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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-27388
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HFNC FINANCIAL CORP
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(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1937349
- --------------------------------------------- ----------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
139 SOUTH TRYON STREET, CHARLOTTE, NORTH CAROLINA 28202
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(Address of principal executive offices)
(Zip Code)
(704) 373-0400
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(Registrant's telephone number, including area code)
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 report[s]), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
$0.01 PAR VALUE COMMON STOCK 17,192,500 SHARES
- ------------------------------------ -------------------------------------
Class of Stock Outstanding at September 30, 1996
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HFNC FINANCIAL CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets,
September 30, 1996 and June 30, 1996 3
Consolidated Condensed Statements of Income,
Three month Periods
Ended September 30, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows
Three month Periods Ended September 30, 1996
and 1995 5
Notes to Consolidated Condensed Financial
Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security
Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
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HFNC FINANCIAL CORP.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
As of
----------------------------
September 30, June 30,
1996 1996
<S> <C> <C>
ASSETS
- ------
CASH AND CASH EQUIVALENTS:
Cash $ 9,909,127 $ 6,769,598
Federal funds sold 4,473,000 2,836,000
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Total 14,382,127 9,605,598
SECURITIES AVAILABLE FOR SALE:
At fair value (amortized cost:
September 30, 1996 - $248,666,018;
June 30, 1996 - $248,922,746) 249,961,796 248,445,333
LOANS RECEIVABLE, NET 553,427,803 505,130,813
REAL ESTATE 1,304,412 2,539,014
OFFICE PROPERTIES AND EQUIPMENT, NET 9,096,973 5,846,103
STOCK OF FEDERAL HOME LOAN BANK
OF ATLANTA, at cost 5,062,100 5,062,100
OTHER ASSETS 11,839,276 12,249,107
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TOTAL $845,074,487 $788,878,068
LIABILITIES AND EQUITY
- ----------------------
DEPOSITS $438,876,527 $448,570,916
OTHER BORROWED FUNDS (Note 4) 145,000,000 85,000,000
OTHER LIABILITIES 13,433,780 8,802,696
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TOTAL LIABILITIES 597,310,307 542,373,612
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EQUITY (Note 1):
Common stock, par value $0.01 per
share: 25,000,000 shares
authorized; 17,192,500 shares
issued and outstanding 171,925 171,925
Additional paid-in capital 168,494,521 168,390,571
Unearned ESOP shares (Note 2) (8,550,000) (8,700,000)
Retained Income 86,858,168 86,896,095
Unrealized gain (loss) on securities
available for sale (net of of
deferred taxes: September 30, 1996
- $506,212; June 30, 1996
- $223,278) 789,566 (254,135)
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Total equity 247,764,180 246,504,456
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TOTAL $845,074,487 $788,878,068
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</TABLE>
See notes to consolidated condensed financial statements.
3
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HFNC FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
1996 1995
<S> <C> <C>
INTEREST INCOME:
Interest on loans $11,193,955 $ 9,605,039
Interest and dividends on securities 4,447,357 1,951,381
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Total 15,641,312 11,556,420
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INTEREST EXPENSE:
Interest on customer deposits 5,947,190 7,269,062
Interest on other borrowed funds 1,782,656 61,474
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Total 7,729,846 7,330,536
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NET INTEREST INCOME 7,911,466 4,225,884
PROVISION FOR LOAN LOSSES (RECOVERY OF
ALLOWANCE) 374,397 (141,892)
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NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 7,537,069 4,367,776
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OTHER OPERATING INCOME:
Service charges and fees 196,043 219,473
Gain on sale of office properties and
equipment -- 657,616
Other 115,562 137,267
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Total 311,605 1,014,356
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OTHER OPERATING EXPENSES:
Salaries and employee benefits 1,600,810 1,487,141
Federal deposit insurance premiums 265,484 269,320
Special SAIF recapitalization assessment 3,077,275 --
Occupancy 410,565 580,867
Net cost of real estate operations 173,203 (4,326)
Advertising 182,285 160,318
Data processing 95,829 62,833
Other 780,300 426,977
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Total 6,585,751 2,983,130
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INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 1,262,923 2,399,002
PROVISION FOR INCOME TAXES 486,225 902,936
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE 776,698 1,496,066
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
FOR POSTRETIREMENT BENEFITS (Net of
income tax benefit of $650,000) -- 1,050,000
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NET INCOME 776,698 446,066
Retained income, beginning balance 86,896,095 79,321,993
Less: Dividends declared ($.05 per share) (814,625) --
----------- -----------
Retained income, ending balance $86,858,168 $79,768,059
----------- -----------
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NET INCOME PER SHARE (Note 1): $ 0.05 n/a
</TABLE>
See notes to consolidated condensed financial statements.
4
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HFNC FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 776,698 $ 446,066
Adjustments to reconcile net income to
net cash provided by operating
activities:
Cumulative effect of a change in
accounting principle, net -- 1,050,000
Depreciation and amortization 110,545 125,625
Amortization of net deferred loan fees 453,356 386,182
Net amortization (accretion) of
premiums and discounts on
investment securities 165,792 (10,206)
Provision for losses on loans (recovery
of allowance) 374,397 (141,892)
Provision for losses on real estate
(recovery of allowance) 70,379 (72,932)
(Gain) loss on sale of:
Fixed assets -- (657,616)
Real estate owned 30,073 129,769
Fair value of committed ESOP shares 253,950 --
Increase in other liabilities 4,631,084 2,740,016
Increase in other assets (319,659) (582,062)
------------ ------------
Net cash provided by operating
activities 6,546,615 3,412,950
------------ ------------
INVESTING ACTIVITIES:
Proceeds from maturities and calls of
investment securities 2,000,000 9,500,000
Proceeds from principle repayment of
mortgage-backed securities 3,040,936 --
Proceeds from sale of real estate 1,232,594 950,987
Proceeds from disposal of office
properties and equipment -- 1,497,096
Purchase of mortgage-backed securities (4,950,000) --
Purchase of investment securities held
to maturity -- (13,773,274)
Purchase of office properties and
equipment (3,361,415) (10,123)
Net loan originations (49,223,187) (9,955,015)
------------ ------------
Net cash used in investing
activities (51,261,072) (11,790,329)
------------ ------------
--
FINANCING ACTIVITIES:
Increase (decrease) in deposits (9,694,389) 21,000,475
Net proceeds from securities sold
under agreements to repurchase 35,000,000
Advances from Federal Home Loan Bank 25,000,000 --
Repayments of advances from Federal
Home Loan Bank -- (10,000,000)
Cash dividends paid (814,625) --
------------ ------------
Net cash provided by
financing activities 49,490,986 11,000,475
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 4,776,529 2,623,096
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 9,605,598 15,122,724
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,382,127 $ 17,745,820
------------ ------------
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SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 8,396,563 $ 7,837,251
Income taxes 431,501 --
Loans foreclosed 98,444 75,000
Unrealized gain (loss) on investment
securities available for sale, net
of taxes 1,043,701 14,704
</TABLE>
See notes to consolidated condensed financial statements.
5
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HFNC FINANCIAL CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
HFNC Financial Corp. (the "Company") was incorporated under North Carolina law
in August 1995 by Home Federal Savings and Loan Association (the "Association")
in connection with the conversion of the Association from a federally chartered
mutual savings and loan association to a federally chartered stock savings and
loan association, the issuance of the Association's stock to the Company and the
offer and sale of the Company's common stock by the Company (the "Conversion").
The Conversion, completed on December 28, 1995, resulted in the issuance and
sale of 17,192,500 shares of $0.01 par value common stock. The gross proceeds
of the Conversion totaled $171,925,000, of which $171,925 was allocated to
common stock and $168,266,013 (net of conversion costs of $3,487,062) is
included in additional paid-in capital. Approximately 50% of the net proceeds
from the Conversion were used to acquire 100% of the common stock of the
Association. Substantially all of the remaining net proceeds from the
Conversion are being retained by HFNC Investment Corp., a wholly-owned
subsidiary of the Company.
The accompanying consolidated condensed financial statements of the Company
have been prepared in accordance with instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, such information reflects all adjustments (consisting
solely of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the interim periods.
The results of operations for the three month period ended September 30, 1996
are not necessarily indicative of the results to be expected for the year
ending June 30, 1997. The consolidated financial statements and notes
thereto should be read in conjunction with the audited financial statements
and notes thereto for the year ended June 30, 1996, contained in the
Company's 1996 annual report.
EARNINGS PER SHARE -- Because the Company completed its conversion to stock
ownership on December 28, 1995, earnings per share comparisons to prior periods
are not considered meaningful for presentation in the consolidated condensed
financial statements. Net income per share was computed by dividing net income
by 16,330,000, the weighted average number of shares outstanding during the
period. In accordance with generally accepted accounting principles, ESOP shares
are only considered outstanding for earnings per share calculations when they
are committed to be released.
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2. EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Conversion (Note 1), the Company established an
Employee Stock Ownership Plan (ESOP) to provide benefits to substantially all
employees. A $9,000,000 loan from the Company's wholly owned subsidiary, HFNC
Investment Corp. was used by the ESOP to purchase 900,000 shares of the
Company's common stock in the Conversion at $10 per share. As the loan is
internally leveraged, the note receivable from the ESOP is not reported as an
asset nor is the ESOP's debt reported as a liability, however, the cost of
unallocated shares is shown as a reduction of stockholders' equity on the
balance sheet. During the quarter ended September 30, 1996, 15,000 shares
from the plan were committed to be released, with a cost to the plan of
$150,000 and a fair value $103,950 in excess of cost. The cost of the shares
is reflected on the balance sheet as a reduction of unearned ESOP shares and
the excess of fair value over cost is reflected as an addition to additional
paid-in capital as shares are released.
3. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care and life insurance benefits for
substantially all of its retired employees. These postretirement plans are
currently not funded. Effective July 1, 1995, the Association adopted
Statement of Financial Accounting Standards (SFAS) NO. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". SFAS No. 106
requires the Company to accrue the estimated cost of retiree benefit payments
during the years the employee provides services. The Association previously
expensed the cost of these benefits, which are principally health care
insurance costs, as paid. SFAS No. 106 allows recognition of the cumulative
effect of the liability in the year of adoption or the amortization of the
obligation over a period of up to twenty years. The Company elected to
recognize the cumulative effect of this obligation on the immediate
recognition basis. The cumulative effect as of July 1, 1995 was an increase
in accrued postretirement health care costs of $1,700,000 and a decrease in
net earnings of $1,050,000 (after income taxes of $650,000), which has been
included in the Company's consolidated condensed statement of income for the
three months ended September 30, 1995.
4. OTHER BORROWED FUNDS
Other borrowed funds at September 30, 1996 consisted of $125.0 million of
securities sold under repurchase agreements and $25.0 million of advances from
the Federal Home Loan Bank of Atlanta (FHLB advances). The securities sold
under agreement to repurchase had an interest rate of 5.60% and matured October
18, 1996. The FHLB advances had an interest rate of 5.83% and mature on August
14, 1997.
7
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5. LITIGATION
The Association is currently involved in litigation with a borrower and
affiliated companies who have alleged that the Association and another financial
institution engaged in a conspiracy to wrongfully declare each of the borrower's
loans in default and to wrongfully force the borrower to pay off those loans
before the borrower was otherwise obligated to do so. The plaintiffs allege
violations of North Carolina's Unfair and Deceptive Trade Practices Act,
improper economic coercion, interference with contracts and interference with
potential contractual relationships. Plaintiffs claim substantial damages,
punitive damages, interest, attorney's fees and other costs. The litigation,
which began in the North Carolina state court system in 1994, was removed to the
United States Bankruptcy Court for the Western district of North Carolina,
Charlotte Division. The Association filed counterclaims against each of the
plaintiffs and a third party complaint against the individual borrower, which
are in the nature of claims for sums due under numerous promissory notes. The
Association also seeks to recover statutory treble damages, punitive damages,
interest, attorneys' fees and other costs.
In May 1995, an order for summary judgment was entered in the United States
Bankruptcy Court in favor of the Association on all of its counterclaims against
the borrower and in favor of the Association with respect the dismissal of all
of the borrower's claims against the Association. On September 26, 1995, the
United States District Court entered the United States Bankruptcy Court's
recommended and proposed order and judgment dismissing the plaintiffs' claims
against the Association and in favor of the Association on all of its
counterclaims in an amount in excess of $8.0 million against the plaintiffs and
the individual borrower. On October 24, 1995, the plaintiffs filed a notice of
appeal to the Fourth Circuit Court of Appeals. On September 10, 1996, the
Fourth Circuit Court of Appeals affirmed the District Court's dismissal of the
plaintiff's claims against the Association.
In June 1995, affiliated companies of the borrower involved in the
aforementioned litigation filed another adversary proceeding against the
Association alleging wrongful dishonor of a check, altered by the plaintiff,
which was to be used to meet debt service requirements with respect to
properties which were the subject of United States Bankruptcy Court
proceedings. The Association had exercised its right to set off the funds on
deposit against outstanding debts owed to the Association. In addition to
claiming damages as a result of alleged potential loss of equity in the
properties, the plaintiffs seek treble damages and attorneys' fees. This
lawsuit is still in the discovery phase.
In December 1995, affiliated companies of the borrower filed an action against
H. Joe King, Jr., J. Harold Barnes, Jr., officers of the Association, and
against an officer of another financial institution, essentially asserting the
same claims against them as against the Association and the other financial
institution in the initial litigation. The Association
8
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has agreed, pursuant to Indemnity Agreements entered into between Messrs.
King and Barnes and the Association in September 1988, to indemnify both Mr.
King and Mr. Barnes with respect to all costs, expense and liability that may
arise in connection with this case. The litigation is currently in the
discovery phase and is scheduled for trial in May of 1997.
The Association and its officers continue to deny any liability in the above
described cases and continue to vigorously defend against the claims. However,
based on the advice of legal counsel, the Association is unable to give an
opinion as to the likely outcome of the litigation or estimate the amount or
range of potential loss, if any.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
The Company's assets amounted to $845.1 million at September 30, 1996,
compared to $788.9 million at June 30, 1996, an increase of $56.2 million or
7.1%. This increase was primarily due to growth in loans receivable of $48.3
million, to $553.4 million at September 30, 1996 compared to $505.1 million
at June 30, 1996, resulting from the development of new loan products and to
the use of correspondent loan originators in generating loan volume. In
addition to the increase in loans receivable, cash and cash equivalents
increased $4.8 million to $14.4 million, and office properties and equipment
increased $3.3 million from the purchase of a new office for the
Association's mortgage loan origination operation. Total liabilities
increased $54.9 million from the prior period due primarily to the $60.0
million, or 70.6%, increase in other borrowed funds to $145.0 million from
$85.0 million in the prior quarter. The increase in other borrowed funds was
used primarily to fund increased loan originations. "Other liabilities" also
increased due to the $3.1 million liability for the Savings Association
Insurance Fund (SAIF) recapitalization payment and to an increase of $1.4
million in advances by borrowers for taxes and insurance. Deposits declined
by $9.7 million or 2.2% as the Association has sought to reprice at market
rates deposits that were originated at promotional rates in the prior year.
Stockholders' equity increased $1.3 million due to net income of $777,000 and
to an increase in unrealized gains on securities available for sale of $1.0
million. These were offset somewhat by the payment of $815,000 in dividends.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
GENERAL: Net income for the three months ended September 30, 1996 amounted
to $777,000, an increase of $331,000 from the comparable quarter in 1995,
primarily due to an increase in interest and dividend income of $4.1 million
and a reduction in interest on deposits of $1.3 million. These additions to
income were offset somewhat by an increase in interest on borrowed funds of
$1.7 million, a current period provision for loan losses of $374,000,
compared to a prior period net recovery of allowance of $142,000, and a
reduction in the gain on sale of office properties and equipment of $658,000.
The quarter ended September 30, 1996 was further impacted by a $3.1 million
one time special assessment by the Federal Deposit Insurance Corporation
(FDIC) to recapitalize the SAIF. This assessment will recapitalize the SAIF
insurance fund, allowing premiums for savings and loan associations to be
reduced to a level more comparable to those of commercial banks. The reduced
premiums will take effect in January of 1997 and will benefit the Company's
income in future periods. See "SAIF Special Assessment." Net income for
the quarter ended September 30, 1995 was affected by a one time after-tax
cost of $1.1 million resulting from the implementation of a new accounting
pronouncement related to postretirement benefits.
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NET INTEREST INCOME: Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities. The Company's net interest income increased
$3.7 million, or 87.2%, to $7.9 million for the three months ended September
30, 1996, compared to $4.2 million for the three months ended September 30,
1995. This increase reflects both the increase in the Company's interest
rate spread to 2.43% for the 1996 quarter from 2.24% for the 1995 quarter and
the increase in the ratio of interest-earning assets to interest-bearing
liabilities to 1.4 for the quarter ended September 30, 1996 from 1.1 for the
quarter ended September 30, 1995, primarily due to investment of the stock
conversion proceeds.
INTEREST INCOME: Interest income increased $4.1 million or 35.3% from the
prior year quarter due to an increase in interest on loans of $1.6 million
and an increase in interest on securities of $2.5 million. The increase in
interest on loans resulted from loan growth since the stock conversion, with
the average balance outstanding increasing to $525.9 million in the quarter
ended September 30, 1996 compared to $437.5 million in the prior year
quarter, an increase of $88.4 million or 20.2%. The increase in interest on
securities primarily resulted from the investment of conversion proceeds into
these investments, with the average balance of investment securities
increasing to $246.9 million during the quarter ended September 30, 1996,
compared to an average balance of $113.7 million in the same quarter of 1995.
INTEREST EXPENSE: Total interest expense for the quarter ended September 30,
1996 increased $399,000 or 5.4% over the quarter ended September 30, 1995.
Interest on customer deposits during the current quarter decreased $1.3
million or 18.2% from the comparable quarter in 1995 due to decreases in both
the level of deposits during the period and the average rate paid for those
deposits. The average deposit balance decreased to $440.4 million for the
current quarter, down from $499.8 million for the quarter ended September 30,
1995. The average rate paid decreased to 5.40% from 5.82% in the 1995
quarter. Both of these decreases were due to the Association's efforts to
reprice renewing certificates of deposit to present market rates. Many of
these certificates of deposit were originated in early 1995 as part of a
marketing program to respond to rates offered by other financial institutions
in its market area and in response to a general increase in market interest
rates on deposits. A large portion of these certificates have matured and
have either not been renewed or have been renewed at market rates. Interest
on advances and other borrowings increased $1.7 million due to an increase in
the average balance outstanding to $122.7 million in the quarter ended in
September 30, 1996, compared to $4.1 million in the prior year quarter. Such
increase in other borrowings was due primarily to an increase securities sold
under repurchase agreement to generate funds to support the increased loan
origination activity. This increase in average balance was somewhat offset
by a decrease in the average rate paid to 5.64% in the 1996 quarter from 5.95%
in the 1995 quarter.
PROVISION FOR LOAN LOSSES (RECOVERY OF ALLOWANCE): The Company's allowance for
loan losses is maintained at a level which is deemed to be appropriate based
upon an assessment of prior loss experience, the volume and type of lending
presently being conducted by the Company, industry standards, past due loans,
general economic
11
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conditions in the Company's market area, and to other factors related to the
collectibility of the loan portfolio. In order to give recognition to the
possibility of unknown losses, a part of the loan loss allowance relates to
assets that are fully performing. During the quarter ended September 30,
1996, the Association recorded a provision for loan losses of $374,000
compared to a recovery of $142,000 in the comparable 1995 quarter.
Approximately $200,000 of the current quarter provision relates to the loan
growth during the quarter. These loans are fully performing, but an
allowance is established for potential losses not yet known. At September
30, 1996, the allowance amounted to $7.8 million, which amounted to 92.6% of
nonperforming loans and 1.4% of total loans.
OTHER OPERATING INCOME: Other operating income decreased $703,000 to $312,000
in the current quarter compared to $1.0 million in the prior year quarter. This
was due primarily to a $658,000 gain on sale of office property and equipment in
the 1995 quarter, with no such sale occurring in the current year quarter.
OTHER OPERATING EXPENSES: Other operating expenses increased $3.6 million over
the same quarter in the prior year, to $6.6 million compared to $3.0 million in
the quarter ended September 30, 1995. The primary component of the increase was
a $3.1 million special SAIF assessment discussed previously. See "SAIF
Special Assessment." Excluding the SAIF assessment, other operating expenses
increased $525,000 to $3.5 million in the quarter ended September 30, 1996.
Current year increases in salaries and employee benefits of $114,000, net cost
of real estate operations of $178,000, and miscellaneous other expenses of
$353,000 were offset somewhat by a reduction of $170,000 in occupancy expenses.
Salary and benefit costs increased due to accounting recognition of costs
associated with the release of unallocated shares from the employee stock
ownership plan. Compensation expense must be recognized at the fair value of
shares at the time they are committed to be released rather than at the cost of
those shares to the plan. This fair value recognition increased current quarter
salaries and benefits costs by $104,000 compared to the prior year. The net
cost of real estate operations increased due to a net provision for losses on
REO of $70,000 in the current year compared to a net recovery of $73,000 in the
1995 quarter and to an increase in repair expenses. Miscellaneous other
expenses increased $353,000 due primarily to $171,000 in increased legal
expenses in the quarter ended September 30, 1996 compared to the 1995 quarter
and to a new $75,000 franchise tax paid during the 1996 quarter related to the
holding company. Occupancy expenses decreased $170,000 from the prior year
quarter due to non-recurring expenses in 1995 relating to the exterior repairs
to the Company's main office.
PROVISION FOR INCOME TAXES: The income tax provision for the quarter ended
September 30, 1996 decreased $417,000 from the provision in the 1995 quarter
due to a decrease in "income before income taxes and cumulative effect of a
change in accounting principle". As noted in the following paragraph, the
change in accounting principle in the 1995 quarter was expressed net of tax.
12
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CHANGE IN ACCOUNTING PRINCIPLE. In the quarter ended September 30, 1995, the
Association adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions". As a result, the Association recognized a $1.7
million accumulated postretirement benefit obligation effective July 1, 1995.
On an after tax basis, this charge amounted to approximately $1.1 million and
was reported as a change in accounting principle.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing and financing activities. The Company's primary
sources of funds are deposits, borrowings, amortization, prepayments and
maturities of outstanding loans, sales of loans, maturities of investment
securities and other short-term investments and funds provided from operations.
While scheduled loan amortization and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. The Company invests excess funds in
overnight deposits and other short-term interest-earning assets. The Company
can use cash generated through the retail deposit market, its traditional
funding source, to offset the cash utilized in investing activities. The
Company's available for sale securities and short-term interest earning assets
can also be used to provide liquidity for lending and other operational
requirements. As an additional source of funds, the Company may borrow from the
FHLB of Atlanta or through securities sold under repurchase agreements.
SAIF SPECIAL ASSESSMENT
The deposits of the Bank are insured by the SAIF of the FDIC. Both the SAIF
and the Bank Insurance Fund ("BIF"), the federal deposit insurance fund that
covers commercial bank deposits, are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of insured deposits. The BIF had achieved
a fully funded status in contrast to the SAIF and the FDIC had recently
reduced the average deposit insurance premium paid by BIF-insured commercial
banks to a level substantially below the average premium paid by SAIF-insured
institutions.
In late 1995, the FDIC approved a final rule regarding deposit insurance
premiums which, effective with the semiannual premium assessment on January
1, 1996, reduced deposit insurance premiums for BIF member institutions to
zero (subject to an annual minimum of $2,000) for institutions in the lowest
risk category. Deposit insurance premiums for SAIF members were maintained
at their then existing levels (23 basis points for institutions in the lowest
risk category). Accordingly, until the SAIF had attained a reserve ratio of
1.25% of insured deposits, SAIF members such as the Association would have
been competitively disadvantaged as compared to commercial banks due to this
premium differential.
Legislation, passed by the U.S. House of Representatives and the Senate, was
signed into law by the President on September 30, 1996 to recapitalize the
SAIF. The special assessment was fully anticipated by the Association
because legislation had been close to enactment on several occasions over the
past year. As a result of such legislation, the Association was required to
pay a one-time assessment of 65.7 cents for every $100 of deposits which
amounted to $3.1 million pre-tax with a $1.9 million after-tax effect.
The legislation also mandated that SAIF-insured institutions' (such as the
Association) deposit insurance premiums decline from 23 basis points to
approximately 6.4 basis points, effective January 1, 1997. The mandated
decline in the premium rate is expected to reduce the Assocation's pre-tax
annual SAIF premiums by approximately $800,000 (based on current deposit
levels). The reduced future annual premiums will more than offset the
negative impact on the Association's first quarter earnings.
13
<PAGE>
HFNC FINANCIAL CORP.
PART II
Item 1. Legal Proceedings
-----------------
Other than as discussed in Note 5 of the Notes to
Consolidated Condensed Financial Statements, the Company is
not engaged in any legal proceedings at the present time other
than those generally associated with the normal course of
business.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
HFNC FINANCIAL CORP.
Date: November 5, 1996 By: /s/ H. Joe King, Jr.
-------------------------------------
H. Joe King, Jr.
President and Chief Executive Officer
Date: November 5, 1996 By: /s/ A. Burton Mackey, Jr.
-------------------------------------
A. Burton Mackey, Jr.
Vice President and Treasurer
15
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<PAGE>
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<S> <C>
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<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 12,909,129
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,473,000
<TRADING-ASSETS> 0
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<DEPOSITS> 438,876,527
<SHORT-TERM> 145,000,000
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0
0
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