION>
 
                                                                                  SEQUENTIAL
                                                                                 PAGE NUMBER
                                                           REFERENCE TO         WHERE ATTACHED
                                                           PRIOR FILING          EXHIBITS ARE
                                                            OR EXHIBIT            LOCATED IN
REGULATION                                                    NUMBER                 THIS
S-K EXHIBIT                                                  ATTACHED              FORM 10-K
  NUMBER               DOCUMENT                               HERETO                REPORT
<S>           <C>                                          <C>                  <C>

      3(i)    Articles of Incorporation                         (1)             Not Applicable

     3(ii)    By-Laws                                           (1)             Not Applicable

       4.0    Rights Agreement                                  (5)             Not Applicable

      10.1    Employment contracts between the Bank and
              Curtis L. Hage and Donald F. Bertsch              (1)             Not Applicable

      10.2    Amendment to employment contract between
              the Bank and Curtis L. Hage                       (4)             Not Applicable

      10.3    Amendment to employment contract between
              the Bank and Donald F. Bertsch                    (4)             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.                                   (4)             Not Applicable

      10.6    Amendment to 1991 Stock Option and
              Incentive Plan                                    10.6            Page 110

      10.7    1996 Director Restricted Stock Plan               10.7            Page 111

      10.8    Employment Contract between the Bank
              and Gene F. Uher                                  10.8            Page 120

        21    Subsidiaries of Registrant                        21              Page 130

        23    Consents of Experts and Counsel                   23              Page 131

        27    Financial Data Schedule                           27              Page 132

</TABLE>
 
_____________
(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, 1994.
(4) Filed as exhibits to the Company's Annual Report on Form 10k for the fiscal
    year ended June  30, 1996.
(5) Filed as Exhibit I to the Company's filing on Form 8-A, filed on October
    28, 1996.

All of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.

(b) REPORTS ON FORM 8-K

No current reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1997.


                                         107
<PAGE>

                                      SIGNATURES


    Pursuant to 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 the undersigned, 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 the Securities Exchange Act of 1934, this 
report has been signed below by the following persons in the capacities and 
on the dates indicated.

/s/ Curtis L. Hage                     /s/ Donald F. Bertsch
-------------------------------------  -------------------------------------
Curtis L. Hage, Chairman, President    Donald F. Bertsch, Senior Vice
and Chief Executive Officer            President and Chief Financial Officer
(PRINCIPAL EXECUTIVE AND OPERATING     (PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)                               OFFICER)


Date: September 17, 1997               Date: September 17, 1997
      -------------------------------        -------------------------------


/s/ Thomas L. Van Wyhe                 /s/ Paul J. Hallem
-------------------------------------  -------------------------------------
Thomas L. Van Wyhe, Director           Paul J. Hallem, Director


Date: September 17, 1997               Date: September 17, 1997
      -------------------------------        -------------------------------


/s/ Jeffrey G. Parker                  /s/ Robert L. Hanson
-------------------------------------  -------------------------------------
Jeffrey G. Parker, Director            Robert L. Hanson, Director


Date: September 17, 1997               Date: September 17, 1997
-------------------------------------        -------------------------------

/s/ William G. Pederson
-------------------------------------  -------------------------------------
William. G. Pederson, Director         Kevin T. Kirby


Date: September 17, 1997               Date:
      -------------------------------        -------------------------------


                                       -------------------------------------
                                       JoEllen G. Koerner, Ph.D.


                                       Date: 
                                             -------------------------------

                                         108
<PAGE>

                                  INDEX TO EXHIBITS


  Exhibit
  Number
-----------

   10.6       Amendment to 1991 Stock Option and Incentive Plan

   10.7       1996 Director Restricted Stock Plan

   10.8       Employment Contract between the Bank and Gene F. Uher

   21         Subsidiaries of Registrant

   23         Consents of Experts and Counsel


                                         109