<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 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
                                          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 of          (I.R.S. Employer Identification No.)
 incorporation or organization)     
           
 
225 South Main Avenue, Sioux Falls, South Dakota                57104
-------------------------------------------------------------------------------
   (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 21, 1998 there were 4,749,180 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 21, 1998 was $66.1 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 1998 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."). 
This subsidiary ceased operations in fiscal year 1998.  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, 1998,
the Company had total assets of $571.0 million and consolidated stockholders'
equity of $56.6 million (or 9.91% 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 57104.  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 and one internet branch which is located at www.homefederal.com.

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, 1998, the Bank's loan portfolio totalled $450.1 million, which
consisted of $131.1 million of one- to four- family residential mortgage loans,
$54.6 million of multi-family real estate loans, $38.0 million of commercial
real estate loans, $12.8 million of construction and development loans, $156.2
million of consumer loans, $16.3 million of agricultural loans and $41.1 million
of commercial business loans.  On such date, the Bank had $39.6 million of
mortgage-backed securities and $44.2 million of investment securities.

MORTGAGE CORP.

HomeFirst Mortgage Corp. is a South Dakota Corporation which had an office in
Omaha, Nebraska.  The Company ceased operations of the Mortgage Corp. during the
first quarter of fiscal 1998.  The Mortgage Corp. was a mortgage banking
operation that originated one- to four-family residential loans which were sold
into the secondary market.  The Mortgage Corp. had assets of $1,000 at June 30,
1998.  The Mortgage Corp. had a net loss of $11,000 during the year ended
June 30, 1998.  The primary exit costs involved were compensation costs of
$28,000 and occupancy costs of $21,000.


                                          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 $98,000 during fiscal
year 1998.

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., engages in the business of buying, selling and
managing repossessed real estate properties of Home Federal.  PMD, Inc. had no
activity during fiscal year 1998.

MARKET AREA

Based on total assets at June 30, 1998, 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 and central 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 and one internet
branch.  The Bank's immediate market area features a variety of agri-business,
banking, financial services, health care and light manufacturing firms.

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.  While the Bank sold fixed-rate
loans with maturities of 15 years or greater and conventional ARM loans into the
secondary market, during fiscal 1998 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.  In addition, the Bank
makes 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, 1998, the Bank's net loan portfolio totalled $436.1 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 allowance for losses) as of the dates indicated.

 



<TABLE>
<CAPTION>
                                                                            At June 30,
                                    ----------------------------------------------------------------------------------------------
                                          1998             1997               1996                1995                1994
                                     Amount  Percent Amount   Percent   Amount    Percent   Amount    Percent   Amount   Percent
                                    -------  ------- ------   -------   ------    -------   ------    -------   ------   ---------
                                                                      (Dollars In Thousands) 
<S>                                 <C>      <C>     <C>       <C>     <C>        <C>      <C>        <C>       <C>      <C>
 REAL ESTATE LOANS:
     One- to four-family..........  $131,062  29.13% $165,573   36.50% $178,198     41.12% $163,379     42.99%  $145,142     44.56%
     Multi-family.................    54,560  12.12    59,971   13.22    62,932     14.52    73,516     19.34     56,906     17.48
     Commercial...................    38,002   8.44    34,252    7.55    26,130      6.03    22,400      5.89     18,710      5.74
     Construction and development.    12,804   2.85     5,315    1.17    20,823      4.81    12,522      3.30     17,590      5.40
                                     ------- ------  --------  ------   -------    ------   -------    ------   --------    ------
     Total real estate loans......   236,428  52.54   265,111   58.44   288,083     66.48   271,817     71.52    238,348     73.18
                                     ------- ------  --------  ------   -------    ------   -------    ------   --------    ------
 OTHER LOANS:
 Consumer Loans:
     Mobile home..................    11,152   2.48    15,571    3.43    20,031      4.62    25,462      6.70     31,762      9.75
     Automobiles..................    66,044  14.67    66,483   14.66    48,181     11.12    32,583      8.57     22,586      6.93
     Deposit account..............     2,167   0.48     2,299    0.51     2,210      0.51     2,761      0.73      2,051      0.63
     Student......................     6,986   1.55     6,409    1.41     5,729      1.32     2,884      0.76      2,508      0.77
     Junior liens.................    41,599   9.24    38,736    8.54    24,298      5.60    22,613      5.95     18,676      5.73
     Credit cards.................    12,335   2.74     2,310    0.51     - - -      0.00     - - -      0.00      - - -      0.00
     Other (1)....................    15,944   3.54    20,934    4.61    25,475      5.88    10,784      2.84      5,077      1.57
                                     ------- ------  --------  ------   -------    ------   -------    ------   --------    ------
     Total consumer loans.........   156,227  34.70   152,742   33.67   125,924     29.05    97,087     25.55     82,660     25.38
                                     ------- ------  --------  ------   -------    ------   -------    ------   --------    ------

 Commercial business..............    41,068   9.13    27,534    6.07    13,913      3.21    11,129      2.93      4,700      1.44
                                     ------- ------  --------  ------   -------    ------   -------    ------   --------    ------
 Agricultural.....................    16,327   3.63     8,261    1.82     5,461      1.26     - - -      0.00      - - -      0.00
                                     ------- ------  --------  ------   -------    ------   -------    ------   --------    ------

         Total other loans........   213,622  47.46   188,537   41.56   145,298     33.52   108,216     28.48     87,360     26.82
                                     ------- ------  --------  ------   -------    ------   -------    ------   --------    ------

         Total gross loans........   450,050 100.00%  453,648  100.00%  433,381    100.00%  380,033    100.00%   325,708    100.00%
                                     ------- ------  --------  ------   -------    ------   -------    ------   --------    ------
                                     ------- ------  --------  ------   -------    ------   -------    ------   --------    ------

 LESS:
     Loans in process.............    (5,199)          (4,272)           (7,349)            (10,934)             (11,552)
     Deferred fees and discounts..    (1,514)          (1,348)           (1,480)               (914)                (909)
     Allowance for losses.........    (7,199)          (4,526)           (4,129)             (4,039)              (4,899)
                                    --------         --------          --------            --------             --------
       Total loans receivable, net  $436,138         $443,502          $420,423            $364,146             $308,348
                                    --------         --------          --------            --------             --------
                                    --------         --------          --------            --------             --------

</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 loans at the dates indicated.

 
<TABLE>
<CAPTION>
                                                                            At June 30,
                                    ----------------------------------------------------------------------------------------------
                                          1998              1997               1996               1995                1994
                                    Amount   Percent  Amount   Percent   Amount    Percent   Amount    Percent   Amount   Percent
                                    ------   -------  ------   -------   ------    -------  -------    -------  -------  ---------
                                                                      (Dollars In Thousands) 
<S>                                 <C>      <C>      <C>      <C>     <C>        <C>      <C>        <C>       <C>      <C>
FIXED-RATE LOANS: 
Real Estate:
   One- to four-family ...........  $ 69,679  15.48% $ 72,198   15.91% $ 82,108    18.95%  $ 73,460     19.33%  $ 77,615    23.83%
   Multi-family, commercial & 
      construction................    19,729   4.38    18,463    4.07    24,706     5.70     18,821      4.95     18,929     5.81
                                     ------- ------  --------  ------   -------   ------    -------    ------   --------   ------
     Total real estate loans .....    89,408  19.86    90,661   19.98   106,814    24.65     92,281     24.28     96,544    29.64
                                     ------- ------  --------  ------   -------   ------    -------    ------   --------   ------

Consumer (including mobile 
   home loans)....................   116,409  25.87   124,054   27.35   114,434    26.40     94,955     24.99     79,899    24.53
Agricultural .....................       982   0.22     1,293    0.29     - - -     0.00      - - -      0.00      - - -     0.00
Commercial business ..............     9,323   2.07     8,516    1.88       960     0.22      3,602       .95      2,283     0.70
                                     ------- ------  --------  ------   -------   ------    -------    ------   --------   ------
     Total fixed-rate loans ......   216,122  48.02   224,524   49.50   222,208    51.27    190,838     50.22    178,726    54.87
                                     ------- ------  --------  ------   -------   ------    -------    ------   --------   ------
ADJUSTABLE-RATE LOANS:
Real estate:
    One- to four-family ..........    61,383  13.64    93,375   20.58   105,389    24.32     96,213     25.32     75,738    23.25
    Multi-family, commercial & 
      construction................    85,637  19.03    81,075   17.87    75,880    17.51     83,323     21.92     66,067    20.29
                                     ------- ------  --------  ------   -------   ------    -------    ------   --------   ------
         Total real estate loans..   147,020  32.67   174,450   38.45   181,269    41.83    179,536     47.24    141,805    43.54
                                     ------- ------  --------  ------   -------   ------    -------    ------   --------   ------

Consumer .........................    39,818   8.85    28,688    6.32    16,951     3.91      2,132       .56      2,760     0.85
Agricultural .....................    15,345   3.41     6,968    1.54     - - -     0.00      - - -      0.00      - - -     0.00
Commercial business ..............    31,745   7.05    19,018    4.19    12,953     2.99      7,527      1.98      2,417     0.74
                                     ------- ------  --------  ------   -------   ------    -------    ------   --------   ------
         Total adjustable-rate 
           loans .................   233,928  51.98   229,124   50.50   211,173    48.73    189,195     49.78    146,982    45.13
                                     ------- ------  --------  ------   -------   ------    -------    ------   --------   ------


         Total loans .............   450,050 100.00%  453,648  100.00%  433,381   100.00%   380,033    100.00%   325,708   100.00%
                                     ------- ------  --------  ------   -------   ------    -------    ------   --------   ------
                                     ------- ------  --------  ------   -------   ------    -------    ------   --------   ------

Less:
    Loans in process .............    (5,199)          (4,272)           (7,349)            (10,934)             (11,552)
    Deferred fees and discounts ..    (1,514)          (1,348)           (1,480)               (914)                (909)
    Allowance for loan losses ....    (7,199)          (4,526)           (4,129)             (4,039)              (4,899)
                                     -------         --------           -------             -------             --------
         Total loans receivable, 
           net ...................  $436,138         $443,502          $420,423            $364,146             $308,348
                                    --------         --------          --------            --------             --------
                                    --------         --------          --------            --------             --------
</TABLE>


 
                                          5
<PAGE>

The following schedule illustrates the scheduled principal contractual
repayments of the Bank's loan portfolio at June 30, 1998.  Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due.  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 ending     One- to Four-   Multi-                                   Credit                 Commercial
June 30,                      Family        Family   Commercial (2)     Consumer     Cards    Agricultural   Business      Total
                              -------       -------  --------------     --------     ------   ------------  ---------      -----
                                                                 (Dollars in Thousands)
<S>                         <C>           <C>        <C>               <C>           <C>      <C>           <C>           <C>
1999 (1)..............       $   3,148    $  2,363     $    3,590      $   33,786    $  12,335   $   5,561   $  28,144    $ 88,927
2000..................           3,410       2,575          3,927          34,093        - - -       5,736       3,596      53,337
2001..................           3,698       2,804          4,301          33,389        - - -         344       3,960      48,496
2002 and 2003.........           8,349       6,378          9,872          29,930        - - -         788       2,460      57,777
2004 to 2008..........          27,816      21,626         24,739           5,662        - - -       2,630       2,908      85,381
2009 and following....          84,641      18,814          4,377           7,032        - - -       1,268       - - -     116,132
                            ----------    --------     ----------      ----------    ---------   ---------   ---------    --------
Total.................      $  131,062    $ 54,560     $   50,806      $  143,892    $  12,335   $  16,327   $  41,068    $450,050
                            ----------    --------     ----------      ----------    ---------   ---------   ---------    --------
                            ----------    --------     ----------      ----------    ---------   ---------   ---------    --------

</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, 1999 which have predetermined
interest rates is $176.7 million, while the total amount of loans due after such
date which have floating or adjustable interest rates is $184.4 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, 1998, the Company's one- to four-family
residential mortgage loans totalled $131.1 million, or approximately 29.1% 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 1998 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, 1998, the Company originated $25.6 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 $89.6 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.  While the Company has
generally retained servicing rights on such loans whenever possible, during
fiscal 1998 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, 1998, the Bank 
serviced $278.2 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 is 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, fire and casualty 

                                          7
<PAGE>

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 ("FHLB") 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 
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, 1998, the Bank had $54.6 million of multi-family and $38.0 million
of commercial real estate loans, which represented 12.1% and 8.4%, respectively,
of the Bank's gross loan portfolio.  At June 30, 1998, $719,000 of the Bank's
multi-family and commercial real estate portfolio or 0.2% 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 allowance 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, 1998 was $176.8 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 $7.7 million at June
30, 1998.  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" for a discussion of the
loans-to-one borrower rule.  On June 30, 1998, the Bank did not have any loans
exceeding the Loans to One Borrower requirements.


                                          8
<PAGE>

At June 30, 1998, 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 47
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 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, 1998,
the Bank had $2.1 million of residential construction loans to borrowers
intending to live in the properties upon completion of construction.

The Bank has 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 and 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, 1998, 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, 1998, the Bank had
$1.3 million of multi-family residential construction loans.  At June 30, 1998,
all of the Bank's construction loans were performing in accordance with their
terms.

Construction loans are generally originated with a maximum loan-to-value ratio
of 75% and land development loans are generally originated with 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.


                                          9
<PAGE>

CONSUMER LENDING.  Management considers its consumer loan products to be an
important component of its lending 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, 1998, mobile home loans amounted to $11.1 million or 2.5% 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, 1998, automobile loans amounted to $66.0 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, 1998, such loans amounted to $41.6 million or 9.2% 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, 1998, student loans amounted to $7.0 million or 1.6% of
the Bank's gross loan portfolio.

At June 30, 1998, the Bank's consumer loan portfolio totalled $156.2 million, or
34.7% of its gross loan portfolio.  Of the consumer loan portfolio at
June 30, 1998, 25.5% 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 (although 
historically the Bank has loaned up to 100% of the account balance), 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.


                                          10
<PAGE>

Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer 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, 1998, $1.0 million) (excluding $140,000 of repossessed consumer
collateral), or approximately 0.64% 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 year 1991, the Bank began offering
VlSA/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
$12.3 million in credit card loans at June 30, 1998.  The Bank added a new
officer to its staff in fiscal year 1997 with 12 years of experience in the
credit card industry.  Credit card processing is being provided by independent
third parties.  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, 1998, approximately $41.1 million or
9.1% 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, 1998, seven of the Bank's commercial
business loans totaling $396,000 were 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 year 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 $16.3 million of its loan portfolio in
agricultural loans which was 3.6% of its loan portfolio at June 30, 1998.

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, 1998, 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.  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, 1998, the Company had $9.6 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 are 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 1998 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 1998, the Bank purchased $16.6 million of
mortgage-backed securities.  At June 30, 1998, mortgage-backed securities
totalled $39.6 million, or 8.1% 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 that provides low-interest
residential housing financing for first time home buyers in South Dakota.  In
return for servicing such portfolio, the Bank generally receives a fee of
three-eighths of one percent from the SDHDA.  At 


                                          12
<PAGE>

June 30, 1998, the Bank serviced $364.3 million in loans for others (primarily
the SDHDA).

The contractual right to service mortgage loans has an economic value.  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 $1.4 million at June 30, 
1998. 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.

<TABLE>
<CAPTION>
                                                         Years Ended June 30,
                                                     --------------------------
                                                       1998      1997     1996
                                                       ----      ----     ----
                                                        (Dollars in Thousands)
<S>                                                  <C>       <C>      <C>
ORIGINATIONS BY TYPE:
Adjustable rate:
  Real estate. . . . . . . . . . . . . . . . .      $ 25,580  $ 44,899  $26,848
  Non-real estate. . . . . . . . . . . . . . .        32,659    29,554   21,987
                                                     -------   -------   ------
     Total adjustable rate. . . . . . . . .           58,239    74,453   48,835
                                                    --------  --------  -------
Fixed-rate:
  Real estate. . . . . . . . . . . . . . . . .        89,582    16,601   33,083
  Non-real estate. . . . . . . . . . . . . . .        93,869   104,217   89,847
                                                    --------  --------  -------
     Total fixed-rate. . . . . . . . . . . . .       183,451   120,818  122,930
                                                    --------  --------  -------
        Total loans originated . . . . . . . .       241,690   195,271  171,765
                                                    --------  --------  ------- 
PURCHASES:
  Loan participations. . . . . . . . . . . . .        21,510    13,813   23,886
  Mortgage-backed securities . . . . . . . . .        16,573     - - -   20,162
                                                    --------  --------  -------
     Total purchased . . . . . . . . . . . . .        38,083    13,813   44,048
                                                    --------  --------  ------- 
SALES:
  Real estate loans. . . . . . . . . . . . . .       106,397    53,250   55,050
  Mortgage-backed securities . . . . . . . . .           477    12,184   20,978
                                                    --------  --------  -------
     Total sales . . . . . . . . . . . . . . .       106,874    65,434   76,028
PRINCIPAL REPAYMENTS                                 165,509   147,954  104,358
                                                    --------  --------  -------

     Total reductions. . . . . . . . . . . . .       272,383   213,388  180,386
                                                    --------  --------  ------- 
Other, net . . . . . . . . . . . . . . . . . .        (5,622)   (1,938)  (3,039)
                                                    --------  --------  -------
     Net increase (decrease) . . . . . . . . .      $  1,768  $ (6,242) $32,388
                                                    --------  --------  -------
                                                    --------  --------  -------

</TABLE>

                                          13
<PAGE>

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 in nonaccrual loans.  The
amount of impaired loans was not material at June 30, 1998.

The following table sets forth information concerning delinquent mortgage and
other loans at June 30, 1998.  The amounts presented represent the total
remaining principal balances of the related loans, rather than the actual
amounts which are overdue.


 
<TABLE>
<CAPTION>

                                                                               At June 30, 1998
                                                                            (Dollars in Thousands)
                                            -------------------------------------------------------------------------------------
                                                                                 REAL ESTATE
                                            -------------------------------------------------------------------------------------
                                                      One- to four-family                             Commercial                 
                                            -------------------------------------------------------------------------------------
                                                                          Percent                                       Percent  
                                                                          of Total                                      of Total 
                                              Number         Amount        Loans             Number         Amount       Loans  
                                             -------         ------       --------          -------        -------       ------
<S>                                         <C>           <C>            <C>                 <C>        <C>            <C>
 Loans delinquent for:
   30-59 days.......................             21       $    533           0.12%               1       $    159         0.04%
   60-89 days.......................              4             37           0.01                1            311         0.07
   90 days and over.................             13            745           0.17                3            720         0.16
                                               ----       --------          -----              ---       --------       ------
 Total delinquent loans ............             38       $  1,315           0.30%               5       $  1,190         0.27%
                                               ----       --------          -----              ---       --------       ------
                                               ----       --------          -----              ---       --------       ------


<CAPTION>


                                                        At June 30, 1998
                                                     (Dollars in Thousands)
                                            ---------------------------------------
                                                          REAL ESTATE
                                            ---------------------------------------
                                                           Consumer
                                            ---------------------------------------
                                                                          Percent    
                                                                          of Total   
                                              Number         Amount        Loans     
                                             -------         ------       -------- 
<S>                                         <C>           <C>            <C>         
 Loans delinquent for:
   30-59 days.......................            266       $  1,967           0.44%       
   60-89 days.......................             43            364           0.08        
   90 days and over.................             52            544           0.12        
                                               ----       --------          -----   

 Total delinquent loans ............            361       $  2,875           0.64%       
                                               ----       --------          ----- 
                                               ----       --------          ----- 

<CAPTION>

                                                                               At June 30, 1998
                                                                            (Dollars in Thousands)
                                            -------------------------------------------------------------------------------------
                                                                               NON REAL ESTATE
                                            -------------------------------------------------------------------------------------
                                                        Credit Card                                       Business
                                            -------------------------------------------------------------------------------------
                                                                          Percent                                       Percent 
                                                                          of Total                                      of Total
                                             Number           Amount        Loans           Number         Amount        Loans
                                             -------         ------       --------          -------        -------       ------
<S>                                         <C>           <C>            <C>                 <C>        <C>            <C>
 Loans delinquent for:
   30-59 days.......................          3,502       $  1,293           0.29%               9           $432         0.10%
   60-89 days.......................          1,406            617           0.14                4            196         0.04
   90 days and over.................          1,104            530           0.12                7            396         0.09
                                              -----       --------          -----              ----      --------       ------

 Total delinquent loans ............          6,012       $  2,440           0.55%               20        $1,024         0.23%
                                              -----       --------          -----              ----      --------       ------
                                              -----       --------          -----              ----      --------       ------
 

</TABLE>

----------

There were no construction and development loans delinquent at June 30, 1998.
There were no agricultural loans delinquent at June 30, 1998.
There were no multi-family loans delinquent at June 30, 1998.


                                          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.

 
<TABLE>
<CAPTION>

                                                                              At June 30,
                                                        --------------------------------------------------------
                                                        1998          1997       1996         1995        1994
                                                        ----           ----      ----         ----        ----
                                                                            (Dollars in Thousands)
<S>                                                     <C>           <C>         <C>         <C>        <C>
Non-accruing loans:
     One- to four-family . . . . . . . . . . . . .      $  623       $  618      $  682       $  169      $  263
     Commercial real estate. . . . . . . . . . . .         719          154         556          710         717
     Multi-family. . . . . . . . . . . . . . . . .       - - -        - - -       - - -        1,611       1,718
     Mobile homes. . . . . . . . . . . . . . . . .          31           52          58          198         122
     Credit cards. . . . . . . . . . . . . . . . .       - - -        - - -       - - -        - - -       - - -
     Consumer(1) . . . . . . . . . . . . . . . . .         482          428         340           23          51
     Commercial business . . . . . . . . . . . . .         396        - - -         427        - - -       - - -
     Agricultural. . . . . . . . . . . . . . . . .       - - -        - - -       - - -        - - -       - - -
                                                        ------       ------       ------      ------      -------
        Total. . . . . . . . . . . . . . . . . . .       2,251        1,252       2,063        2,711       2,871
                                                        ------       ------       ------      ------      -------

Accruing loans delinquent more than 90 days
     One- to four-family . . . . . . . . . . . . .       - - -        - - -       - - -          143          60
     Commercial real estate. . . . . . . . . . . .       - - -        - - -       - - -        - - -       - - -
     Multi-family. . . . . . . . . . . . . . . . .       - - -        - - -       - - -        - - -       - - -
     Mobile homes. . . . . . . . . . . . . . . . .       - - -        - - -       - - -            7          51
     Credit cards. . . . . . . . . . . . . . . . .         530        - - -       - - -        - - -       - - -
     Consumer(1) . . . . . . . . . . . . . . . . .       - - -        - - -       - - -            2          10
     Agricultural. . . . . . . . . . . . . . . . .       - - -        - - -       - - -        - - -       - - -
     Commercial business . . . . . . . . . . . . .       - - -        - - -       - - -        - - -       - - -
                                                        ------       ------       ------      ------      -------
        Total. . . . . . . . . . . . . . . . . . .         530        - - -       - - -          152         121
                                                        ------       ------       ------      ------      -------
 
Foreclosed assets:
     One- to four-family . . . . . . . . . . . . .          22          311          52          108          50
     Commercial real estate. . . . . . . . . . . .       - - -        - - -           1            3       1,005
     Multi-family. . . . . . . . . . . . . . . . .       - - -        - - -       - - -        - - -         150
     Mobile homes. . . . . . . . . . . . . . . . .          67          124          88           38         152
     Credit cards. . . . . . . . . . . . . . . . .       - - -        - - -       - - -        - - -       - - -
     Consumer(1) . . . . . . . . . . . . . . . . .         140          158          87           54          25
     Agricultural. . . . . . . . . . . . . . . . .       - - -        - - -       - - -        - - -       - - -
     Commercial business . . . . . . . . . . . . .       - - -        - - -       - - -        - - -       - - -
                                                        ------       ------       ------      ------      -------
        Total. . . . . . . . . . . . . . . . . . .         229          593         228          203       1,382
                                                        ------       ------       ------      ------      -------

Total non-performing assets(2) . . . . . . . . . .      $3,010       $1,845      $2,291       $3,066      $4,374
                                                        ------       ------       ------      ------      -------
                                                        ------       ------       ------      ------      -------

Non-performing assets to total assets(3) . . . . .        0.53%        0.33%       0.41%        0.57%       0.89%
                                                        ------       ------       ------      ------      -------
                                                        ------       ------       ------      ------      -------

Non-performing loans to total loans(4) . . . . . .        0.63%        0.28%       0.49%        0.79%       0.97%
                                                        ------       ------       ------      ------      -------
                                                        ------       ------       ------      ------      -------

</TABLE>

----------
(1)  Consists of non-performing consumer loans exclusive of mobile home loans
     and credit card 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, 1998, gross interest income which would have been
recorded had the non-accruing loans been current in accordance with their
original terms amounted to approximately $229,000.  Income that was recorded on
these non-accrual loans amounted to approximately $250,000 for the year ended
June 30, 1998.

NON-ACCRUING LOANS.  As of June 30, 1998, the Bank had $2.3 million in net book
value of non-accruing loans.  Included in non-accruing loans at June 30, 1998
were ten loans totalling $623,000 secured by one- to four-family real estate,
three loans in the amount of $719,000 secured by commercial real estate, seven
commercial business loans totalling $396,000, five mobile home loans totalling
$31,000, and thirty-three consumer loans (excluding mobile home loans) totalling
$482,000.

ACCRUING LOANS DELINQUENT MORE THAN 90 DAYS.  At June 30, 1998 the Bank had
$530,000 accruing credit card loans delinquent more than 90 days.  When a loan
becomes 90 days delinquent, except for credit card loans, 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 non-accrual status until the borrower has
brought the loan current.  Credit card loans remain in accrual status until 120
days, when accrued interest income on the loan is taken out of income.

FORECLOSED ASSETS.  As of June 30, 1998, the Bank had $229,000 of foreclosed
assets.  The balance of foreclosed assets at June 30, 1998 consisted of $140,000
in consumer (other than mobile homes) collateral, $67,000 in mobile homes and
$22,000 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, 1998 there were 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 amounts 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
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, 1998, the Bank had
classified $5.1 million of its assets as special mention (including certain
loans discussed herein), $5.0 million as substandard (including certain loans
discussed herein), and approximately $1.0 million as doubtful.  Classified
assets at June 30, 1998 consisted of the $3.0 million of non-performing assets,
and the $8.1 million of other loans of concern discussed above.


                                          17
<PAGE>

ALLOWANCE FOR LOAN LOSSES.  The current level of the allowance for loan 
losses is a result of management's assessment of the risks within the 
portfolio based on the information revealed in credit reporting processes.  
The Company utilizes a risk-rating system on all commercial business, 
agricultural, construction, multi-family and commercial real estate loans, 
including purchased loans, that exceed $250,000 and a monthly credit review 
and reporting process on all types of loans that results in the calculation 
of guideline reserves based on the risk within the portfolio.  This 
assessment of risk takes into account the composition of the loan portfolio, 
previous loan experience, current economic conditions and other factors that, 
in management's judgment, deserve recognition. In regard to credit card 
loans, the Company is providing a reserve in a range of 25% to 30% of the 
loan balance until the credit card portfolio becomes seasoned.  As of June 
30, 1998, $3.2 million of the $7.2 million allowance for loan losses was 
reserved for the credit card loan portfolio. Regulators have reviewed the 
Company's methodology for determining allowance requirements on the Company's 
loan portfolio and have made no recommendations for increases in the 
allowances during the five year period ended June 30, 1998. The Company has 
historically maintained a positive variance from the minimum estimated 
allowance for loan losses based on the analyses that are conducted by bank 
management and corporate credit personnel.  Management has reviewed the 
allocations in the various classifications of loans and believes the 
allowance was adequate at all times during the five year period ended June 
30, 1998.

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 properties is established by a charge to operations if the carrying 
values of the properties exceed their estimated net realizable values.

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, 1998, the Bank had a total allowance for losses on 
loans of $7.2 million, or 1.62% of total loans.  See Note 1 of the Notes to 
Consolidated Financial Statements for a description of the Bank's policy 
regarding the provision for losses on loans.

                                          18
<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>

                                                                           Years Ended June 30,
                                             -----------------------------------------------------------------------
                                                   1998           1997           1996           1995          1994
                                                   ----           ----           ----           -----         ----
                                                                           (Dollars in Thousands)
<S>                                              <C>            <C>            <C>            <C>            <C>
Balance at beginning of period . . . . . . .     $4,526         $4,129         $4,039         $4,899         $4,829
Charge-offs:
One- to four-family. . . . . . . . . . . . .        (95)          (104)           (23)           (34)           (61)
     Commercial. . . . . . . . . . . . . . .       (173)           (15)           (35)         - - -            (40)
     Multi-family. . . . . . . . . . . . . .      - - -          - - -          - - -           (400)          (322)
     Consumer. . . . . . . . . . . . . . . .     (1,065)          (757)          (487)          (264)          (102)
     Agriculture . . . . . . . . . . . . . .      - - -          - - -          - - -          - - -          - - -
     Credit cards. . . . . . . . . . . . . .       (906)           (59)         - - -          - - -          - - -
     Mobile homes. . . . . . . . . . . . . .       (184)          (186)          (305)          (265)          (220)
                                                -------        -------         ------         ------         ------
     Total charge-offs . . . . . . . . . . .     (2,423)        (1,121)          (850)          (963)          (745)
                                                -------        -------         ------         ------         ------
Recoveries:
     One- to four-family . . . . . . . . . .         12             24             51             16              6
     Commercial. . . . . . . . . . . . . . .      - - -            493             58             90            359
     Multi-family. . . . . . . . . . . . . .      - - -             46              6            398             87
     Commercial Business . . . . . . . . . .      - - -              1             43          - - -          - - -
     Consumer. . . . . . . . . . . . . . . .        184            194            100             54             40
     Agriculture . . . . . . . . . . . . . .      - - -          - - -          - - -          - - -          - - -
     Credit cards. . . . . . . . . . . . . .        179             19          - - -          - - -          - - -
     Mobile homes. . . . . . . . . . . . . .         32             48             92             60             48
                                                -------        -------         ------         ------         ------
     Total recoveries. . . . . . . . . . . .        407            825            350            618            540
                                                -------        -------         ------         ------         ------

     Net (charge-offs) . . . . . . . . . . .     (2,016)          (296)          (500)          (345)          (205)
                                                -------        -------         ------         ------         ------

Additions (recoveries) charged to 
operations . . . . . . . . . . . . . . . . .      4,689            693            590           (515)           275
                                                -------        -------         ------         ------         ------

Balance at end of period . . . . . . . . . .     $7,199         $4,526         $4,129         $4,039         $4,899
                                                -------        -------         ------         ------         ------
                                                -------        -------         ------         ------         ------
  
Ratio of net (charge-offs) during the
period to average loans outstanding during
the period . . . . . . . . . . . . . . . .  .     (0.45)%        (0.07)%        (0.12)%        (0.10)%        (0.07)%
                                                -------        -------         ------         ------         ------
                                                -------        -------         ------         ------         ------
Ratio of allowance for loan losses to total 
loans at end of period . . . . . . . . . . .       1.62%          1.02%          0.98%          1.11%          1.59%
                                                -------        -------         ------         ------         ------
                                                -------        -------         ------         ------         ------
Ratio of allowance for loan losses to non-
performing loans at end of period(1) . . . .     258.86%        361.50%        200.15%        141.08%        163.74%
                                                -------        -------         ------         ------         ------
                                                -------        -------         ------         ------         ------
</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 loan losses at the dates
indicated is summarized as follows:
 
 

<TABLE>
<CAPTION>
                                                                                At June 30,
                                            ----------------------------------------------------------------------------------------
                                                   1998                             1997                        1996 
                                                   ----                             ----                        ---- 
                                                         Percent of                     Percent of                     Percent 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). . . . . .            $1,203         29.12%           $1,540        36.50%          $1,789          43.27%
Commercial and multi-family 
     real estate(1). . . . . . .               967         23.41               926        21.94              957          23.21
Mobile homes . . . . . . . . . .               102          2.48               145         3.43              191           4.62
Consumer(2). . . . . . . . . . .             1,219         29.49             1,254        29.73            1,060          25.69
Credit cards . . . . . . . . . .             3,181          2.74               329         0.51            - - -          - - -
Agricultural . . . . . . . . . .               150          3.63                77         1.82            - - -          - - -
Commercial business. . . . . . .               377          9.13               255         6.07              132           3.21
                                            ------         ------           ------        ------          ------         -------
     Total . . . . . . . . . . .            $7,199        100.00%           $4,526       100.00%          $4,129         100.00%
                                            ------         ------           ------        ------          ------         -------
                                            ------         ------           ------        ------          ------         -------

<CAPTION>
                                                                    At June 30,
                                            -----------------------------------------------------------
                                                     1995                          1994
                                                     -----                          ----
                                                           Percent of                      Percent 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). . . . . .              $910         44.64%              $1,320        47.08%
Commercial and multi-family 
     real estate(1). . . . . . .             1,743         26.88                1,677        26.10
Mobile homes . . . . . . . . . .               608          6.70                  908         9.75
Consumer(2). . . . . . . . . . .               644         18.85                  901        15.63
Credit cards . . . . . . . . . .             - - -          - - -               - - -        - - -
Agricultural . . . . . . . . . .             - - -          - - -               - - -        - - -
Commercial business. . . . . . .               134           2.93                  93         1.44
                                            ------         ------              ------        ------
     Total . . . . . . . . . . .            $4,039         100.00%             $4,899       100.00%
                                            ------         ------              ------        ------
                                            ------         ------              ------        ------
</TABLE>

----------
(1)  Includes construction loans and credit card loans.
(2)  Excludes allowance for loan losses relating to mobile home loans and credit
     card 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 year 1998, the
Bank had $477,000 of sales and repayments of $6.9 million.  The Bank had $16.6
million of purchases of mortgage-backed securities during fiscal year 1998.  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,
1998, 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, 1998
                                               ---------   ---------    ------    -------   --------    -------     --------------
<S>                                            <C>         <C>          <C>       <C>       <C>         <C>         <C>
FIXED-RATE:
Federal Home Loan Mortgage Corporation            $- - -       $- - -     $3,903   $2,930    $   882    $   - - -         $  7,715
Federal National Mortgage Association              - - -        - - -      2,118    3,522      6,565          989           13,194
Government National Mortgage Association           - - -        - - -      - - -    - - -      - - -          102              102
Real Estate Mortgage Investment Conduit            - - -        - - -      - - -    - - -      - - -        2,715            2,715
                                                  ------       ------     ------  -------     ------    ---------         --------
  Total Fixed-Rate                                 - - -        - - -      6,021    6,452      7,447        3,806           23,726
                                                  ------       ------     ------  -------     ------    ---------         --------
VARIABLE-RATE:
Resolution Trust Corporation                       - - -        - - -      - - -    - - -      - - -          733              733
Resolution Funding Mortgage Security               - - -        - - -      - - -    - - -      - - -        1,210            1,210
Real Estate Mortgage Investment Conduit            - - -        - - -      - - -    - - -      - - -        9,809            9,809
Federal Home Loan Mortgage Corporation             - - -        - - -      - - -    - - -      - - -        2,307            2,307
Federal National Mortgage Association              - - -        - - -      - - -    - - -      - - -        1,918            1,918
                                                  ------       ------     ------  -------     ------    ---------         --------
  Total Variable-Rate                              - - -        - - -      - - -    - - -      - - -       15,977           15,977
                                                  ------       ------     ------  -------     ------    ---------         --------

     Total                                        $- - -       $- - -     $6,021   $6,452     $7,447      $19,783         $ 39,703
                                                  ------       ------     ------  -------     ------    ---------         --------
                                                  ------       ------     ------  -------     ------    ---------         --------

</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, 1998, the Bank's liquidity ratio (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was 6.0%. 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, 1998, the Company had $12.0 million in interest-bearing deposits,
and investment securities totalled $40.6 million, or 7.1% of its total assets.
As of such date, the Bank also had a $3.7 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, 1998, the average term to maturity
or repricing of the investment securities portfolio was 0.54 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,
                                                 --------------------------------------------------------------------------------
                                                           1998                        1997                         1996
                                                           ----                        ----                         ----
                                                  Amortized       % of        Amortized       % of        Amortized         % of
                                                    Cost          Total         Cost          Total         Cost            Total
                                                   -----         ------         -----         ------        ------          -----
                                                                                (Dollar in Thousands)
<S>                                               <C>            <C>          <C>            <C>          <C>              <C>
Interest-bearing deposits...............             $12,000         21.36%       $6,000         11.32%     $  - - -         - - -%
                                                     -------       -------       -------       -------       -------       -------
                                                     -------       -------       -------       -------       -------       -------
Investment securities:
      U.S. government securities........               2,994          5.33%        7,019         13.24%       14,280         22.91%
      Federal agency obligations........              24,492         43.59        21,428         40.41        36,086         57.89
      Federal Home Loan Bank............              11,997         21.35        11,999         22.63         - - -         - - -
      FHLMC preferred stock.............                 500          0.89           500          0.94           508          0.81
      FNMA common stock.................                   8          0.01             8          0.02             8          0.01
      Redwood Financial common stock....               - - -         - - -           462          0.87         - - -         - - -
      Tax free bonds....................                 540          0.96           385          0.73           565          0.91
      Corporate bond....................               - - -         - - -         - - -         - - -         6,222          9.99
                                                     -------       -------       -------       -------       -------       -------
         Subtotal.......................              40,531         72.13        41,801         78.84        57,669         92.52
                                                     -------       -------       -------       -------       -------       -------

FHLB stock..............................               3,657          6.51         5,222          9.84         4,665          7.48
                                                     -------       -------       -------       -------       -------       -------

      Total investment securities and                                                                                 
      FHLB stock........................             $56,188        100.00%      $53,023        100.00%      $62,334        100.00%
                                                     -------       -------       -------       -------       -------       -------
                                                     -------       -------       -------       -------       -------       -------

Average remaining life or term to 
repricing excluding FHLB                                                                                                        
stock, FHLMC Preferred Stock, Redwood                            .54 years                   .58 years                  1.46 years
Financial Common Stock
</TABLE>

                                                                     24


<PAGE>

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

<TABLE>
<CAPTION>


                                                                            At June 30, 1998
                                            ---------------------------------------------------------------------------------------
                                               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 . . . . . . .        $   ---        $ 2,994         $  ---         $  ---        $ 2,994        $ 3,018
Federal agency obligations . . . . . . .          1,998         34,491            ---            ---         36,489         36,473
Tax Free Bonds . . . . . . . . . . . . .            ---            110             45            385            540            573
                                                -------        -------         ------         ------        -------        -------
Total investment securities. . . . . . .        $ 1,998        $37,595         $   45         $  385        $40,023        $40,064
                                                -------        -------         ------         ------        -------        -------
                                                -------        -------         ------         ------        -------        -------
Weighted average yield . . . . . . . . .           5.62%          6.02%          7.63%          6.50%          6.01%
                                                 -------        -------         ------         ------        -------
                                                 -------        -------         ------         ------        -------

</TABLE>

The Company's investment securities portfolio at June 30, 1998 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 within specified limits and approved in advance by
the Board of Directors for transactions over these limits.  At the present time,
Home Federal does not have any investments that are held for trading purposes.
At June 30, 1998, the Company has $44.2 million of securities available for
sale, including FHLB stock of $3.7 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,
                                                                 -------------------------------------------------------------
                                                                       1998                 1997                 1996
                                                                 --------------------  ------------------   ------------------
                                                                          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, 1998, 1997 and 1996. . . . . . . . . . . .  $61,266     13.72%   $28,968      6.93%    $31,445      7.90%
NOW Accounts weighted average rates of 1.51%, 1.44%
and 1.78% at June 30, 1998, 1997 and 1996. . . . . . . . . . . .   24,659      5.52     24,614      5.88      22,030      5.53
Non-interest bearing Accounts. . . . . . . . . . . . . . . . . .   33,403      7.48     20,973      5.02      11,293      2.84
Money Market Accounts weighted average rates of 4.03%, 2.90%
and 3.% at June 30, 1998, 1997 and 1996. . . . . . . . . . . . .   43,868      9.84     34,421      8.23      34,339      8.62
                                                                 --------    ------   --------    ------    --------    -------
Total Transaction Accounts . . . . . . . . . . . . . . . . . . .  163,196     36.56    108,976     26.06      99,107     24.89
                                                                 --------    ------   --------    ------    --------    -------

CERTIFICATES OF DEPOSIT:
     0.00 - 3.99%. . . . . . . . . . . . . . . . . . . . . . . .      ---      0.00        322      0.08         191      0.01
     4.00 - 4.99%. . . . . . . . . . . . . . . . . . . . . . . .    9,891      2.22      6,230      1.49      28,524      7.17
     5.00 - 5.99%. . . . . . . . . . . . . . . . . . . . . . . .  150,856     33.79    175,399     41.94     152,678     38.36
     6.00 - 6.99%. . . . . . . . . . . . . . . . . . . . . . . .   97,386     21.81    100,314     23.99      86,363     21.70
     7.00 - 7.99%. . . . . . . . . . . . . . . . . . . . . . . .   23,983      5.37     25,819      6.17      29,551      7.42
     8.00 - 8.99%. . . . . . . . . . . . . . . . . . . . . . . .    1,055      0.24      1,114      0.27       1,747      0.44
     9.00% and greater . . . . . . . . . . . . . . . . . . . . .       57      0.01         12      0.00           5      0.01
                                                                  -------    ------   --------    ------    --------    -------

Total Certificates of Deposit. . . . . . . . . . . . . . . . . .  283,228     63.44    309,210     73.94     299,059     75.11
                                                                 --------    ------   --------    ------    --------    -------
Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . $446,424    100.00%  $418,186    100.00%   $398,166    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
deposits (withdrawals) before interest credited during the years ended June 30,
1998, 1997, and 1996 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.

<TABLE>
<CAPTION>


                                                  Year Ended June 30,
                                     ---------------------------------------
                                        1998            1997          1996
                                        ----            ----          ----
                                            (Dollars in Thousands)

<S>                                  <C>            <C>            <C>
Opening balance. . . . . . . .       $418,186       $398,166       $400,675

Net deposits (withdrawals) . .          6,039           (763)       (23,188)

Interest credited. . . . . . .         22,199         20,783         20,679
                                     --------        --------        -------

Ending balance . . . . . . . .       $446,424       $418,186       $398,166
                                     --------       ---------      --------
                                     --------       ---------      --------

Net increase (decrease). . . .        $28,238         $20,020        ($2,509)
                                     --------        --------        -------
                                     --------        --------        -------

Percent increase (decrease). .          6.75%          5.03%         (0.63%)
                                     -------         -------        -------
                                     -------         -------        -------
</TABLE>


                                          27
<PAGE>

The following table shows rate and repricing information for the Company's
certificates of deposit as of June 30, 1998.

<TABLE>
<CAPTION>

                              0.00-       5.00-        6.00-       7.00%        8.00%      9.00%                    Percent
                              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>
September 30, 1998 . . . .   $5,687   $  31,688    $  15,136     $    49      $   147    $   ---       $52,707     18.61%
December 31, 1998. . . . .    4,183      20,880       16,711         654          190        ---        42,618     15.05
March 31, 1999 . . . . . .       15      21,082        3,740       6,386          191        ---        31,414     11.09
June 30, 1999. . . . . . .        6      21,107       11,789      12,158           25        ---        45,085     15.92
September 30, 1999 . . . .      ---      14,623       23,334       1,402           66        ---        39,425     13.92
December 31, 1999. . . . .      ---      11,234       15,312       1,788           66        ---        28,400     10.03
March 31, 2000 . . . . . .      ---      10,648        5,109       1,158          248        ---        17,163      6.06
June 30, 2000. . . . . . .      ---       6,796          927         341          ---         57         8,121      2.87
September 30, 2000 . . . .      ---       2,116        1,339         ---           72        ---         3,527      1.24
December 31, 2000. . . . .      ---       4,790           97           2           21        ---         4,910      1.73
March 31, 2001 . . . . . .      ---       1,025          166          25          ---        ---         1,216      0.43
June 30, 2001. . . . . . .      ---         611          378         ---          ---        ---           989      0.35
Thereafter . . . . . . . .      ---       4,256        3,348          20           29        ---         7,653      2.70
                             ------     -------      -------      ------       ------    --------     --------    -------
Total. . . . . . . . . . .   $9,891    $150,856      $97,386     $23,983       $1,055    $    57      $283,228    100.00%
                             ------     -------      -------     -------       ------    --------     --------    -------
                             ------     -------      -------     -------       ------    --------     --------    -------
Percent of Total . . . . .     3.49%      53.27%       34.38%       8.47%        0.37%       0.02%      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, 1998.

<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 . . . . . . . . . . . . . . . . . . . . .        $39,755        $33,640        $64,437        $93,337       $231,169

Certificates of deposit of
$100,000 or more . . . . . . . . . . . . . . . . .          4,417          5,283          8,631         17,793         36,124

Public funds(1). . . . . . . . . . . . . . . . . .          8,536          3,695          3,432            272         15,935
                                                          -------        -------        -------       --------       --------

Total certificates of deposit. . . . . . . . . . .        $52,708        $42,618        $76,500       $111,402       $283,228
                                                          -------        -------        -------       --------       --------
                                                          -------        -------        -------       --------       --------

</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.  Deposits at June 30, 1998 and 1997 include
$38.3 million and $4.1 million, respectively of deposits from one local
governmental entity, the majority of which are demand accounts.

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, 1998, the Bank's FHLB
advances totalled $50.1 million, representing 9.76% 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.

<TABLE>
<CAPTION>

                                                  Years Ended June 30,
                                                  --------------------
                                              1998         1997      1996
                                              ----         ----      ----
                                                  (Dollars in Thousands)
                    <S>                    <C>           <C>        <C>
                    MAXIMUM BALANCE:
                    FHLB advances. . . .   $74,219       $87,516    $97,996
                    Other borrowings . .       524           600        600

                    AVERAGE BALANCE:
                    FHLB advances. . . .   $63,532       $77,629    $86,851
                    Other borrowings . .       524           562        600

</TABLE>


                                          29
<PAGE>

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

<TABLE>
<CAPTION>

                                                  Years Ended June 30,
                                                  --------------------
                                              1998         1997      1996
                                              ----         ----      ----
                                                  (Dollars in Thousands)
                    <S>                   <C>           <C>        <C>
                    FHLB advances. . . .  $ 50,111      $ 74,219   $ 89,523
                    Other borrowings . .       524           524        600
                                          --------      --------   --------
                    Total borrowings . .  $ 50,635      $ 74,743   $ 90,123
                                          --------      --------   --------
                                          --------      --------   --------

                    Weighted average
                    interest rate of
                    FHLB advances. . . .      5.69%         5.69%      5.59%
</TABLE>

SUBSIDIARY ACTIVITIES

As a federally chartered thrift institution, Home Federal is permitted by OTS
regulations to invest up to 2% of its assets, or $11.4 million at June 30, 1998,
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 $120,000.  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 subsidiary corporations, Hometown Insurors, Inc.
("Hometown"), Mid-America Service Corporation ("Mid-America") and PMD, Inc.
("PMD").

Hometown, located in Sioux Falls, South Dakota, provides a full line of
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 had a negative investment in Hometown of $18,000 at June 30, 1998.
Hometown had a loss before tax of $122,000 for the 1998 fiscal year.  In July,
1998, Home Federal infused capital of $50,000 into Hometown.

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, 1998, the Bank had a $138,000 investment in
Mid-America.  Mid-America had income before tax of $46,000 for the 1998 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, 1998, the
Bank had a $1,000 investment in PMD.  PMD had no activity during fiscal year
1998.

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,
1998, the Company had a negative investment in HF Card Services of $14,000.  HF
Card Services had net income of $98,000 for the 1998 fiscal year.

HomeFirst Mortgage Corp. is a South Dakota Corporation which had office in
Omaha, Nebraska.  The Mortgage Corp. was a mortgage banking operation that
originated one- to four- family residential loans which were sold into the
secondary market.  The Mortgage Corp. had assets of $1,000 at June 30, 1998.
The Company ceased operations of the Mortgage Corp. during the first quarter of
fiscal 1998.  The Mortgage Corp. had a net loss of $11,000 during the year ended
June 30, 1998.  The primary exit costs involved were compensation costs of
$28,000 and occupancy costs of $21,000.


                                          30
<PAGE>

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.

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 24 financial institutions which compete for deposits in Minnehaha
County.  According to information contained in reports prepared by the FDIC, the
Bank is the third largest financial institution based on total deposits in
Minnehaha County, excluding Citibank and Hurley State Bank.  Management
estimates that its deposit market share in Minnehaha County, where the majority
of its deposits are located, is approximately 12%.

EMPLOYEES

At June 30, 1998, the Bank had a total of 292 employees including 23 employees
of the Bank's service corporations.

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

REGULATION

GENERAL.  The Bank 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, the Bank is subject to broad federal
regulation and oversight extending to all its operations.  The Bank 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 the Bank, 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 of such
statutes, regulations and policies.

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, the Bank 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 June 15, 1998. Examiners may require a federal savings
association to provide for higher general or specific loan loss-reserves.

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, 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, 1998 was approximately $131,000.

The OTS has proposed amendments to its regulations that are intended to assess
savings associations on a more


                                          31
<PAGE>

equitable basis.  The proposed regulations would base the assessment for an
individual savings association on three components:  the size of the
association, on which the basic assessment would be based; the association's
supervisory condition, which would result in percentage increases for any
savings institution with a composite rating of 3, 4 or 5 in its most recent
safety and soundness examination; and the complexity of the association's
operations, which would result in percentage increases for a savings association
that managed over $1 billion in trust assets, serviced for others loans
aggregating more than $1 billion, or had certain off-balance sheet assets
aggregating more than $1 billion.  In order to avoid a disproportionate impact
on the smaller savings institutions, the OTS is proposing to permit the portion
of the assessment based on assets size either under the current regulations or
under the amended regulations.  Management believes that, assuming the proposed
regulations are adopted as proposed, any change in its rate of OTS assessments
will not be material.

ENFORCEMENT.  Under the Federal Deposit Insurance Act (the "FDI Act"), the OTS
has primary enforcement responsibility over savings associations and has the
authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any stockholder, attorney,
appraiser or accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings association.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders, and
certain written agreements and conditions continue, up to $1 million per day for
such violations if the person obtained a substantial pecuniary gain as a result
of such violation or knowingly or recklessly caused a substantial loss to the
institution.  Criminal penalties for certain financial institution crimes
include fines of up to $1 million and imprisonment for up to 30 years.  In
addition, regulators have substantial discretion to take enforcement action
against an institution that fails to comply with its regulatory requirements,
particularly with respect to its capital requirements.  Possible enforcement
actions range from the imposition of a capital plan and capital directive to
receivership, conservatorship, or the termination of deposit insurance.  Under
the FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings association.
If action is not taken by the Director of the OTS, the FDIC has authority to
take such action under certain circumstances.

BUSINESS ACTIVITIES.  The Bank derives its lending and investment powers from
the Home Owners' Loan Act, as amended (the "HOLA"), and the regulations of the
OTS thereunder.  Under these laws and regulations, the Bank may invest in
mortgage loans secured by residential and commercial real estate, commercial and
consumer loans, certain types of debt securities and certain other assets.  The
Bank may also establish service corporations that may engage in activities not
otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage.  These investment powers are
subject to various limitations, including (a) a prohibition against the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories; (b) a limit of 400% of an association's capital on
the aggregate amount of loans secured by non-residential real estate property;
(c) a limit of 20% of an association's assets on the aggregate amount of
commercial loans, with the amount of commercial loans in excess of 10% of assets
being limited to small business loans; (d) a limit of 35% of an association's
assets on the aggregate amount of consumer loans and acquisitions of certain
debt securities; (e) a limit of 5% of assets on non-conforming loans (loans in
excess of the specific limitations of the HOLA); and (f) a limit of the greater
of 5% of assets or an association's capital on certain construction loans made
for the purpose of financing what is or is expected to become residential
property.

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, 1998, the Bank's
lending limit under this restriction was $7.7 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


                                          32
<PAGE>

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.

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.  The Bank 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.

On September 30, 1996, Congress passed and President Clinton signed into law The
Deposit Insurance Funds Act of 1996 ("Funds Act") to resolve the deposit
insurance premium disparity.  The Funds Act also included extensive regulatory
relief for banks and thrifts. The Funds Act 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 Funds Act includes the following items which 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 1997 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


                                          33
<PAGE>

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.  Assessments currently range
from 0.0% of deposits for institutions in the highest category to 0.27% of
deposits for institutions in the lowest category.  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 adopted 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 regulations would also generally prohibit
certain indemnification payments for civil money penalties or other enforcement
action.

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 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, 1998, Home Federal had
$1.4 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 such 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, 1998, the Bank had Tier I (Leverage) capital equal to $44.2 million,
or 7.75% of adjusted total assets, which is $27.1 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, 1998, the Bank had $1.4 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.


                                          34
<PAGE>

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, 1998, Home Federal 
had no capital instruments that qualified as supplementary capital and $7.2 
million of general loss reserves, which was in excess of 1.25% of 
risk-weighted assets by $2.4 million.


                                          35
<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, 1998.

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, 1998, the Bank had total capital of $49.0 million (including $44.2
million in core capital and $4.8 million in qualifying supplementary capital)
and risk-weighted assets of $386.8 million (including $2.3 million in converted
off-balance sheet assets), or total capital of 12.76% of risk-weighted assets.
This amount was $18.3 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, 1998.

<TABLE>
<CAPTION>

                                                                 PERCENT OF
                                                                  APPLICABLE
                                              AMOUNT               ASSETS(1)
                                              ------             -----------
                                                 (DOLLARS IN THOUSANDS)
<S>                                          <C>                  <C>
GAAP capital . . . . . . . . . . .           $44,191                  7.75%
                                             -------                 ------
                                             -------                 ------
Tier I (Leverage) capital. . . . .           $44,201                  7.75%
Required(3). . . . . . . . . . . .            17,113                  3.00
                                             -------                 ------
Excess over requirement. . . . . .           $27,088                  4.75%
                                             -------                 ------
                                             -------                 ------

Risk based capital(4). . . . . . .           $49,036                 12.76%
Required . . . . . . . . . . . . .            30,754                  8.00
                                             -------                 ------
Excess over requirement. . . . . .           $18,282                  4.76%
                                             -------                 ------
                                             -------                 ------

</TABLE>

---------------------
(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.


                                          36
<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 $4.8 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, 1998.

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.

PROMPT CORRECTIVE ACTION STANDARDS.  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.


                                          37
<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


                                          38
<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) in each calendar quarter 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.  Furthermore, every savings
association must maintain sufficient liquidity to ensure its safe and sound
operation.  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 4%.

Monetary penalties may be imposed upon associations for violations of the liquid
asset ratio requirement.  At June 30, 1998, the Bank was in compliance with the
liquidity requirements, with the overall liquid asset ratio at 6.04%.

ACCOUNTING FOR INVESTMENTS.  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.

The CRA regulations rate an institution based on its actual performance in
meeting community needs.  In particular, the rating system focuses 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


                                          39
<PAGE>

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 the sum of goodwill and other intangible assets, properties
used to conduct the savings association's business and specified 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, 1998,
the Bank maintained 85.71% of its portfolio assets in qualified thrift
investments, and thus met the test.  The Bank has always met the QTL 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,
not to exceed 20% of portfolio assets.

Any savings association that fails to meet the QTL test must either convert to a
national bank charter or operate under certain restrictions on its activities,
unless it requalifies as a QTL and thereafter remains a QTL.  If an association
does not requalify 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 and dispose
of any investments not permissible for a national bank.  In addition, it must
repay promptly any outstanding FHLB borrowings, which may result in prepayment
penalties.  A savings association that has failed the QTL test may requalify
under the QTL test and be free of such limitations, but it may do so only once.
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 Bank'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 BHC 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


                                          40
<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."

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
checking accounts).  The FRB regulations generally require that reserves be
maintained in the amount of 3% of the aggregate of transaction accounts up to
$47.8 million.  The amount of aggregate transaction accounts in excess of $47.8
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 $4.7 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, 1998, the Bank was in
compliance with these


                                          41
<PAGE>

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, 1998, Home Federal had $3.7 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 7.34% and were 6.83% for fiscal year 1998.

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, 1998, dividends paid by the FHLB of Des
Moines to Home Federal totalled approximately $337,000, which constitute a
$31,000 decrease in the amount of dividends received in fiscal 1997.  The
$69,000 dividend received for the quarter ended June 30, 1998 reflects an
annualized rate of 6.79% or 2.7% increase from the rate for the same period in
fiscal 1997.

FEDERAL AND STATE TAXATION

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.  Effective for fiscal year 1997, federal income tax laws changed
to eliminate the percentage of taxable income and experience formulas for the
Bank 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 $720,000 at June 30, 1998, is required to be recaptured ratably over a six
year period.  The onset of recapture was delayed in fiscal years 1998 and 1997
since the Bank met a residential loan origination requirement which allowed for
a two year delay in recapture.  At June 30, 1998, the Bank's recorded deferred
tax liability of $245,000 provides for the recapture of the loan loss reserves
and is netted against the deferred tax asset.

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
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.

To the extent earnings appropriated to a savings association's bad debt reserves
for "qualifying real property loans" and


                                          42
<PAGE>

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, 1998, the Bank's Excess for tax
purposes totalled approximately $4.8 million.

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 52, 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 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 59,  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 35 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.


                                          43
<PAGE>

TERRY L. KAPPES - Mr. Kappes, age 44, is Senior Vice President/Retail Banking, a
position he has held since June 1998.  Prior to that time, he was employed with
Bank One - Colorado, Grand Junction, Colorado from 1993 until joining Home
Federal with his most recent position being Senior Vice President/Retail Market
Manager.  Mr. Kappes served as Senior Vice President for First Bank System,
Billings, Montana from 1988 to 1991 and First Bank of South Dakota, Sioux Falls,
South Dakota from 1977 to 1988.

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 63, 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.

GEORGE D. ROBERTS - Mr. Roberts, age 51, is Senior Vice President/Hometown
Insurors, Inc., a subsidiary of Home Federal Savings Bank.  Mr. Roberts has held
this position since October 1996.  He was employed as Agency Manager for
Principal Financial Group from 1987 until joining Hometown Insurors, Inc.  Prior
to that time, he was employed as a Brokerage Consultant for Bankers Life of Des
Moines from 1983 to 1987.  Mr. Roberts received his B.S. from the University of
Nebraska, Omaha, Nebraska.  He also holds the designation of LUTCF.

JOHN E. ROERS - Mr. Roers, age 51, 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 40, 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 45, 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 55, 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. from May 1966 to June 1993.
Mr. Beverley attended Bradley University, Peoria, Illinois.

MICHAEL R. BREIDENBACH - Mr. Breidenbach, age 50, is Vice President/Commercial
Lending, a position he has held since June 1998.  Mr. Breidenbach has held
various positions since joining 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.

CARTER V. BROTON - Mr. Broton, age 44, 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


                                          44
<PAGE>

MBA degree from the University of South Dakota.

MICHAEL J. ECHOLS - Mr. Echols, age 54, 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 50, 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.

RANDALL D. FINK - Mr. Fink, age 44, is Vice President/Mortgage Loan Production
Manager, 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 38, 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 49, 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.

GAIL G. GROTENHUIS - Ms. Grotenhuis, age 45, is Vice President/General Manager
of Mid-America Service Corporation, a subsidiary of Home Federal Savings Bank.
Ms. Grotenhuis joined Mid-America in 1993 and was appointed Vice President in
1997.

DIANE HOVDA - Ms. Hovda, age 53, is Vice President/Financial Management, 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.

SHARON A. MANUEL - Ms. Manuel, age 48, 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 44, is Vice President/Information Systems.  He
joined Home Federal in 1979 and was promoted to his present position in 1988.

NATALIE A. SOLBERG - Ms. Solberg, age 35, 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.

GARY G. SIEVERDING - Mr. Sieverding, age 34, is Vice President/Commercial
Business Lending.  He joined Home Federal in 1996 and was promoted to his
present position in 1997.  Prior to joining Home Federal, he was with First
Savings Bank - Sioux Falls, First Bank of South Dakota, N.A. and Western Bank in
various management capacities.  Mr. Sieverding received his education from South
Dakota State University, Brookings, SD and his ABA from the National Commercial
Lending School, Norman, OK.


                                          45
<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 51, is Vice President/Financial Management, 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 57104.  The Bank also conducts
business from 18 other retail banking locations located in its primary market
area.

The Bank owns each of its offices, except for one office that it leases.  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, 1998 was $14.3 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, 1998.


                                          46
<PAGE>

                                      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, 1998 and 1997.  Quotations for such periods are as reported by NASDAQ
for National Market System issues.  On April 24, 1998, the Company declared a
three-for-two stock split in the form of a stock dividend on one-half share of
common stock for each one share outstanding, payable to shareholders of record
on May 8, 1998.  The quotations for the periods listed below have been
retroactively adjusted based upon the new shares outstanding after the effect of
the three-for-two stock split for all periods presented.

<TABLE>
<CAPTION>

                FISCAL 1998            HIGH           LOW
              --------------------------------------------
               <S>                   <C>            <C>
                1st Quarter           $18.00        $14.17
                2nd Quarter           $18.17        $16.50
                3rd Quarter           $20.00        $18.00
                4th Quarter           $24.16        $19.75

                FISCAL 1997            HIGH           LOW
              --------------------------------------------
                1st Quarter           $10.67        $10.00
                2nd Quarter           $11.67         $9.83
                3rd Quarter           $13.67        $11.17
                4th Quarter           $14.33        $12.50
</TABLE>

As of September 15, 1998, the Company had 622 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 $0.07 per share throughout
fiscal year 1998.  In addition, HF Financial Corp. paid quarterly cash dividends
of $0.06 throughout fiscal year 1997.  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.


                                       47

<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,
                                                       ----------------------------------------------------------------------
                                                         1998             1997           1996          1995            1994
                                                       ----------------------------------------------------------------------
                                                                                 (Dollars in Thousands)

<S>                                                    <C>             <C>            <C>            <C>            <C>
Selected Statement of Financial Condition Data:
Total assets                                            $570,979        $562,114       $554,659       $535,682       $491,325
Loans receivable, net                                    426,522         440,019        413,143        360,007        306,306
Loans held for sale                                        9,616           3,483          7,280          4,139          2,042
Mortgage-backed securities                                  ----            ----           ----         83,384         74,894
Mortgage-backed securities available for sale             39,647          30,340         59,495           ----           ----
Investment securities                                       ----            ----           ----         28,932         74,737
Securities available or held for sale                     44,232          46,940         41,168         33,402          6,459
Deposits                                                 446,424         418,186        398,166        400,675        392,415
Advances from FHLB of Des Moines
  and other borrowings                                    50,635          74,743         90,123         73,695         42,860
Stockholders' equity                                      56,601          52,974         51,263         48,354         46,022

<CAPTION>
                                                                                 Years Ended June 30,
                                                       ----------------------------------------------------------------------
                                                          1998            1997           1996           1995           1994
                                                       ----------------------------------------------------------------------
                                                                                 (Dollars in Thousands)
<S>                                                    <C>             <C>            <C>            <C>            <C>
Interest and dividend income                            $ 46,201        $ 44,012       $ 43,465       $ 38,126       $ 36,692
Interest expense                                          25,449          24,832         25,761         24,008         20,221
                                                        --------        --------       --------       --------       --------
   Net interest income                                    20,752          19,180         17,704         14,118         16,471
Provision (recoveries) for losses on loans                 4,689             693            590           (515)           275
                                                        --------        --------       --------       --------       --------
   Net interest income after provision (recoveries)
      for losses on loans                                 16,063          18,487         17,114         14,633         16,196
Loan servicing income                                      1,187           1,150            689            754            564
Loan fees and service charges                              1,184             946            791            586            879
Gain (loss) on mortgage-backed securities,
  and securities available or held for sale, net             226             150            500            164           (156)
Credit card fee income                                     6,163             613           ----           ----           ----
Other noninterest income                                   4,871           3,613          3,668          2,626          2,879
Noninterest expense                                      (19,983)        (19,703)       (15,147)       (13,855)       (14,072)
                                                        --------        --------       --------       --------       --------
   Income before income taxes and cumulative
     effect of accounting changes                          9,711           5,256          7,615          4,908          6,290
Income tax expense                                         3,238           1,582          2,893          1,803          2,465
                                                        --------        --------       --------       --------       --------
   Income before cumulative effect of
      accounting changes                                   6,473           3,674          4,722          3,105          3,825
Cumulative effect of accounting changes                     ----            ----           ----             93          2,000
                                                        --------        --------       --------       --------       --------
   Net income                                           $  6,473        $  3,674       $  4,722       $  3,198       $  5,825
Earnings per share: (4)                                 --------        --------       --------       --------       --------
                                                        --------        --------       --------       --------       --------
   Income before cumulative effect of
      accounting changes
           Basic                                        $   1.46        $   0.81       $   1.03       $   0.66       $   0.82
           Diluted                                      $   1.42        $   0.79       $   1.00       $   0.66       $   0.82
   Net Income
           Basic                                        $   1.46           $0.81          $1.03          $0.68          $1.25


                                       48

<PAGE>

           Diluted                                         $1.42           $0.79          $1.00          $0.68          $1.25

Dividends per share (5)                                    $0.28           $0.24          $0.22          $0.20          $0.17
Dividends payout ratio                                     19.28%          29.48%         21.41%         29.41%         13.40%

<CAPTION>
                                                                                 Years Ended June 30,
                                                       ----------------------------------------------------------------------
                                                          1998            1997           1996           1995           1994
                                                       ----------------------------------------------------------------------
<S>                                                       <C>             <C>            <C>            <C>            <C>
Other Data:
Interest rate spread information:
  Average during period                                     3.40%           3.24%          2.88%          2.40%          3.21%
  End of period                                             3.41            3.36           3.01           2.36           3.15
Net interest margin (1)                                     3.80            3.64           3.31           2.80           3.55
Average interest-earning assets to average
   interest-bearing liabilities                             1.09            1.08           1.09           1.08           1.08
Equity to total assets (end of period)                      9.91            9.42           9.24           9.03           9.37
Equity-to-assets ratio (ratio of average equity
   to average total assets)                                 9.59            9.25           8.97           8.94           9.10
Nonperforming assets to total assets
  (end of period) (2)                                       0.53            0.33           0.41           0.57           0.89
Allowance for loan losses to nonperforming
  loans (end of period) (3)                               258.86          361.50         200.15         141.08         163.74
Allowance for loan losses to total loans
  (end of period)                                           1.62            1.02           0.98           1.11           1.59
Nonperforming loans to total loans
  (end of period)(3)                                        0.63            0.28           0.49           0.79           0.97
Other noninterest expense to average total assets           3.47            3.55           2.71           2.64           2.89
Net interest income after provision (recoveries)
    for losses on loans to noninterest expense
    (end of period)                                        80.38           93.83         112.99         105.62         115.09
Return on assets  (ratio of net income to average
  total assets)                                             1.13            0.66           0.85           0.61           1.20
Return on equity (ratio of net income to average
   equity)                                                 11.73%           7.17%          9.43%          6.81%         13.14%
Number of full-service offices                                19              19             19             18             16
</TABLE>


1)  Net interest income divided by average interest-earning assets.
2)  Nonperforming assets include nonaccruing loans, accruing loans delinquent
    more than 90 days and foreclosed assets.
3)  Nonperforming loans include nonaccruing 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 and for the three-for-two stock split in the form of a
    stock dividend payable to shareholders of record on May 8, 1998.
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 and for the three-for-two stock split in the form of a
    stock dividend payable to shareholders of record on May 8, 1998.


                                       49

<PAGE>

                 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."). The Company
ceased operation of the Mortgage Corp. during fiscal 1998.  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.

The Bank 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.  The Bank
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.  The Bank, 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 that had an office
in Omaha, Nebraska.  The Mortgage Corp. was a mortgage banking operation that
originated one- to four- family residential loans which were sold into the
secondary market and to the Bank.  The Company ceased operation of HomeFirst
Mortgage Corp. during the first quarter of fiscal 1998.  The Mortgage Corp had a
net loss of $11,000 during fiscal year 1998. The primary exit costs involved
were compensation costs of $28,000 and occupancy costs of $21,000.

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, securities,
provision for losses on loans, service charge fees, credit card 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.


                                          50

<PAGE>

FINANCIAL CONDITION DATA

At June 30, 1998, the Company had total assets of $571.0 million, an increase of
$8.9 million from the level at June 30, 1997.  The increase in assets was due
primarily to an increase in cash and cash equivalents of $7.5 million and in
mortgage-backed securities of $9.3 million.  The increase in cash and cash
equivalents and mortgage-backed securities was funded primarily by a decrease in
loans receivable of $13.5 million, a decrease in securities available for sale
of $2.7 million and an increase in deposits of $28.2 million from the levels at
June 30, 1997.  The remaining excess funds received from the loans receivable,
securities available for sale and deposits were used to paydown advances from
Federal Home Loan Bank ("FHLB") and other borrowings by $24.1 million from
levels at June 30, 1997.   In addition, stockholders' equity increased from
$52.9 million at June 30, 1997 to $56.6 million at June 30, 1998, primarily due
to net income of $6.5 million and the change in the net unrealized loss on
securities available for sale of $213,000, which was offset by the payment of
cash dividends of $1.2 million to the Company's stockholders and an increase in
treasury stock of $2.1 million.

The decrease in loans receivable of $13.5 million was due primarily to
amortizations and prepayments of principal exceeding originations of principal.

The increase in mortgage-backed securities of $9.3 million was primarily
the result of purchases of $16.6 million exceeding sales, amortizations and
prepayments of principal.  The Bank's purchases of mortgage-backed securities
were comprised primarily of thirty year, fixed-rate, mortgage-backed securities
that have a principal payment balloon in the fifth or seventh year.

The decrease in securities of $2.7 million from the level at June 30, 1997
is primarily due to sales and maturities of securities available for sale of
$55.9 million exceeding purchases of $52.9 million during the year ended June
30, 1998.  The Bank's purchases of securities available for sale were comprised
primarily of U.S. Government agency securities which have a maturity of three
years or less that have a call feature that varies from three months to one
year.

The increase in deferred tax assets of $1.6 million is due primarily to the
increase in the allowance for credit card loan losses from $329,000 at June 30,
1997 to $3.2 million at June 30, 1998, an increase of $2.9 million which when
tax effected resulted in an increase in deferred tax assets of $1.1 million.
See "Notes to Consolidated Financial Statements Note 9" for further discussion
on income taxes.

The $28.2 million increase in deposits was primarily due to an increase in
savings accounts of $32.3 million, an increase in now accounts and demand
accounts of $12.5 million and an increase in money market accounts of $9.4
million which were offset by a decrease in certificates of deposit of $26.0
million. The number of demand, now and money market accounts increased from
18,925 at June 30, 1997 to 20,620 at June 30, 1998 for an 8.96% increase.  These
increases were primarily the result of a focused marketing campaign during the
fiscal year.  In addition, the average balance of accounts in this category
increased from $4,228 at June 30, 1997 to $4,943 at June 30, 1998, for a 16.91%
increase.  The number of savings accounts decreased slightly from 19,008 at June
30, 1997 to 18,775 however the average balance of savings accounts increased
from $1,524 at June 30, 1997 to $3,263 at June 30, 1998 for a 114.11% increase.
The majority of the increase in savings accounts were from deposits from local
governmental entities.

Advances from the FHLB and other borrowings decreased $24.1 million for the
year ended June 30, 1998 primarily due to the payment of $53.1 million on
advances and other borrowings which were partially offset by the Company
obtaining $29.0 million of advances and borrowings during the fiscal year.


                                          51

<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 nonaccruing loans.  The yields and costs for the years
ended June 30, 1998, 1997 and 1996 include fees which are considered adjustments
to yield.

<TABLE>
<CAPTION>

                                                                           YEARS ENDED JUNE 30,
                                      ---------------------------------------------------------------------------------------------
                                               1998                                 1997                           1996
                                      ---------------------------------------------------------------------------------------------
                                          Average   Interest               Average  Interest              Average  Interest
                                      Outstanding    Earned/   Yield/  Outstanding   Earned/  Yield/  Outstanding   Earned/  Yield/
                                          Balance       Paid     Rate      Balance     Paid     Rate      Balance      Paid    Rate
                                      -----------   --------   ------  -----------  -------   ------  -----------  --------  ------
                                                                           (Dollars in thousands)

<S>                                   <C>           <C>        <C>     <C>          <C>       <C>     <C>         <C>       <C>
Interest-earning assets:
     Loans receivable (1)               $445,511     $40,154   9.01%     $437,230   $38,596   8.83%     $404,622  $35,628     8.81%
     Mortgage-backed securities           32,213       2,023   6.28%       41,119     2,668   6.49%       74,853    4,918     6.57%
     Other investment securities (2)      62,931       3,687   5.86%       42,953     2,380   5.54%       49,859    2,555     5.12%
     FHLB stock                            4,940         337   6.82%        5,222       368   7.05%        5,051      364     7.21%
                                        --------     -------   ----      --------   -------   ----      --------  -------     ----
Total interest-earning assets           $545,595     $46,201   8.47%     $526,524   $44,012   8.36%     $534,385  $43,465     8.13%
                                                     -------   ----                 -------   ----                -------     ----
     Noninterest-earning assets           29,712                           27,762                         24,054
                                        --------                         --------                       --------
Total assets                            $575,307                         $554,286                       $558,439
                                        --------                         --------                       --------
                                        --------                         --------                       --------
Interest-bearing liabilities:
Deposits:
     Checking and money market           $89,429     $ 2,273   2.54%     $ 71,323   $ 1,794   2.52%     $ 61,466  $ 1,646     2.68%
     Savings                              53,260       1,904   3.57%       30,227       626   2.07%       33,140      699     2.11%
     Certificates of deposit             294,797      17,554   5.95%      306,085    17,969   5.87%      307,586   18,370     5.97%
                                        --------     -------   ----      --------   -------   ----      --------  -------     ----
          Total deposits                $437,486     $21,731   4.97%     $407,635   $20,389   5.00%     $402,192  $20,715     5.15%
FHLB advances and other
borrowings                                64,350       3,718   5.78%       77,644     4,443   5.72%       88,129    5,046     5.73%
                                        --------     -------   ----      --------   -------   ----      --------  -------     ----
Total interest-bearing liabilities      $501,836     $25,449   5.07%     $485,279   $24,832   5.12%     $490,321  $25,761     5.25%
                                                     -------   ----                 -------   ----                -------     ----
     Other liabilities                    18,278                           17,740                         18,021
                                        --------                         --------                       --------
Total liabilities                       $520,114                         $503,019                       $508,342
     Equity                               55,193                           51,267                         50,097
                                        --------                         --------                       --------
Total liabilities and equity            $575,307                         $554,286                       $558,439
                                        --------                         --------                       --------
                                        --------                         --------                       --------

Net interest income; interest
rate spread                                          $20,752   3.40%                $19,180   3.24%               $17,704     2.88%
                                                     -------   ----                 -------   ----                -------     ----
Net interest margin (3)                                        3.80%                          3.64%                           3.31%
                                                               ----                           ----                            ----
                                                               ----                           ----                            ----
-----------------------------------------------------------------------------------------------------------------------------------
</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.


                                          52

<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>

                                                            Years Ended June 30,                    Years Ended June 30,
                                             ------------------------------------------   ---------------------------------------
                                                                 1998 vs 1997                            1997 vs 1996
                                             ------------------------------------------   ---------------------------------------
                                                                             (Dollars in Thousands)

                                                 Increase      Increase                      Increase      Increase
                                               (Decrease)     (Decrease)        Total      (Decrease)    (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)                        $  746           $812         $1,558         $2,878         $   90       $2,968
     Mortgage-backed securities                    (559)           (86)          (645)        (2,189)           (61)      (2,250)
     Other investment securities (2)              1,170            137          1,307           (383)           208         (175)
     FHLB stock                                     (19)           (12)           (31)            12             (8)           4
                                                 ------           ----         ------         ------         ------       ------

Total interest-earning assets                    $1,338           $851         $2,189         $  318         $  229       $  547
                                                 ------           ----         ------         ------         ------       ------
                                                 ------           ----         ------         ------         ------       ------

Interest-bearing liabilities:
Deposits:
    Checking and money market                    $  460           $ 19         $  479         $  159         $  (11)      $  148
    Savings                                         823            455          1,278            (60)           (13)         (73)
    Certificates of deposit                        (672)           257           (415)           (88)          (313)        (401)
                                                 ------           ----         ------         ------         ------       ------
      Total deposits                                611            731          1,342             11           (337)         326
FHLB advances and other borrowings                 (768)            43           (725)          (600)            (3)        (603)
                                                 ------           ----         ------         ------         ------       ------

Total Interest-bearing liabilities               $ (157)          $774         $  617         $ (589)        $ (340)      $ (929)
                                                 ------           ----         ------         ------         ------       ------
                                                 ------           ----         ------         ------         ------       ------

Net interest income increase                                                   $1,572                                     $1,476
                                                                               ------                                     ------
                                                                               ------                                     ------

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

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


                                          53

<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.

<TABLE>
<CAPTION>

                                                    At June 30,
                                            -----------------------------
                                            1998        1997         1996
                                            -----------------------------

<S>                                         <C>         <C>          <C>
Weighted average yield on:
Loans receivable                            9.07%       8.85%        8.53%
Mortgage-backed securities                  6.10        6.32         6.32
Other investment securities (1)             6.21        5.82         5.40
FHLB stock                                  6.79        6.75         7.00

Combined weighted average yield on
     Interest-earning assets                8.47        8.45         8.04

Weighted average rate paid on:
Deposits                                    4.95        4.99         4.92
FHLB advances                               5.85        5.69         5.53

Combined weighted average rate paid on
     interest-bearing liabilities           5.06        5.09         5.03

Spread                                      3.41%       3.36%        3.01%
</TABLE>

(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,
                                                     ------------------------
                                                     1998       1997     1996
                                                     ------------------------
                                                       (Dollars in Thousands)

<S>                                                <C>        <C>      <C>
Total nonaccruing loans                            $2,251     $1,252   $2,063
Total accruing loans delinquent more than 90 days     530       ----     ----
Total foreclosed assets                               229        593      228
                                                   ------     ------   ------
Total nonperforming assets                         $3,010     $1,845   $2,291
                                                   ------     ------   ------
                                                   ------     ------   ------

Ratio of nonperforming assets to total assets        0.53%      0.33%    0.41%

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

Ratio of nonperforming loans to total loans (1)      0.63%      0.28%    0.49%
                                                   ------     ------   ------
                                                   ------     ------   ------
</TABLE>

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

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


                                          54

<PAGE>

     When a loan becomes 90 days delinquent, except for credit card loans, 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 non-accrual status until the
borrower has brought the loan current.  Credit card loans remain in accrual
status until 120 days, when accrued interest income on the loan is taken out of
income.

     Nonperforming assets increased to $3.0 million at June 30, 1998 from $1.8
million at June 30, 1997, an increase of $1.2 million.  In addition, the ratio
of nonperforming assets to total assets, which is one indicator of credit risk
exposure, increased to 0.53% at June 30, 1998 from 0.33% at June 30, 1997.

     Nonaccruing loans increased to $2.3 million at June 30, 1998 from $1.3
million at June 30, 1997, an increase of $1.0 million. Included in nonaccruing
loans at June 30, 1998 were ten loans totaling $623,000 secured by one- to
four-family real estate, three loans in the amount of $719,000 secured by
commercial real estate, five mobile home loans totaling $31,000, seven
commercial business loans totaling $396,000 and thirty-three consumer loans
totaling $482,000.  For the year ended June 30, 1998, gross interest income of
$229,000 would have been recognized on loans accounted for on a non-accrual
basis had such loans been current in accordance with their original terms.
Gross interest income of $250,000 was recognized as income on loans accounted
for on a non-accrual basis.

     Foreclosed assets decreased to $229,000 at June 30, 1998 from $593,000 at
June 30, 1997, a decrease of $364,000.

     At June 30, 1998, 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 possible loan losses.  The allowance for possible 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, 1998
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, 1998 will be adequate in the future.


                                          55

<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>

                                                   Years Ended June 30,
                                            -----------------------------------
                                              1998         1997           1996
                                            -----------------------------------
                                                   (Dollars In Thousands)

<S>                                       <C>          <C>             <C>
Balance at beginning of period            $ 4,526      $ 4,129         $ 4,039
Total charge-offs                         (2,423)      (1,121)           (850)
Total recoveries                              407          825             350
                                          -------      -------         -------
Net (charge-offs)                         (2,016)        (296)           (500)
Additions charged to operations             4,689          693             590
                                          -------      -------         -------

Balance at end of period                  $ 7,199      $ 4,526         $ 4,129
                                          -------      -------         -------
                                          -------      -------         -------

Ratio of net (charge-offs) during the
period to average loans outstanding
during the period                          (0.45)%      (0.07)%         (0.12)%
                                          -------      -------         -------
                                          -------      -------         -------

Ratio of allowance for loan losses
to total loans at end of period              1.62%        1.02%           0.98%
                                          -------      -------         -------
                                          -------      -------         -------

Ratio of allowance for loan losses to
nonperforming loans at end of period       258,86%      361.50%         200.15%
                                          -------      -------         -------
                                          -------      -------         -------
</TABLE>

     The allowance for loan losses was $7.2 million at June 30, 1998 as compared
to $4.5 million at June 30, 1997.  The ratio of the allowance for losses on
loans to total loans was 1.62% at June 30, 1998 and 1.02% at June 30, 1997.  The
Bank's management has considered nonperforming assets and other assets of
concern in establishing the allowance for losses on loans.  The Bank continues
to monitor its allowance for possible loan losses and make future additions or
reductions in light of the level of loans in its portfolio and as economic
conditions dictate.

     The current level of the allowance for loan losses is a result of
management's assessment of the risks within the portfolio based on the
information revealed in credit reporting processes. The Company utilizes a
risk-rating system on all commercial business, agricultural, construction and
multi-family and commercial real estate loans, including purchased loans, that
exceed $250,000 and a monthly credit review and reporting process on all types
of loans that results in the calculation of the guidelines reserves based on the
risk within the portfolio. This assessment of risk takes into account the
composition of the loan portfolio, previous loan experience, current economic
conditions and other factors that in management's judgment deserve recognition.
In regard to credit card loans, the Company is providing a reserve in a range of
25% to 30% of the loan balance until the credit card portfolio becomes seasoned.
As of June 30, 1998, $3.2 million of the $7.2 million allowance for loan losses
was reserved for the credit card loan portfolio. Regulators have reviewed the
Company's methodology for determining allowance requirements on the Company's
loan portfolio and have made no recommendations for increases in the allowances
during the three year period ended June 30, 1998. The Company has historically
maintained a positive variance from the minimum estimated allowance for loan
losses based on the analyses that are conducted by bank management and corporate
credit personnel. Management has reviewed the allocations in the various
classifications of loans and believes the allowance was adequate at all times
during the three year period ended June 30, 1998.


                                          56

<PAGE>

COMPARISON OF THE YEARS ENDED JUNE 30, 1998 AND JUNE 30, 1997

GENERAL.  The Company's net income increased $2.8 million to $6.5 million for
the year ended June 30, 1998 as compared to $3.7 million for the year ended June
30, 1997.  As discussed in more detail below, this increase was due primarily to
the increase in noninterest income of $7.2 million and an increase in net
interest income of $1.6 million which were partially offset by an increase in
the provision for losses on loans of $4.0 million and an increase in income tax
expense of $1.7 million.

INTEREST INCOME.  Interest income increased $2.2 million from $44.0 million for
the year ended June 30, 1997 to $46.2 million for the year ended June 30, 1998.
This increase was primarily due to an increase in interest earned on loans and
investment securities.  The average yield on loans increased from 8.83% to 9.01%
while the average balance of loans increased $8.3 million during this period due
to originations and purchases exceeding amortizations, prepayments and sales
during the year ended June 30, 1998. The increase in the yield is due primarily
to the changing type of loans that comprise the portfolio of the Company to
loans that have a higher yield than single-family real estate loans.  Commercial
business loans, agricultural loans  and credit card loans comprise 15.50% of the
total loan portfolio at June 30, 1998 as compared to 8.40% at June 30, 1997.  In
addition, one-to four-family loans comprise 29.13% of the total loan portfolio
at June 30, 1998 as compared to 36.50% at June 30, 1997.   The increase in
interest earned on investment securities was primarily due to an increase in the
average balance of investment securities of $20.0 million.  During this period
the average yield on investment securities increased from 5.54% to 5.86% due to
current market rates being at a higher rate on new purchases as compared to the
rates of matured investment securities.  The increase in the average balance of
investment securities was due to the Company's purchase of primarily U.S.
Government securities which have a maturity of three years or less that have a
call feature that varies from three months to one year. The increase in interest
earned on loans and investment securities was partially offset by a decrease in
interest earned on mortgage-backed securities primarily due to a decrease in the
average balance of $8.9 million from the prior fiscal year.

INTEREST EXPENSE.  Interest expense increased $617,000 from $24.8 million for
the year ended June 30, 1997 to $25.4 million for the year ended June 30, 1998.
This increase was primarily due to an increase in the average balance of
savings, demand, now and money market account balances and due to an increase in
the average rate paid on savings which were partially reduced by a decrease in
the average balance of certificates of deposit and FHLB advances and other
borrowings.  The average balance of savings accounts increased $23.0 million
during the year ended June 30, 1998.  In addition, the average rate paid on
savings accounts increased from 2.07% for the year ended June 30, 1997 to 3.57%
for the year ended June 30, 1998.    The average balance of demand, now and
money market accounts increased $18.1 million during the year ended June 30,
1998.  The increase in the average balance of savings, demand, now and money
market accounts of $41.1 million was used to reduce the average balance of FHLB
advances by $13.3 million and to reduce the average balance of certificates of
deposit by $11.3 million.  The majority of the increase in savings, demand, now
and money market accounts were from deposits from local governmental entities
and commercial customers.  See "Financial Condition Data" for further
discussion.

NET INTEREST INCOME. The Company's net interest income for the year ended June
30, 1998 increased $1.6 million, or 8.19%, to $20.8 million compared to $19.2
million for the same period ended June 30, 1997.  The increase in net interest
income reflects an overall increase in average net interest-earning assets
during the period resulting from internal increases in the portfolio of loans
and securities.  The net interest spread on average interest-earning assets
increased to 3.40% for the period ended June 30, 1998 from 3.24% for the same
period in 1997.  The increase in the net interest spread is due primarily to the
increased yield on interest-earning assets due to a change in the loan portfolio
mix during fiscal year 1998.

During the fiscal years ended June 30, 1998 and 1997, the Company increased its
origination of commercial, agricultural, credit card and consumer loans. The
Company anticipates activity in this type of lending to continue in future
years, subject to market demand. In addition, the Company sold the majority of
conventional single-family residential real estate loan originations into the
secondary market.  Net interest income is expected to trend upward as a result
of this lending activity as interest rate yields are generally higher on these
types of loans compared to the yield provided by conventional single-family
residential real estate loans.  This lending activity is considered to carry a
higher level of risk due to the nature of the collateral and the size of the
individual loans.  As such, the Company anticipates continued increases in its
allowance for loan losses.

PROVISION FOR LOSSES ON LOANS. The allowance for possible losses on loans is
maintained at a level which is considered by management to be adequate to absorb
possible 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 possible loan losses charged to expense.


                                          57

<PAGE>

During the year ended June 30, 1998, the Company recorded a provision for losses
on loans of $4.7 million  compared to $693,000 for the year ended June 30, 1997.
The provision for losses on loans of $4.7 million for the year ended June 30,
1998 compared to the same period in fiscal 1997 is primarily to provide for
future expected write-offs on credit card loans and 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, 1998 was $7.2 million.  The allowance
increased from the June 30, 1997 balance primarily as a result of the provision
for losses on loans of $4.7 million which was reduced by charge-offs exceeding
recoveries by $2.0 million.  The ratio of allowance for loan losses to
nonperforming loans at June 30, 1998 was 258.86% compared to 361.50% at June 30,
1997.  The allowance for losses on loans to total loans at June 30, 1998 was
1.62% compared to 1.02% at June 30, 1997.  The Bank's management believes that
the June 30, 1998 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 $13.6 million for the year ended
June 30, 1998 as compared to $6.5 million for the year ended June 30, 1997. 

Loan fees and service charges increased by $238,000 for the year ended June 
30, 1998 as compared to the same period in the prior fiscal year.  This 
increase was primarily due to an increase in mortgage loan activity of $53.7 
million from $61.5 million during the year ended June 30, 1997 to $115.2 
million for the year ended June 30, 1998.

Gain on the sale of loans increased $733,000 to $1.1 million for the year ended
June 30, 1998 from $352,000 for the year ended June 30, 1997.  Loans originated
for resale and sales of participation interest in loans that were sold during
the year ended June 30, 1998 were $106.4 million as compared to $53.3 million in
the year ended June 30, 1997.

Fees on deposits increased $557,000 for the year ended June 30, 1998 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.

The increase in credit card income of $5.6 million for the year ended June 30,
1998 as compared to the same period in fiscal 1997 is primarily due to an
increase in fees received on unsecured credit cards.  This represents processing
fees, interchange fees, annual fees, late fees  and other miscellaneous fees.
This credit card program was initiated in fiscal 1997.  Interest income on
credit card loans is included in interest income on loans.

NONINTEREST EXPENSE.  Noninterest expense increased $280,000 from $19.7 million
for the year ended June 30, 1997 to $20.0 million for the year ended June 30,
1998.  This increase was primarily from an increase in compensation and employee
benefits of $494,000, an increase in other general and administrative expenses
of $146,000, an increase in advertising of $252,000, and an increase in credit
card processing expense of $2.4 million which were partially offset by a
decrease in federal insurance premiums and assessments of $2.9 million.


                                          58

<PAGE>

The increase in compensation and employee benefits was due primarily to an
increase in health insurance of $89,000, an increase in incentive compensation
of $139,000, an increase in pension costs of $98,000, and an increase in
compensation of $332,000 due to merit raises, which were partially offset by a
reduction in temporary personnel costs of $118,000 and other employee benefits
of $34,000.

The decrease in the federal insurance premiums of $2.9 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 resulted in a one time
assessment of $2.6 million to the Bank in order to recapitalize the SAIF during
the first quarter of fiscal 1997.  This one time assessment was charged to the
Bank on September 30, 1996.  In addition, the quarterly assessment rate of the
Bank was reduced from 23 basis points to 6.5 basis points which has resulted in
a lower assessment expense to the Bank.

There was an increase of $2.4 million in the cost of third party processors of
credit cards. This represents costs for processing of applications, collecting
loans, and marketing costs for the acquisition of credit cards for the unsecured
credit card program.  The increase in expense is due primarily to an increase in
the number of credit cards from 10,651 as of June 30, 1997 to 50,512 as of June
30, 1998.  The Company began offering credit cards in the second quarter of
fiscal 1997.

INCOME TAX EXPENSE.  The Company's  income tax expense for the year ended June
30, 1998 was  $3.2 million compared to $1.6 million for the  year ended June 30,
1997, an increase of $1.7 million. This increase was proportionate to the
increase in the Company's income before income tax and due to the increase in
the effective tax rate to 33.30% for the year ended June 30, 1998 as compared to
30.00% for the same period in the prior fiscal year.


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 losses on loans of $103,000 which were
partially offset by an increase in net interest income of $1.5 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 INCOME. The Company's net interest income for the year ended June
30, 1997 increased $1.5 million, or 8.33%, to $19.2 million compared to $17.7
million for the same period ended June 30, 1996.  The increase in net interest
income reflects an overall increase in the net interest spread on average
interest earnings assets from 2.88% for the year ended June 30, 1996 to 3.24%
for the year ended June 30, 1997.  The increase in the net interest spread was
primarily due to an increase in the yield on interest-earning assets increasing
from 8.13% for the year ended June 30, 1996 to 8.36% for the year ended June 30,
1997.

PROVISION FOR LOSSES ON LOANS. 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 losses on loans of $693,000
for the year ended June 30, 1997 as 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.

NONINTEREST INCOME.  Noninterest income was $6.5 million for the year ended 
June 30, 1997 as compared to $5.6 million for the year 

                                         59

<PAGE>

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 Statement of Financial Accounting Standards ("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 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.

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.

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 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, an
increase in other general and administrative expenses of $387,000, an increase
in credit card processing expense of $465,000 and an increase in amortization of
intangible assets of $121,000 which were partially offset by a decrease in
advertising of $133,000.

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.

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.

There was an increase of $465,000 in the cost of third party processors of
credit cards. 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.

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


                                          60

<PAGE>

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

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.

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 4% 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 Bank has historically maintained its liquidity
ratio at a level in excess of that required by these regulations.  At June 30,
1998, the Bank's regulatory liquidity ratio was 6.04%.

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 1998, the Bank
acquired  funds that allowed it to reduce its borrowings with the FHLB by
$24.1 million.  See "Financial Condition Data" for further discussion. The Bank
renewed its open line of credit with the FHLB in January 1998 at an amount of
$10.0 million which will expire December 31, 1998. Management expects this line
of credit to be renewed at this time.   There were no outstanding advances on
this line of credit at June 30, 1998.

The Bank anticipates that it will have sufficient funds available to meet
current loan commitments.  At June 30, 1998, the Bank had outstanding
commitments to originate or purchase loans of $39.7 million and to sell loans of
$20.9 million.  The Bank had outstanding commitments to purchase securities
available for sale of $7.0 million.  There was no commitment to sell
mortgage-backed securities or securities available for sale.

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.  A total of 207,472 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.  A total
of 111,750 shares of common stock were purchased pursuant to this program.  In
April of 1998, the Company initiated a third stock buy back program in which up
to 10% of the common stock of the Company may be acquired beginning May 1, 1998
through April 30, 1999.  In accordance with the provisions of the current stock
buy back program, the Company had purchased 15,000 shares of common stock as of
June 30, 1998.

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 $16,000 was transferred from additional paid-in
capital to common stock.


                                          61

<PAGE>

On April 24, 1998, the Company declared a three-for-two stock split in the form
of a stock dividend of one-half share of common stock for each one share
outstanding, payable to shareholders of record on May 8, 1998.  Earnings and
dividends per share have been retroactively adjusted based upon the new shares
outstanding after the effect of the three-for-two stock split for all periods
presented.  The stockholders' equity of the Company was adjusted for the effect
of the three-for-two stock split and $16,000 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, 1998 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 7.75% at June 30, 1998.

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, 1998, is required to be recaptured ratably over a
six year period.  The onset of recapture was delayed in fiscal years 1998 and
1997 since the Bank met a residential loan origination requirement which allowed
for a two year delay in recapture. At June 30, 1998, the Bank's recorded
deferred tax liability of $245,000 provides for the recapture of the loan loss
reserves.

At June 30, 1998 and 1997, securities with a fair value of $64.6 million and
$35.5 million, respectively, were pledged as collateral for public deposits and
other purposes.  Deposits at June 30, 1998 and 1997 include $38.3 million and
$4.1 million respectively, of deposits from one local governmental entity, the
majority of which are demand accounts.


                                          62

<PAGE>

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 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 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 is
effective for financial statements for periods beginning after December 15,
1997.

The FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits".  This Statement standardizes the disclosure
requirements for pensions and other postretirement benefits, requires additional
information on changes in the benefit obligations and fair values of plan
assets, and eliminates certain disclosures that are no longer useful.  This
Statement also permits reduced disclosures for nonpublic entities.  This
Statement supersedes the disclosure requirements in FASB Statements No. 87,
"Employers'  Accounting for Pensions, No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions".  This Statement is effective for financial
statements for periods beginning after December 15, 1997.

The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities".  This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities.  It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value.  If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset liability or an unrecognized firm commitment, (b) a
hedge of the exposure to variable cash flows of a forecasted transaction, or (c)
a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.  This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Initial application of this Statement should be as of the beginning of an
entity's fiscal quarter; on that date, hedging relationships must be designated
anew and documented pursuant to the provisions of this Statement.  Earlier
application of all of the provisions of this Statement is encouraged, but it is
permitted only as of the beginning of any fiscal quarter that begins after
issuance of this Statement.  This Statement should not be applied retroactively
to financial statements of prior periods.


                                       63

<PAGE>

YEAR 2000

The Year 2000 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 Bank is heavily dependent on computer processing in its
business activities and the Year 2000 issue creates risk for the Bank from
unforeseen problems in the Bank's computer system and from third parties with
whom the Bank processes financial information.  Such failures of the Bank's
computer system and/or third parties computer systems could have a material
impact on the Bank's ability to conduct its business.

In May 1997, the Company developed a five step plan that follows the guidelines
as specified by the Federal Financial Institutions Examination Councils.  As new
requirements are provided by this council, the plan is modified to reflect the
new requirements. Management of the Company is updated at least monthly on the
status of the plan and the Bank's Information Systems Steering Committee has
changed from a quarterly meeting to a bi-monthly meeting to be more proactive on
Year 2000.  In addition, the Board of Directors of the Company are updated on
the status of the Year 2000 project at each of its meetings.  The five stages of
the plan are as follows: awareness, assessment, renovation, validation and
implementation.  The awareness and assessment phases were completed by December
31, 1997.  The assessment phase included hardware, software and third party
vendors that provide a service to the Company (i.e. utility companies, alarm
companies, payroll providers, electronic funds transfer providers, insurance
providers, loan participation companies, mortgage loan secondary market
agencies, and governmental agencies).  The renovation, validation and
implementation phases are currently in process and progressing as planned.
Currently, systems that are known to be noncompliant with Year 2000 have already
been replaced or are scheduled to be upgraded or replaced by December 31, 1998.
In May 1996, the Bank installed new hardware and operations systems software
which the vendor has represented to be Year 2000 compliant.   All mission
critical systems of the 1996 installation, both hardware and software, are
scheduled to be tested in the first quarter of fiscal 1999.  In addition,
testing will be performed with service providers that are providing the
capability to test with the Bank.  The Company has included in its test plan
various dates that have been required by regulatory agencies.  The overall plan
of the Company has a scheduled completion date of December 31, 1998.

Based on the Bank's review of its computer systems, management believes the cost
of the remediation effort to make the systems Year 2000 compliant is
approximately $100,000.  Approximately $20,000 was incurred in fiscal 1998 with
the remaining $80,000 to be incurred in fiscal 1999.   In addition,
approximately 1,500 to 2,000 man hours are expected to be incurred by Bank
personnel related to Year 2000 issues which have an estimated cost of $60,000.
Management expects these costs to be incurred in fiscal 1999.  Such costs will
be charged against income as they are incurred.

ASSET/LIABILITY MANAGEMENT

The Bank, 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 the Bank'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, the Bank 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, 1998, the Bank's cumulative one-year gap as a percentage of total
assets was a negative 11.89% and its one- to three-year gap as a percentage of
total assets was a negative 6.57%.

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,
1998".  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


                                          64

<PAGE>

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 100.00% within the
first year.

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

<TABLE>
<CAPTION>

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

<S>                                     <C>
     Less than 7.00%                       11.00%
      7.00 to 7.99%                        18.00
      8.00 to 8.99%                        28.00
      9.00% and over                       34.00
</TABLE>

     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.


                                          65

<PAGE>

<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)                $ 136,281     $  79,981         $32,864        $27,005       $276,131
Consumer loans                                   95,170        33,109          27,539            409        156,227
Commercial business and agriculture loans        42,337         6,089           7,113          1,857         57,396
Investment securities and other                  20,665        25,492           9,108            464         55,729
                                              ---------     ---------         -------        -------       --------
Total interest-earning assets                 $ 294,453     $ 144,671         $76,624        $29,735       $545,483
                                              ---------     ---------         -------        -------       --------
                                              ---------     ---------         -------        -------       --------

Interest-bearing liabilities:

Transaction accounts                          $ 101,930     $    ----         $  ----        $  ----       $101,930
Savings accounts                                 61,266          ----            ----           ----         61,266
Certificates of deposit                         171,824       103,751           7,575             78        283,228
Other borrowings                                    340           524            ----           ----            864
FHLB advances                                    27,000        10,000          11,666          1,445         50,111
                                              ---------     ---------         -------        -------       --------

Total interest-bearing liabilities            $ 362,360     $ 114,275         $19,241        $ 1,523       $497,399
                                              ---------     ---------         -------        -------       --------

Interest-earning assets less
interest-bearing liabilities                  $(67,907)     $  30,396         $57,383        $28,212       $ 48,084
                                              ---------     ---------         -------        -------       --------

Cumulative interest rate sensitivity gap      $(67,907)     $(37,511)         $19,872        $48,084
                                              ---------     ---------         -------        -------

Cumulative gap as a percent of
interest-earning assets                         (12.45)%       (6.88)%           3.64%          8.81%
                                              ---------     ---------         -------        -------

Cumulative gap as a percent of total assets     (11.89)%       (6.57)%           3.48%          8.42%
                                              ---------     ---------         -------        -------
</TABLE>


                                          66

<PAGE>

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

     Pages 6 through 8 of the attached 1998 Annual Report to Stockholders are
herein incorporated by reference.

Interest Rate Risk Management

     The Company 's net income is dependent on its net interest income. Net
interest income is susceptible to interest rate risk to the degree that
Interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net income.

     In an attempt to manage its exposure to change in interest rates,
management monitors the Company's interest rate risk. Since 1991, management's
asset-liability committee has met monthly to review the Company's interest rate
risk position and profitability, and to recommend adjustments for consideration
by the Board of Directors. Management also reviews the Bank's securities
portfolio, formulates investment strategies, and oversees the timing and
implementation of transactions to assure attainment of the Board 's objectives
in the most effective manner. Notwithstanding the Company's interest rate risk
management activities, the potential for changing interest rates is an
uncertainty that can have an adverse effect on net income.

     In adjusting the Company's asset/liability position, the Board and
management attempt to manage the Company's interest rate risk while enhancing
net interest margins. At times, depending on the level of general interest
rates, the relationship between long and short-term interest rates, market
conditions and competitive factors, the Board and management may determine to
increase the Company's interest rate risk position somewhat in order to increase
its net interest margin. The Company's results of operations and net portfolio
values remain vulnerable to increases in interest rates and to fluctuations in
the difference between long- and short-term Interest rates.

     Consistent with the asset/liability management philosophy described above,
the Company has taken several steps to manage its interest rate risk. First, the
Company has structured the security portfolio to shorten the lives of its
interest-earning assets. The Company's recent purchases of mortgage-backed
securities and securities available for sale have had either short or medium
terms to maturity or adjustable interest rates. At June 30, 1998, the Company
had securities available for sale of $39.6 million with contractual maturities
of five years or less and adjustable rate mortgage-backed securities of $16.0
million. Mortgage-backed securities amortize and experience prepayments of
principal; the Company has received average cash flows from principal paydowns,
maturities, sales and calls of securities of $50.2 million annually over the
past three fiscal years. The Company also controls interest rate risk reduction
by emphasizing non-certificate depositor accounts. The Board and management
believe that such accounts carry a lower cost than certificate accounts, and
that a material portion of such accounts may be more resistant to changes in
interest rates than are certificate accounts. At June 30, 1998, the Company had
$61.3 million of regular savings accounts, $43.9 million of money market
accounts and $58.1 million of NOW and demand accounts, representing 36.6% of
total depositor accounts.

     One approach used to quantify interest rate risk is the net portfolio value
("NPV") analysis. In essence, this analysis calculates the difference between
the present value of liabilities and the present value of expected cash flows
from assets and off-balance sheet contracts. The following table sets forth, at
June 30, 1998, an analysis of the Company's interest rate risk as measured by
the estimated changes in NPV resulting from instantaneous and sustained parallel
shifts in the yield curve (+ or - 400 basis points, measured in 100 basis point
increments).

<TABLE>
<CAPTION>

                                        Estimated Increase
                                        (Decrease) in NPV
                                        ------------------
       Change in        Estimated
     Interest Rates    NPV Amount        Amount        Percent
     --------------    ----------        ------        -------

     Basis Points             (Dollars in thousands)

     <S>              <C>               <C>            <C>
          +400          $53,167         $(8,431)       (14)%
          +300           56,299          (5,300)        (9)
          +200           58,959          (2,640)        (4)
          +100           60,826            (773)        (1)
           ---           61,599             ---        ---
          -100           62,783           1,184          2
          -200           63,789           2,191          4
          -300           66,326           4,727          8
          -400           69,809           8,211         13
</TABLE>


                                          67

<PAGE>

     Certain assumptions utilized by the OTS in assessing the interest rate risk
of thrift institutions were employed in preparing data for the Bank included in
the preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under the
various interest rate scenarios. It was also assumed that delinquency rates will
not change as a result of changes in interest rates although there can be no
assurance that this will be the case. Even if interest rates change in the
designated amounts, there can be no assurance that the Company's assets and
liabilities would perform as set forth above. In addition, a change in U. S.
Treasury rates in the designated amounts accompanied by a change in the shape of
the Treasury yield curve would cause significantly different changes to the NPV
than indicated above.

     The Company does not currently engage in trading activities or use
derivative instruments to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, the
Company does not intend to engage in such activities in the immediate future.

     Interest rate risk is the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate risk
and commodity price risk, do not arise in the normal course of the Company's
business activities.


                                          68

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements of the Company as of June 30, 1998, and 1997
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
                                    --------

<TABLE>
<CAPTION>

     --------------------------------------------------------------------------------
     <S>                                                                       <C>
     INDEPENDENT AUDITOR'S REPORT. . . . . . . . . . . . . . . . . . . . . . . . . 70

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

     CONSOLIDATED FINANCIAL STATEMENTS

     Statements of financial condition . . . . . . . . . . . . . . . . . . . . .71-72

     Statements of income. . . . . . . . . . . . . . . . . . . . . . . . . . . .73-74

     Statements of stockholders' equity. . . . . . . . . . . . . . . . . . . . . . 75
     Statements of cash flows. . . . . . . . . . . . . . . . . . . . . . . . . .76-78
     Notes to consolidated financial statements. . . . . . . . . . . . . . . . 79-109


                                       69

</TABLE>
<PAGE>

                            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, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended June 30, 1998.  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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted accounting principles.




                                             /s/ McGladrey & Pullen, LLP

                                             McGLADREY & PULLEN, LLP


Sioux Falls, South Dakota
August 13, 1998


                                       70
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

ASSETS                                                          1998           1997
--------------------------------------------------------------------------------------
<S>                                                          <C>            <C>
Cash and cash equivalents                                    $  25,458      $  17,957
Securities available for sale (Note 2)                          44,232         46,940
Mortgage-backed securities available for sale (Note 2)          39,647         30,340
Loans receivable (Notes 3 and 8)                               426,522        440,019
Loans held for sale (Note 3)                                     9,616          3,483
Accrued interest receivable (Note 5)                             4,338          4,136
Foreclosed real estate and other properties                        229            593
Office properties and equipment, at cost, net of
  accumulated depreciation (Note 6)                             14,317         15,070
Prepaid expenses and other assets                                1,999            870
Mortgage servicing rights (Note 4)                               1,423          1,134
Deferred income taxes (Note 9)                                   3,198          1,569
Intangible assets                                                   -               3
                                                             -------------------------











                                                             $ 570,979      $ 562,114
                                                             -------------------------
                                                             -------------------------
</TABLE>

See Notes to Consolidated Financial Statements.


                                          71
<PAGE>

<TABLE>
<CAPTION>

LIABILITIES AND STOCKHOLDERS' EQUITY                                 1998           1997
-------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>
Liabilities
   Deposits (Note 7)                                              $ 446,424      $ 418,186
   Advances from Federal Home Loan Bank and other
      borrowings (Note 8)                                            50,635         74,743
   Advances by borrowers for taxes and insurance                      4,792          4,074
   Accrued interest payable                                           5,898          6,560
   Other liabilities                                                  6,629          5,577
                                                                  -------------------------
          TOTAL LIABILITIES                                         514,378        509,140
                                                                  -------------------------

Commitments and Contingencies (Note 18)

Stockholders' Equity (Notes 9, 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, 4,730,276 and 4,701,795
      shares outstanding at June 30, 1998 and 1997                       47             31
   Additional paid-in capital                                        14,863         14,695
   Retained earnings, substantially restricted                       46,561         41,336
   Unearned compensation                                               (340)          (453)
   Net unrealized loss on securities available for sale                  (9)          (222)
   Less cost of treasury stock, 1998 334,222 shares,
      1997 222,472 shares                                            (4,521)        (2,413)
                                                                  -------------------------
                                                                     56,601         52,974
                                                                  -------------------------
                                                                  $ 570,979      $ 562,114
                                                                  -------------------------
                                                                  -------------------------
</TABLE>


                                          72
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                     1998           1997           1996
----------------------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>            <C>
Interest and dividend income:
   Loans receivable                                               $  40,154      $  38,596      $  35,628
   Mortgage-backed securities                                         2,023          2,668          4,918
   Investment securities and
      interest-bearing deposits                                       4,024          2,748          2,919
                                                                  ----------------------------------------
                                                                     46,201         44,012         43,465
                                                                  ----------------------------------------

Interest expense:
   Deposits                                                          21,731         20,389         20,715
   Advances from Federal Home Loan Bank
      and other borrowings                                            3,718          4,443          5,046
                                                                  ----------------------------------------
                                                                     25,449         24,832         25,761
                                                                  ----------------------------------------
          NET INTEREST INCOME                                        20,752         19,180         17,704
Provision for losses on loans                                         4,689            693            590
                                                                  ----------------------------------------
          NET INTEREST INCOME AFTER
             PROVISION FOR LOSSES ON LOANS                           16,063         18,487         17,114
                                                                  ----------------------------------------

Noninterest income:
   Loan servicing income                                              1,187          1,150            689
   Loan fees and service charges                                      1,184            946            791
   Fees on deposits                                                   2,190          1,633          1,188
   Commission and insurance income                                      749            699            780
   Appraisal and inspection fees                                        369            461            576
   Gain on sale of loans                                              1,085            352            835
   Gain on sale of securities, net                                      226            150            500
   Trust income                                                         201            112             70
   Credit card fee income                                             6,163            613             -
   Other                                                                277            356            219
                                                                  ----------------------------------------
                                                                     13,631          6,472          5,648
                                                                  ----------------------------------------

</TABLE>

See Notes to Consolidated Financial Statements.


                                          73
<PAGE>

<TABLE>
<CAPTION>
                                                                     1998           1997           1996
----------------------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>            <C>
Noninterest expense:
   Compensation and employee benefits                             $  10,152      $   9,658      $   8,824
   Occupancy and equipment                                            2,701          2,705          2,502
   Federal insurance premiums (Note 7)                                  278          3,199            931
   Advertising                                                          650            398            531
   Credit card processing expense                                     2,827            465             -
   Other general and administrative expenses                          3,069          2,923          2,536
   (Gains) losses and provision for losses and
      expenses on foreclosed real estate and
      other properties, net                                             303            206           (205)
   Reduction in cost of intangible assets                                 3            149             28
                                                                  ----------------------------------------
                                                                     19,983         19,703         15,147
                                                                  ----------------------------------------
          INCOME BEFORE INCOME TAXES                                  9,711          5,256          7,615
Income tax expense (Note 9)                                           3,238          1,582          2,893
                                                                  ----------------------------------------
          Net income                                              $   6,473      $   3,674      $   4,722
                                                                  ----------------------------------------
                                                                  ----------------------------------------

Earnings per share (Note 12):
   Basic                                                          $    1.46      $    0.81      $    1.03
   Diluted                                                        $    1.42      $    0.79      $    1.00

</TABLE>


                                          74
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                          1998           1997           1996
---------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>            <C>            <C>
Common stock:
   Balance at beginning of year                                        $      31      $      31      $      15
   Exercise of stock options (Note 16)                                        -              -              -
   Stock split in the form of a stock dividend (Note 12)                      16             -              16
                                                                       ----------------------------------------
   Balance at end of year                                              $      47      $      31      $      31
                                                                       ----------------------------------------
                                                                       ----------------------------------------

Additional paid-in capital:
   Balance at beginning of year                                        $  14,695      $  14,480      $  14,209
   Additional paid-in capital from exercise of stock options (Note 16)       184            215            287
   Stock split in the form of a stock dividend (Note 12)                     (16)            -             (16)
                                                                       ----------------------------------------
   Balance at end of year                                              $  14,863      $  14,695      $  14,480
                                                                       ----------------------------------------
                                                                       ----------------------------------------

Retained earnings:
   Balance at beginning of year                                        $  41,336      $  38,745      $  35,034
   Net income                                                              6,473          3,674          4,722
   Cash dividends paid ($.28, $.24 and $.22 per share
     in 1998, 1997 and 1996, respectively) (Note 12)                      (1,248)        (1,083)        (1,011)
                                                                       ----------------------------------------
   Balance at end of year                                              $  46,561      $  41,336      $  38,745
                                                                       ----------------------------------------
                                                                       ----------------------------------------

Unearned compensation:
   Balance at beginning of year                                        $    (453)     $    (569)     $    (719)
   Amortization of unearned compensation (Note 15)                           113            116            150
                                                                       ----------------------------------------
   Balance at end of year                                              $    (340)     $    (453)     $    (569)
                                                                       ----------------------------------------
                                                                       ----------------------------------------

Net unrealized loss on securities available for sale:
   Balance at beginning of year                                        $    (222)     $    (622)     $    (185)
   Change in unrealized loss during the year, net of related
     deferred taxes                                                          213            400           (437)
                                                                       ----------------------------------------
   Balance at end of year                                              $      (9)     $    (222)     $    (622)
                                                                       ----------------------------------------
                                                                       ----------------------------------------

Treasury stock:
   Balance at beginning of year                                        $  (2,413)     $    (802)     $      -
   Purchase of treasury stock (Note 11)                                   (2,108)        (1,611)          (802)
                                                                       ----------------------------------------
   Balance at end of year                                              $  (4,521)     $  (2,413)     $    (802)
                                                                       ----------------------------------------
                                                                       ----------------------------------------

</TABLE>

See Notes to Consolidated Financial Statements.


                                          75
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                     1998           1997           1996
----------------------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>            <C>
Cash Flows From Operating Activities
   Net income                                                     $   6,473      $   3,674      $   4,722
   Adjustments to reconcile net income to net
      cash provided by operating activities:
      Provision for losses on loans                                   4,689            693            590
      Depreciation                                                    1,653          1,378            721
      Amortization of premiums and discounts, net:
        Securities available for sale                                   (25)            68            218
        Mortgage-backed securities available for sale                    37             41             10
      Reduction in cost of intangible assets                              3            149             28
      Reduction in mortgage servicing rights                            216            139            360
      Amortization of unearned compensation                             113            116            150
      FHLB stock dividends                                               -              -            (102)
      Increase in deferred loan fees                                    166            282            570
      Loans originated for resale                                   (89,777)       (45,553)       (47,675)
   Proceeds from the sale of loans                                   90,862         45,905         48,510
   (Gain) on sale of loans                                           (1,085)          (352)          (835)
   Mortgage servicing rights capitalized (Note 4)                      (224)          (200)            -
   (Gain) on sale of securities, net                                   (226)          (150)          (500)
   (Gains) losses and provision for losses on sales of
      foreclosed real estate and other properties, net                  194             53           (345)
   (Gain) loss on disposal of office properties and
      equipment, net                                                     (7)            22             (1)
   Change in other assets and liabilities (Note 19)                  (2,659)         1,659          1,886
                                                                  ----------------------------------------
         NET CASH PROVIDED BY OPERATING ACTIVITIES                   10,403          7,924          8,307
                                                                  ----------------------------------------

</TABLE>

See Notes to Consolidated Financial Statements.


                                          76
<PAGE>

<TABLE>
<CAPTION>

                                                                          1998           1997           1996
---------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>            <C>            <C>
Cash Flows From Investing Activities
   Loans purchased                                                     $ (21,510)     $ (13,813)     $ (23,886)
   Loans made to customers                                              (151,913)      (149,718)      (124,090)
   Principal collected on loans                                          158,563        130,717         81,308
   Sale of participation interests in loans                               16,620          7,697          7,375
   Mortgage-backed securities available for sale:
      Sales                                                                  477         12,184         20,978
      Purchases                                                          (16,573)            -         (20,162)
      Repayments                                                           6,939         17,234         23,050
   Securities available for sale:
      Sales and maturities                                                55,934         15,056         32,257
      Purchases                                                          (52,860)       (20,446)       (11,355)
   Securities held to maturity:
      Maturities                                                              -              -              30
   Proceeds from sale of office properties and equipment                      55            709              2
   Purchase of office properties and equipment                              (948)        (2,133)        (2,827)
   Purchase of mortgage servicing rights                                    (281)          (135)           (95)
   Proceeds from sale of foreclosed real estate
      and other properties, net                                              919            645          2,176
                                                                       ----------------------------------------
         NET CASH (USED IN) INVESTING ACTIVITIES                          (4,578)        (2,003)       (15,239)
                                                                       ----------------------------------------

Cash Flows From Financing Activities
   Net increase (decrease) in demand deposit, NOW,
      savings accounts and certificates of deposit                        28,238         20,020         (2,509)
   Proceeds of advances from Federal Home Loan
      Bank and other borrowings                                           29,000         34,000         90,582
   Payments on advances from Federal Home Loan
      Bank and other borrowings                                          (53,108)       (49,380)       (74,154)
   Increase (decrease) in advances by borrowers for taxes
      and insurance                                                          718           (593)           199
   Payment on other liabilities for purchase of property
      and equipment                                                           -            (677)            -
   Purchase of treasury stock                                             (2,108)        (1,611)          (802)
   Proceeds from issuance of common stock                                    184            215            287
   Cash dividends paid                                                    (1,248)        (1,083)        (1,011)
                                                                       ----------------------------------------
         NET CASH PROVIDED BY FINANCING ACTIVITIES                         1,676            891         12,592
                                                                       ----------------------------------------
</TABLE>


                                          77
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                          1998           1997           1996
---------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>            <C>            <C>

         INCREASE IN CASH AND CASH EQUIVALENTS                         $   7,501      $   6,812      $   5,660

Cash and Cash Equivalents
   Beginning                                                              17,957         11,145          5,485
                                                                       ----------------------------------------
   Ending                                                              $  25,458      $  17,957      $  11,145
                                                                       ----------------------------------------
                                                                       ----------------------------------------
Supplemental Disclosures of Cash Flows Information
   Cash payments for:
      Interest                                                         $  26,111      $  24,125      $  24,331
      Income and franchise taxes, net                                      4,376          1,576          1,839

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                                                    749          1,295          2,878
   Loans made in connection with the sale of foreclosed real
      estate and other properties                                             30             41             54
   Transfer of securities classified as held to maturity to
      securities available for sale                                           -              -         100,667
   Stock split in the form of a stock dividend                                16             -              16
   Change in unrealized loss on securities available for sale                302            604           (631)
   Deferred income taxes related to change in unrealized loss
      on securities available for sale                                       (89)          (204)           194

</TABLE>


See Notes to Consolidated Financial Statements.


                                          78
<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 ceased operations of HomeFirst Mortgage Corp. during the first
quarter of 1998, with no material affect on the consolidated financial
statements.

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 $12,000 of cash equivalents at
June 30, 1998 and $6,000 at June 30, 1997.

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.

SECURITIES:  Management determines the appropriate classification of securities
at the date individual securities are acquired and evaluates the appropriateness
of such classifications at each balance sheet date.


                                          79
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SECURITIES (CONTINUED):  Securities held to maturity are those debt securities
that the Company has both the positive intent and ability to hold to maturity
and 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 and 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.

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.

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.


                                          80
<PAGE>

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LOANS RECEIVABLE (CONTINUED):  The Company includes all loans considered
impaired 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, 1998 and 1997.

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.  Annual credit card fees net of
loan origination costs are deferred and amortized over the one year privilege
period.  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.

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.


                                          81
<PAGE>

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 and automobile are depreciated using both the straight-line and
declining balance methods over the estimated useful lives of the assets which is
three to twelve years.

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 fiscal year 1997, the Company adopted Financial
Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock-Based
Compensation".  The Statement established standards for accounting for
stock-based compensation, but also allows companies to continue to account for
stock-based compensation under the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and make
certain additional disclosures in the notes to the financial statements.  The
Company continues to account for stock-based compensation in accordance with APB
Opinion No. 25.

FAIR VALUE OF FINANCIAL INSTRUMENTS:  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 52% and 51% of loans at June 30, 1998 and 1997,
     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 quoted market prices of similar loans sold, adjusted for differences
     in loan characteristics.

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


                                          82
<PAGE>

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):

     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.

     DEPOSITS:  The fair values for deposits with no defined maturities equal
     their carrying amounts which represent the amount payable on demand.  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.



                                          83
<PAGE>

NOTE 2.   INVESTMENTS IN SECURITIES

The amortized cost and fair values of investments in securities at June 30,
1998, all of which are classified as available for sale according to
management's intent, are as follows:

<TABLE>
<CAPTION>
                                                               Gross          Gross
                                              Amortized     Unrealized     Unrealized
                                                 Cost          Gains         (Losses)     Fair Value
                                              ------------------------------------------------------
<S>                                           <C>           <C>            <C>            <C>
Debt securities:
  U.S. Treasury issues                        $   2,994     $       24     $        -     $    3,018
  U.S. government agencies
    and corporations                             24,492             46            (37)        24,501
  Federal Home Loan Bank                         11,997              4            (29)        11,972
  Municipal bonds                                   540             34             (1)           573
                                              ------------------------------------------------------
                                                 40,023            108            (67)        40,064
                                              ------------------------------------------------------

Equity securities:
  FHLMC preferred stock                             500              3              -            503
  Stock in Federal Home Loan
    Bank of Des Moines                            3,657              -              -          3,657
  FNMA common stock                                   8              -              -              8
                                              ------------------------------------------------------
                                                  4,165              3              -          4,168
                                              ------------------------------------------------------

Mortgage-backed securities:
  GNMA                                              102              8              -            110
  REMIC                                           9,296              -           (225)         9,071
  FHLMC                                          10,022             65            (19)        10,068
  Resolution Trust Corporation                      733              -             (3)           730
  FNMA                                           15,112            163            (27)        15,248
  Other triple A rated mortgage-backed
    securities                                    4,438              3            (21)         4,420
                                              ------------------------------------------------------
                                                 39,703            239           (295)        39,647
                                              ------------------------------------------------------
                                              $  83,891     $      350     $     (362)    $   83,879
                                              ------------------------------------------------------
                                              ------------------------------------------------------
</TABLE>


                                          84
<PAGE>

NOTE 2.   INVESTMENTS IN SECURITIES (CONTINUED)

The amortized cost and fair values of debt securities as of June 30, 1998, 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.

<TABLE>
<CAPTION>
                                                          
                                                          Amortized      Fair
                                                             Cost        Value
                                                          ---------------------
<S>                                                       <C>        <C>
Due in one year or less                                   $   1,998  $    2,000

Due after one year through five years                        37,595      37,600

Due after five years through ten years                           45          45

Due after ten years                                             385         419
                                                          ---------------------

                                                             40,023      40,064

Mortgage-backed securities                                   39,703      39,647
                                                          ---------------------

                                                          $  79,726  $   79,711
                                                          ---------------------
                                                          ---------------------
</TABLE>


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.  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 $6,959, $56 and
$12,644 and resulted in a net gain of $215, $8 and $140 in fiscal years 1998,
1997 and 1996, respectively.

Proceeds from the sale of mortgage-backed securities available for sale were
$477, $12,184 and $18,161 and resulted in a net gain of $11, $142 and $302 in
fiscal years 1998, 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 FASB
Statement No. 115.

At June 30, 1998 and 1997, securities with a fair value of $64,596 and $35,526,
respectively, were pledged as collateral for public deposits and other purposes.


                                          85
<PAGE>

NOTE 2.   INVESTMENTS IN SECURITIES (CONTINUED)

The amortized cost and fair values of investments in securities at June 30,
1997, all of which are classified as available for sale according to
management's intent, are as follows:

<TABLE>
<CAPTION>
                                                               Gross          Gross
                                              Amortized     Unrealized     Unrealized
                                                 Cost          Gains         (Losses)     Fair Value
                                              ------------------------------------------------------
<S>                                           <C>           <C>            <C>            <C>
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>


                                          86
<PAGE>

NOTE 3.   LOANS RECEIVABLE AND LOANS HELD FOR SALE

Loans receivable at June 30, 1998 and 1997 consist of the following:

<TABLE>
<CAPTION>
                                                                     1998                1997
                                                                  -----------------------------
<S>                                                              <C>                  <C>
Loans secured by real estate:
  Residential:
    One-to-four family                                            $ 121,446           $ 162,090
    Multi-family                                                     54,560              59,971
  Commercial                                                         38,002              34,252
  Construction and development                                       12,804               5,315
Consumer and other loans:
  Automobile                                                         66,044              66,483
  Junior liens on mortgages                                          41,599              38,736
  Commercial business                                                41,068              27,534
  Agriculture                                                        16,327               8,261
  Credit card                                                        12,335               2,310
  Mobile home                                                        11,152              15,571
  Education                                                           6,986               6,409
  Loans on savings accounts                                           2,167               2,299
  Other loans                                                        15,944              20,934
                                                                  -----------------------------
                                                                    440,434             450,165

Less:
  Undisbursed portion of loans in process                             5,199               4,272
  Deferred loan fees and unearned discounts and premiums, net         1,514               1,348
  Allowance for loan losses                                           7,199               4,526
                                                                  -----------------------------
                                                                  $ 426,522           $ 440,019
                                                                  -----------------------------
                                                                  -----------------------------
</TABLE>


Loans held for sale totaling $9,616 and $3,483 at June 30, 1998 and 1997,
respectively, consist of one-to-four family fixed-rate loans.


                                          87
<PAGE>

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:

<TABLE>
<CAPTION>
                                                       1998           1997           1996
                                                    --------------------------------------
<S>                                                 <C>            <C>            <C>
Balance, beginning                                  $  4,526       $  4,129       $  4,039
  Provision charged to income                          4,689            693            590
  Charge-offs                                         (2,423)        (1,121)          (850)
  Recoveries                                             407            825            350
                                                    --------------------------------------
Balance, ending                                     $  7,199       $  4,526       $  4,129
                                                    --------------------------------------
                                                    --------------------------------------
</TABLE>


Nonaccrual loans for which interest has been reduced totaled approximately
$2,251, $1,252 and $2,063 at June 30, 1998, 1997 and 1996, 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:

<TABLE>
<CAPTION>
                                                       1998           1997           1996
                                                      ------------------------------------
<S>                                                   <C>            <C>            <C>
Interest income that would
  have been recorded                                  $  479         $  266         $  457
Interest income recognized                              (250)           (88)          (379)
                                                      ------------------------------------
Interest income foregone                              $  229         $  178         $   78
                                                      ------------------------------------
                                                      ------------------------------------
</TABLE>


                                          88
<PAGE>

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 $364,288 and $322,058 at June 30, 1998 and 1997,
respectively.

Custodial balances maintained in connection with the foregoing loan servicing,
and included in deposits and advances by borrowers for taxes and insurance, were
approximately $2,231 and $1,848 at June 30, 1998 and 1997, respectively.

Mortgage servicing rights in the amount of $224 and $200 were capitalized during
the years ended June 30, 1998 and 1997, respectively.  The fair values of
capitalized mortgage servicing rights were $298 and $174 at June 30, 1998 and
1997, respectively.  The fair values of the mortgage servicing rights were
estimated as the present value of the expected future cash flows using a
discount rate of 15.0% for both periods.  The Company recognized expense for
amortization of the cost of mortgage servicing rights in the amount of $96 and
$19 for the years ended June 30, 1998 and 1997, respectively.

No valuation allowances were provided for mortgage servicing rights capitalized
during the years ended June 30, 1998 and 1997.





                                          89
<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, 1998 and
1997 by asset type:

<TABLE>
<CAPTION>
                                                             1998        1997
                                                      --------------------------
<S>                                                    <C>          <C>
  Loans receivable and loans held for sale             $     3,414  $     3,215
  Securities available for sale                                713          737
  Mortgage-backed securities available for sale                211          184
                                                      --------------------------
                                                       $     4,338  $     4,136
                                                      --------------------------
                                                      --------------------------
</TABLE>

Dividends receivable on investments are included with accrued interest
receivable.


NOTE 6.   OFFICE PROPERTIES AND EQUIPMENT

Office properties and equipment at June 30, 1998 and 1997 consist of the
following:

<TABLE>
<CAPTION>
                                                             1998        1997
                                                      --------------------------
<S>                                                    <C>          <C>
  Land                                                 $     1,920  $     1,852
  Buildings and improvements                                15,189       14,836
  Leasehold improvements                                       303          303
  Furniture, fixtures, equipment and automobile              8,241        7,929
                                                      --------------------------
                                                            25,653       24,920
  Less accumulated depreciation and amortization           (11,336)      (9,850)
                                                      --------------------------
                                                       $    14,317  $    15,070
                                                      --------------------------
                                                      --------------------------
</TABLE>


                                         90
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

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

NOTE 7.   DEPOSITS

Deposits at June 30, 1998 and 1997 consist of the following:

<TABLE>
<CAPTION>

                                                             1998        1997
                                                      --------------------------
<S>                                                    <C>          <C>
  Savings accounts                                     $   61,266   $    28,968
  NOW accounts                                             24,659        24,614
  Noninterest bearing accounts                             33,403        20,973
  Money market accounts                                    43,868        34,421
  Certificates                                            283,228       309,210
                                                      --------------------------
                                                       $  446,424   $   418,186
                                                      --------------------------
                                                      --------------------------
</TABLE>

Scheduled maturities of savings certificates are as follows:

<TABLE>
<CAPTION>
Maturing in fiscal year:
--------------------------------------------------------------------------------
<S>                                                                 <C>
  1999                                                              $   171,824
  2000                                                                   93,109
  2001                                                                   10,642
  2002                                                                    4,835
  2003                                                                    2,740
  Thereafter                                                                 78
                                                                   -------------
                                                                    $   283,228
                                                                   -------------
                                                                   -------------
</TABLE>

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 $51,612 and $66,742 at June 30,
1998 and 1997, respectively.  Deposits at June 30, 1998 and 1997 include $38,250
and $4,113, respectively, of deposits from one local governmental entity, the
majority of which are demand accounts.

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.


                                         91
<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,
1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                             1998        1997
                                                      --------------------------
<S>                                                    <C>          <C>
Fixed-rate advances (with rates ranging from
4.5% to 6.6%):
  Due in one year or less                              $    23,000  $    33,000
  Due after one through two years                           10,000       16,000
  Due after two years through five years                    11,666        6,000
  Due after five years                                       1,445        2,224
                                                      --------------------------
    Total fixed-rate advances                               46,111       57,224
                                                      --------------------------
Variable-rate advances (with rates ranging from
5.6% to 5.7%):
  Due in one year or less                                    4,000       12,995
  Due after one year through two years                          -         4,000
                                                      --------------------------
    Total variable-rate advances                             4,000       16,995
                                                      --------------------------
                                                       $    50,111  $    74,219
                                                      --------------------------
                                                      --------------------------
</TABLE>


Aggregate maturities of advances are as follows:  1999 $27,000; 2000 $10,000;
2001 $0; 2002 $1,000; 2003 $10,666; and thereafter $1,445.

The Bank also has a $10,000 variable rate open line of credit with the Federal
Home Loan Bank of Des Moines which expires December 31, 1998.  There were no
advances outstanding on this line of credit at June 30, 1998.

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 130% 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 at June 30, 1998 and
1997.  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.


                                         92
<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.  Effective for fiscal year 1997, federal income tax laws changed
to eliminate the percentage of taxable income and experience formulas for the
Bank 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, 1998, is required to be recaptured ratably over a six year
period.  The onset of recapture was delayed in fiscal years 1998 and 1997 since
the Bank met a residential loan origination requirement which allowed for a two
year delay in recapture.  At June 30, 1998, 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>
                                               1998         1997         1996
                                         ---------------------------------------
<S>                                       <C>          <C>          <C>
Current:
  Federal                                 $     4,424  $     1,577  $     2,134
  State                                           532          226          379
Deferred:
  Federal (benefit)                            (1,718)        (221)         380
                                         ---------------------------------------
                                          $     3,238  $     1,582  $     2,893
                                         ---------------------------------------
                                         ---------------------------------------
</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>
                                               1998         1997         1996
                                         ---------------------------------------
<S>                                       <C>          <C>          <C>
Computed "expected" tax expense           $     3,399  $     1,840  $     2,665
Increase (decrease) in income taxes
  resulting from:
    Tax exempt interest income                    (55)         (58)         (67)
    Stock compensation deductible for tax         (32)        (155)         (33)
    State taxes, net of federal benefit           346          149          250
    Benefit of income taxed at lower rates       (100)         (53)         (76)
    Other, net                                   (320)        (141)         154
                                         ---------------------------------------
                                          $     3,238  $     1,582  $     2,893
                                         ---------------------------------------
                                         ---------------------------------------
</TABLE>


                                         93
<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, 1998 and 1997 are as
follows:

<TABLE>
<CAPTION>
                                                             1998        1997
                                                      --------------------------
<S>                                                    <C>          <C>
Deferred tax assets:
  Allowance for loan losses                             $    2,326  $     1,294
  Deferred loan fees                                           260          323
  Deferred credit card fees                                    881          193
  Discounts on loans from acquired associations                147          193
  Accrued expenses                                             171          111
  Net unrealized loss on securities available for sale           3           92
  Other                                                         28           27
                                                      --------------------------
                                                             3,816        2,233

  Less valuation allowance                                    (239)        (239)
                                                      --------------------------
                                                             3,577        1,994
                                                      --------------------------
Deferred tax liabilities:
  FHLB stock dividends                                         148          234
  Office properties and equipment                              226          185
  Other                                                          5            6
                                                      --------------------------
                                                               379          425
                                                      --------------------------
                                                        $    3,198  $     1,569
                                                      --------------------------
                                                      --------------------------
</TABLE>


Retained earnings at June 30, 1998 and 1997, 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.  If the Bank no longer
qualifies as a bank, or in the event of a liquidation of the Bank, income would
be created 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, 1998 and 1997.


                                         94
<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
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 total assets (as defined).  Management
believes, as of June 30, 1998, that the Bank meets all capital adequacy
requirements to which it is subject.

As of March 31, 1998, the most recent examination by the Office of Thrift
Supervision (OTS) 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 (core) capital 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, 1998:

<TABLE>
<CAPTION>
                             Bank's Capital    Required Capital   Excess Capital

                            ----------------------------------------------------
                             Amount  Percent   Amount  Percent   Amount  Percent
                            ----------------------------------------------------
<S>                         <C>      <C>      <C>      <C>      <C>      <C>
As of June 30, 1998:
  Tier I (core) capital     $ 44,201   7.75%  $ 17,113   3.00%  $ 27,088   4.75%
  Total risk-based capital    49,036  12.76     30,754   8.00     18,282   4.76

As of June 30, 1997:
  Tier I (core) 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>


                                         95
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

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

NOTE 11.  STOCKHOLDERS' EQUITY AND DIVIDENDS RESTRICTIONS

In April 1996, the Company initiated a stock buy back program.  A total of
207,472 shares of common stock were purchased pursuant to this program.  In
April 1997, the Company initiated another stock buy back program.  A total of
111,750 shares of common stock were purchased pursuant to this program.  In
April 1998, the Company initiated a third stock buy back program in which up to
10% of the common stock of the Company may be acquired beginning May 1, 1998
through April 30, 1999.  A total of 15,000 shares of common stock were purchased
pursuant to this program through June 30, 1998.

During 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.

During 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, 1998, the Bank
mailed written notification to the OTS of its intention to pay $1,223 in
dividends to the Company.


                                         96
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

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

NOTE 12.  EARNINGS PER SHARE

Earnings (loss) per share are calculated in accordance with the provisions of
FASB Statement No. 128, "Earnings Per Share", which was effective for fiscal
year 1998.  This Statement establishes standards for computing and presenting
earnings (loss) 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 an income statement for all entities with complex
capital structures.  All prior years' EPS data in this report have been
recalculated to reflect the provisions of Statement No. 128.


A reconciliation of the income and common stock share amounts used in the
calculation of basic and diluted earnings per share for the fiscal years ended
June 30, 1998, 1997 and 1996 follow.

<TABLE>
<CAPTION>
                                                                         Per
                                                Net        Shares       Share
                                              Income                   Amount
                                           -------------------------------------
<S>                                         <C>          <C>         <C>
1998:
  Basic EPS                                 $     6,473   4,447,543  $     1.46
  Effect of dilutive securities:
  Exercise of stock options                          -      120,197        0.04
                                           -------------------------------------
  Diluted EPS                               $     6,473   4,567,740  $     1.42
                                           -------------------------------------
                                           -------------------------------------

1997:
  Basic EPS                                 $     3,674   4,537,319  $     0.81
  Effect of dilutive securities:
  Exercise of stock options                          -       94,591        0.02
                                           -------------------------------------
  Diluted EPS                               $     3,674   4,631,910  $     0.79
                                           -------------------------------------
                                           -------------------------------------

1996:
  Basic EPS                                 $     4,722   4,587,672  $     1.03
  Effect of dilutive securities:
  Exercise of stock options                          -      141,306        0.03
                                           -------------------------------------
  Diluted EPS                               $     4,722   4,728,978  $     1.00
                                           -------------------------------------
                                           -------------------------------------
</TABLE>


                                         97
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

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

NOTE 12.  EARNINGS PER SHARE (CONTINUED)

On April 24, 1998, the Company declared a three-for-two stock split in the form
of a stock dividend of one-half share of common stock for each one share
outstanding, payable to shareholders of record on May 8, 1998.  All data related
to common shares has been retroactively adjusted based upon the new shares
outstanding after the effect of the three-for-two stock split for all periods
presented.  The stockholders' equity of the Company was adjusted for the effect
of the three-for-two stock split and $16 was transferred from additional paid-in
capital to common stock.

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.  All data related to
common shares was 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.  RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board and the Accounting Standards Executive
Committee have issued certain Statements of Financial Accounting Standards and
Statements of Position, respectively, which have required effective dates
occurring after the Company's June 30, 1998 year end.  The Company's financial
statements, including the disclosures therein, are not expected to be materially
affected by those accounting pronouncements.


                                         98
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

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

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:

<TABLE>
<CAPTION>
                                               1998         1997         1996
                                           -------------------------------------
<S>                                         <C>          <C>          <C>
  Service cost                              $     277    $     193    $     162
  Interest cost on projected benefit
    obligation                                    125          102           96
  Actual return on plan assets                   (239)        (176)        (105)
  Net amortization and deferral                   106           55           (2)
                                           -------------------------------------
                                            $     269    $     174    $     151
                                           -------------------------------------
                                           -------------------------------------
</TABLE>


The following table sets forth the plan's funded status as of June 30, 1998 and
1997, respectively, and the amounts recognized in the accompanying statements of
financial condition:

<TABLE>
<CAPTION>
                                                                       1998         1997
                                                                  ---------------------------
<S>                                                                <C>           <C>
Actuarial present value of benefit obligations:
  Vested benefits                                                  $     1,390   $     1,337
                                                                  ---------------------------
                                                                  ---------------------------
  Accumulated benefits                                             $     1,520   $     1,419
                                                                  ---------------------------
                                                                  ---------------------------

  Projected benefit obligation for services rendered to date       $    (1,931)  $    (1,742)
  Plan assets at fair value                                              2,014         1,651
                                                                  ---------------------------
  Projected benefit obligation (in excess of) plan assets                   83           (91)
  Unrecognized net loss                                                    536           691
  Unrecognized prior service cost (benefit)                               (312)         (362)
  Unrecognized transitional obligation                                      97           109
                                                                  ---------------------------
  Prepaid pension cost                                             $       404   $       347
                                                                  ---------------------------
                                                                  ---------------------------
</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 1998 and 1997.  The rate of increase in future
compensation levels used to determine the actuarial present value of the benefit
obligations was 5.50% for both fiscal years 1998 and 1997.  The expected
long-term rate of return on plan assets was 8.0% for both fiscal years 1998 and
1997.


                                         99
<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 worked 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, 1998, the ESOP holds 274,337
shares comprised of 180,666 shares which have been allocated to eligible
employees and 93,671 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 $121,
$129 and $122 for 1998, 1997 and 1996, 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.

                                         100
<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 Statement No. 123), reported net
income and earnings per common share would have been reduced to the pro forma
amounts shown below:

<TABLE>
<CAPTION>
                                                1998         1997        1996
                                              ---------------------------------
<S>                                           <C>          <C>         <C>
Net income:
  As reported                                 $  6,473     $  3,674    $  4,722
  Pro forma                                      6,383        3,630       4,721

Basic earnings per share:
  As reported                                     1.46         0.81        1.03
  Pro forma                                       1.43         0.80        1.03

Diluted earnings per share:
  As reported                                     1.42         0.79       1.00 
  Pro forma                                       1.40         0.78       1.00 
</TABLE>

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 828,000 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 453,000 to 828,000.

At June 30, 1998, 634,108 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.

                                         101
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

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

NOTE 16.  STOCK-BASED COMPENSATION PLANS (CONTINUED)

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 1998, 1997 and 1996, respectively:  a
dividend rate as a percentage of stock price of 1.30% in 1998 and 1.85% for
years 1997 and 1996, respectively; price volatility of 18.0% in 1998 and 12.0%
for years 1997 and 1996, respectively, risk-free interest rates of 6.34%, 6.79%
and 6.89%, respectively, and expected lives of seven years for all three years.

A summary of the status of the plan and changes during the years ended June 30
are as follows:

<TABLE>
<CAPTION>
                                                         1998                         1997                         1996
                                                  --------------------------------------------------------------------------------
                                                                Weighted                    Weighted                     Weighted
                                                                Average                     Average                       Average
                                                                Exercise                    Exercise                     Exercise
Fixed Options                                     Shares         Price         Shares        Price         Shares          Price
----------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>           <C>            <C>          <C>             <C>         <C>
Outstanding at beginning of year                  207,883       $    6.68      197,820      $    5.13       287,139     $     4.71


   Granted                                         69,629           16.25       54,727          10.75           936          10.37

   Forfeited                                       (1,899)          13.95          -              -          (7,482)          7.99

   Exercised                                      (22,097)           4.09      (44,664)          4.83       (82,773)          3.47
                                                  --------------------------------------------------------------------------------
Outstanding at end of year                        253,516       $    9.48      207,883      $    6.68       197,820     $     5.13
                                                  -------                      -------                      -------
                                                  -------                      -------                      -------
</TABLE>

Options for 157,298, 144,975 and 170,799 were exercisable at June 30, 1998, 1997
and 1996, respectively.  The weighted average fair value of options granted were
$5.21, $5.59 and $5.64 for the fiscal years ended June 30, 1998, 1997 and 1996,
respectively.

                                         102
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

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

NOTE 16.  STOCK-BASED COMPENSATION PLANS (CONTINUED)

Fixed options outstanding at June 30, 1998 are summarized as follows:

<TABLE>
<CAPTION>
                             Options Outstanding         Options Exercisable
                          ------------------------------------------------------
                                                      Remaining    
                            Number         Number     Contractu       Exercise
                          Outstanding   Exercisable    al Life         Price
                          ------------------------------------------------------
                          <S>           <C>           <C>            <C>
                                68,055        68,055   3 years       $     3.33
  
                                10,191        10,191   6 years             5.04
  
                                 7,500         7,500   5 years             7.33
                                                                  
                                35,010        28,008   6 years             8.17
  
                                10,191        10,191   4 years             8.75
  
                                   600           360   7 years             9.92
                                                                  
                                42,410        16,963   8 years            10.21
  
                                   336           202   7 years            11.17
                                                                  
                                10,770         2,154   8 years            13.00
  
                                68,453        13,674   9 years            16.25
                          --------------------------
                               253,516       157,298
                          --------------------------
                          --------------------------
</TABLE>

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:

<TABLE>
<CAPTION>
                                                                   Outstanding
                                                                      Awards
                                                                   -----------
<S>                                                                <C>
June 30, 1996                                                          4,500
  Awards granted                                                         --
  Awards canceled                                                        --
  Awards vested                                                       (3,750)
                                                                   -----------
June 30, 1997                                                            750
  Awards granted                                                         --
  Awards canceled                                                        --
  Awards vested                                                         (750)
                                                                   -----------
June 30, 1998                                                            --
                                                                   -----------
                                                                   -----------
</TABLE>

                                         103
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

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

NOTE 16.  STOCK-BASED COMPENSATION PLANS (CONTINUED)

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 during the restriction period. 
The effective date of the Plan is July 1, 1997.  The Plan has 75,000 shares
allocated to it and is in effect for a period of ten years.  During fiscal year
1998, 6,405 shares were awarded and $94 of expense was incurred under the Plan
as the annual retainer for the Company's Board of Directors for the year ending
June 30, 1998.  On July 1, 1998, 4,046 shares were awarded under the Plan as the
annual retainer for the year ended June 30, 1999.

                                         104
<PAGE>

HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

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

NOTE 17.  FINANCIAL INSTRUMENTS

The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates.  These financial
instruments include commitments to extend credit, standby letters of credit and
financial guarantees.  Those instruments involve, to varying degrees, elements
of credit and interest-rate risk in excess of the amount recognized in the
consolidated statements of financial condition.  The contract or notional
amounts of those instruments reflect the extent of the Bank's involvement in
particular classes of financial instruments.

The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, standby
letters of credit, and financial guarantees written is represented by the
contractual notional amount of those instruments.  The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.

Unless noted otherwise, the Bank does not require collateral or other security
to support financial instruments with credit risk.

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

<TABLE>
<CAPTION>
                                                                                            June 30,
                                                                   ---------------------------------------------------------------
                                                                              1998                               1997
                                                                   ---------------------------------------------------------------
                                                                   Carrying                            Carrying
                                                                    Amount           Fair Value         Amount          Fair Value
                                                                   ---------------------------------------------------------------
<S>                                                                <C>               <C>              <C>               <C>
Financial Assets
                                                               
  Cash and cash equivalents                                        $   25,458        $   25,458       $   17,957        $   17,957
  Securities                                                           83,879            83,879           77,280            77,280
  Loans                                                               436,138           439,146          443,502           446,009
  Accrued interest receivable                                           4,338             4,338            4,136             4,136
  

Financial Liabilities
  Deposits                                                            446,424           445,368          418,186           416,145
  Borrowed funds                                                       50,635            50,303           74,743            74,200
  Accrued interest payable and advances
   by borrowers for taxes and insurance                                10,690            10,690           10,634            10,634
</TABLE>

                                         105
<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. 
The Bank issues, through third parties, primarily unsecured credit cards
nationwide to a target customer market consisting of sub-prime credit customers
who have either an insufficient credit history or a negative credit history. 
The Bank has established specific underwriting standards for credit card loans. 
Collateral for substantially all noncredit card consumer loans are security
agreements and/or Uniform Commercial Code (UCC) filings on the purchased asset. 
At June 30, 1998 and 1997, the Bank has approximately $344 and $428 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 $38,359 and
$1,918 at June 30, 1998 and $32,943 and $718 at June 30, 1997, respectively, and
are collateralized in substantially the same manner as loans receivable.

The Bank had outstanding commitments to originate or purchase and sell loans of
approximately $39,662 and $20,930, respectively, at June 30, 1998.  The portion
of commitments to originate or purchase fixed rate loans totaled $21,182 with a
range in interest rates of 5.11% to 10.50%.  At June 30, 1998, the Bank had
outstanding commitments to purchase investments of $7,000.  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, 1998, 1997 and 1996 consist
of:

<TABLE>
<CAPTION>
                                                 1998       1997       1996
                                              -------------------------------
<S>                                           <C>        <C>        <C>
(Increase) in accrued interest receivable     $    (202) $   (134)  $    (466)
(Increase) decrease in prepaid expenses
  and other assets                               (1,129)     (360)        699
(Increase) decrease in deferred income taxes     (1,718)     (221)        380
Increase in accrued interest payable and
  other liabilities                                 390      2,374      1,273
                                              -------------------------------
                                              $  (2,659) $   1,659  $   1,886
                                              -------------------------------
                                              -------------------------------
</TABLE>

                                         106
<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, 1998 and 1997 and related
condensed statements of income and cash flows for each of the years in the three
year period ended June 30, 1998 are as follows:

                                          
                              CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                       1998        1997
                                                    ---------------------
<S>                                                 <C>         <C>
Assets
  Cash, all with Home Federal Savings Bank          $  11,711   $   9,295
  Investments, marketable securities                      503       1,003
  Investments in subsidiaries                          44,518      43,011
  Other                                                     8         114
                                                    ---------------------
                                                    $  56,740   $  53,423
                                                    ---------------------
                                                    ---------------------

Liabilities                                         $     139   $     449
Stockholders' equity                                   56,601      52,974
                                                    ---------------------
                                                    $  56,740   $  53,423
                                                    ---------------------
                                                    ---------------------

</TABLE>
                                                           
                            CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                           
                                           1998        1997        1996
                                        ---------------------------------
<S>                                     <C>         <C>         <C>
Interest income                         $    543    $    495    $     543
Equity in earnings of subsidiaries         6,038       3,531        4,683
Other income                                 491          58           -
Expenses                                   (321)        (314)        (486)
Income tax expense                         (278)         (96)         (18)
                                        ---------------------------------
    Net income                          $  6,473    $  3,674    $   4,722
                                        ---------------------------------
                                        ---------------------------------

</TABLE>

                                         107
<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>
                                                                 1998            1997            1996
                                                              -----------------------------------------
<S>                                                           <C>             <C>             <C>
Cash Flows From Operating Activities
  Net income                                                    $   6,473       $   3,674     $   4,722
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Amortization of unearned compensation                             113             116           150
    Equity in earnings of subsidiaries                             (6,038)         (3,531)       (4,683)
    Cash dividends received from subsidiaries                       4,531           2,839         3,307
    (Gain) on sale of securities, net                                (194)             -             -
    Increase (decrease) in liabilities                               (310)              7           175
    Other, net                                                        357              93           (92)
                                                              -----------------------------------------
      Net cash provided by operating activities                     4,932           3,198         3,579
                                                              -----------------------------------------

Cash Flows From Investing Activities
  Purchase of investment securities                                    -               -         (5,507)
  Proceeds from maturities and sales of securities                    656           1,056         5,200
  Investment in HF Card Services, L.L.C.                               -              (43)           (8)
  Investment in HomeFirst Mortgage Corp.                               -               -           (250)
                                                              -----------------------------------------
      Net cash provided by (used in) investing activities             656           1,013          (565)
                                                              -----------------------------------------
                                                                                                     
                                                                                                     
Cash Flows From Financing Activities
  Purchase of treasury stock                                       (2,108)         (1,611)         (802)
  Cash dividends paid                                              (1,248)         (1,083)       (1,011)
  Proceeds from issuance of common stock                              184             215           287
                                                              -----------------------------------------
      Net cash (used in) financing activities                      (3,172)         (2,479)       (1,526)
                                                              -----------------------------------------
      Increase in cash                                              2,416           1,732         1,488

Cash at Beginning of Period                                         9,295           7,563         6,075
                                                              -----------------------------------------
Cash at End of Period                                           $  11,711       $   9,295     $   7,563
                                                              -----------------------------------------
                                                              -----------------------------------------
</TABLE>

                                         108
<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)

<TABLE>
<CAPTION>
                                             Year Ended June 30, 1998
                                     ----------------------------------------
                                       First     Second     Third     Fourth
                                     ----------------------------------------
<S>                                  <C>        <C>       <C>       <C>
Total interest income                $ 12,004   $ 11,620  $ 11,402  $  11,175
Net interest income                     5,344      5,140     5,207      5,061
Provision for losses on loans             526        804       898      2,461
Net income                              1,684      1,622     1,416      1,751

Earnings per share:
  Basic                                  0.38       0.36      0.32       0.40
  Diluted                                0.37       0.35      0.31       0.38

<CAPTION>
                                             Year Ended June 30, 1997
                                     ----------------------------------------
                                       First     Second     Third     Fourth
                                     ----------------------------------------
<S>                                  <C>        <C>       <C>       <C>
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:
  Basic                                 (0.08)      0.28      0.29       0.33
  Diluted                               (0.08)      0.27      0.28       0.32
</TABLE>

                                         109
<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 1998, 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 1998, 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 1998, 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 1998, 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 1998, 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 69 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.


                                         110
<PAGE>

     (a) (3) EXHIBITS

<TABLE>
<CAPTION>
                                                   REFERENCE     SEQUENTIAL
                                                      TO        PAGE NUMBER
                                                     PRIOR     WHERE ATTACHED
                                                    FILING      EXHIBITS ARE
                                                  OR EXHIBIT     LOCATED IN
 REGULATION                                         NUMBER          THIS
 S-K EXHIBIT                                       ATTACHED      FORM 10-K
   NUMBER                  DOCUMEN                  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      (1)      Not Applicable
           and Curtis L. Hage and Donald F.
           Bertsch

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

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

      10.4 1991 Stock Option and Incentive Plan       (2)      Not Applicable

      10.5 Articles of Incorporation of HF Card       (4)      Not Applicable
           Services L.L.C.

      10.6 Amendment to 1991 Stock Option and         (6)      Not Applicable
           Incentive Plan

      10.7 1996 Director Restricted Stock Plan        (6)      Not Applicable

      10.8 Employment Contract between the Bank       (6)      Not Applicable
           and Gene F. Uher

      10.9 Employment Contract between the Bank      10.9           Page
           and Mark S. Sivertson

     10.10 Employment Contract between the Bank      10.10          Page
           and Michael H. Zimmerman

     10.11 Change in Control Contract between        10.11          Page
           the Bank and Gene F. Uher

     10.12 Change in Control Contract between        10.12          Page
           the Bank and Mark S. Sivertson

     10.13 Change in Control Contract between        10.13          Page
           the Bank and Michael H. Zimmerman

        21 Subsidiaries of Registrant                 21            Page

        23 Consents of Experts and Counsel            23            Page

        27 Financial Data Schedule                    27            Page
</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.


                                         111
<PAGE>

(5)  Filed as Exhibit I to the Company's filing on Form 8-A, filed on October
     28, 1996.
(6)  Filed as exhibits to the Company's Annual Report on Form 10k for the fiscal
     year ended June 30, 1997.

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, 1998.


                                         112
<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
(PRINCIPAL EXECUTIVE AND OPERATING            Officer (PRINCIPAL FINANCIAL AND
OFFICER)                                      ACCOUNTING OFFICER)

Date:  9/16/98                                Date:  9/16/98
     --------------------------------              -----------------------------


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


Date:  9/16/98                                Date:  9/16/98
     --------------------------------              ---------------------------


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


Date:  9/16/98                                Date:  9/16/98
     --------------------------------              ---------------------------


/s/ William G. Pederson                       /s/ JoEllen G. Koerner
-------------------------------------         --------------------------------
William. G. Pederson, Director                JoEllen G. Koerner, Ph.D.,
                                              Director


Date:  9/18/98                                Date:  9/17/98
     --------------------------------              ---------------------------


/s/ Kevin T. Kirby
-------------------------------------
Kevin T. Kirby, Director


Date:  9/16/98
     --------------------------------


                                         113
<PAGE>

                                 INDEX TO EXHIBITS


<TABLE>
<CAPTION>
       Exhibit
       Number
    ------------
    <S>          <C>
       10.9      Employment Contract between the Bank and Mark S. Sivertson

       10.10     Employment Contract between the Bank and Michael H. Zimmerman

       10.11     Change in Control Contract between the Bank and Gene F. Uher

       10.12     Change in Control Contract between the Bank and Mark S.
                 Sivertson

       10.13     Change in Control Contract between the Bank and Michael H.
                 Zimmerman

       21        Subsidiaries of Registrant

       23        Consents of Experts and Counsel

       27.1      Financial Data Schedule

       27.2      Financial Data Schedule Restated

       27.3      Financial Data Schedule Restated
</TABLE>


                                         114