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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ________________________
Commission file number 0-27388
HFNC FINANCIAL CORP.
(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
(Address of principal executive offices)
(Zip Code)
(704) 373-0400
(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 [ ]
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 November 5, 1997
<PAGE>
HFNC FINANCIAL CORP.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets,
September 30, 1997 and June 30, 1997
Consolidated Condensed Statements of Income,
Three Month Periods Ended September 30, 1997 and 1996
Consolidated Condensed Statements of Changes in
Shareholders' Equity, Three Month Periods Ended
September 30, 1997 and 1996
Consolidated Condensed Statements of Cash Flows,
Three Month Periods Ended September 30, 1997 and 1996
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
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<TABLE>
<CAPTION>
HFNC FINANCIAL CORP.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
As of
September 30, June 30,
---------------------------------
ASSETS 1997 1997
------------- -------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Cash $ 15,870,659 $ 9,934,359
Federal funds sold 12,277,000 21,436,000
------------- -------------
Total 28,147,659 31,370,359
------------- -------------
SECURITIES - Available for sale, at fair value (amortized cost:
$118,908,565 and $169,285,103, at September 30 and June 30,
respectively) 123,044,183 175,710,104
LOANS RECEIVABLE, NET 687,178,868 658,323,320
REAL ESTATE, NET 1,101,571 867,876
OFFICE PROPERTIES AND EQUIPMENT, NET 10,105,535 10,099,107
STOCK OF FEDERAL HOME LOAN BANK OF ATLANTA - At cost 8,000,000 6,450,000
DEFERRED INCOME TAX ASSET, NET 3,536,789 3,390,125
OTHER ASSETS 5,744,648 6,709,218
------------- -------------
TOTAL $ 866,859,253 $ 892,920,109
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS $ 442,314,334 $ 443,839,542
OTHER BORROWED FUNDS 246,800,000 277,000,000
OTHER LIABILITIES 14,717,476 11,020,650
------------- -------------
Total liabilities 703,831,810 731,860,192
</TABLE>
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<TABLE>
<CAPTION>
HFNC FINANCIAL CORP.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
As of
September 30, June 30,
---------------------------------
1997 1997
------------- -------------
<S> <C> <C>
SHAREHOLDERS' EQUITY:
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 90,077,769 89,967,883
ESOP loan and unvested restricted stock (22,832,779) (23,137,490)
Retained income 93,092,764 90,106,224
Unrealized gain on securities available for sale (net of deferred taxes:
$1,617,854 and $2,473,626 at September 30 and June 30, respectively) 2,517,764 3,951,375
------------- -------------
Total shareholders' equity 163,027,443 161,059,917
------------- -------------
TOTAL $ 866,859,253 $ 892,920,109
============= =============
</TABLE>
See notes to consolidated condensed financial statements.
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<TABLE>
<CAPTION>
HFNC FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Month Periods Ended
September 30,
1997 1996
---------- ------------
<S> <C> <C>
INTEREST INCOME:
Interest on loans $ 13,877,882 $ 11,193,955
Interest on securities 3,034,062 4,447,357
------------ ------------
Total 16,911,944 15,641,312
------------ ------------
INTEREST EXPENSE:
Interest on deposits 5,965,898 5,947,190
Interest on other borrowed funds 3,920,174 1,782,656
------------ ------------
Total 9,886,072 7,729,846
------------ ------------
NET INTEREST INCOME 7,025,872 7,911,466
PROVISION FOR LOAN LOSSES (RECOVERY OF ALLOWANCE) (62,970) 374,397
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES (RECOVERY OF ALLOWANCE) 7,088,842 7,537,069
------------ ------------
OTHER OPERATING INCOME:
Service charges and fees 205,775 196,043
Gain on sale of securities 3,341,155 --
Other income 67,701 115,562
------------ ------------
Total 3,614,631 311,605
------------ ------------
</TABLE>
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<TABLE>
<CAPTION>
HFNC FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(continued)
Three Month Periods Ended
September 30,
1997 1996
---------- ------------
<S> <C> <C>
OTHER OPERATING EXPENSES:
Personnel expenses 2,679,764 1,600,810
Federal deposit insurance premiums 70,601 265,484
Special SAIF recapitalization assessment -- 3,077,275
Occupancy 460,083 410,565
Net cost of real estate operations (6,743) 173,203
Advertising 186,722 182,285
Data processing 108,174 95,829
Other expenses 512,587 780,300
------------ ------------
Total 4,011,188 6,585,751
------------ ------------
INCOME BEFORE INCOME TAXES 6,692,285 1,262,923
PROVISION FOR INCOME TAXES 2,618,022 486,225
------------ ------------
NET INCOME $ 4,074,263 $ 776,698
============ ============
Earnings per share $ 0.26 $ 0.05
Dividends per share $ 0.07 $ 0.05
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
Common Additional Paid Retained
Stock In Capital Income
----- ---------- ------
<S> <C> <C> <C>
BALANCE,
JUNE 30, 1996 ................ 171,925 168,390,571 86,896,095
Net income ..................... -- -- 776,698
Shares released from ESOP ...... -- 103,950 --
Dividends paid ................. -- -- (814,625)
Change in net unrealized loss on
securities available for sale -- -- --
------------- ------------- -------------
BALANCE,
SEPTEMBER 30, 1996 ........... $ 171,925 $ 168,494,521 $ 86,858,168
============= ============= =============
BALANCE,
JUNE 30, 1997 ................ $ 171,925 $ 89,967,883 $ 90,106,224
Net income ..................... -- -- 4,074,263
Shares released from ESOP and
restricted stock trusts ...... -- 109,886 --
Dividends paid ................. -- -- (1,087,723)
Change in net unrealized gain on
securities available for sale -- -- --
------------- ------------- -------------
BALANCE,
SEPTEMBER 30, 1997 ........... $ 171,925 $ 90,077,769 $ 93,092,764
============= ============= =============
</TABLE>
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<TABLE>
<CAPTION>
HFNC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
Net unrealized
ESOP and Gain (Loss) on
Unvested Securities
Restricted Available for
Stock Sale (1) Total
----- -------- -----
<S> <C> <C> <C>
BALANCE,
JUNE 30, 1996 ................ (8,700,000) (254,135) 246,504,456
Net income ..................... -- -- 776,698
Shares released from ESOP ...... 150,000 -- 253,950
Dividends paid ................. -- -- (814,625)
Change in net unrealized loss on
securities available for sale -- 1,043,701 1,043,701
------------- ------------- ---------------
BALANCE,
SEPTEMBER 30, 1996 ........... $ (8,550,000) $ 789,566 $ 247,764,180
============= ============= =============
BALANCE,
JUNE 30, 1997 ................ $ (23,137,490) $ 3,951,375 $ 161,059,917
Net income ..................... -- -- 4,074,263
Shares released from ESOP and
restricted stock trusts ...... 304,711 -- 414,597
Dividends paid ................. -- -- (1,087,723)
Change in net unrealized gain on
securities available for sale -- (1,433,611) (1,433,611)
------------- ------------- ---------------
BALANCE,
SEPTEMBER 30, 1997 ........... $ (22,832,779) $ 2,517,764 $ 163,027,443
============= ============= =============
</TABLE>
(1) Net of deferred income taxes.
See notes to consolidated condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Month Periods Ended
September 30,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ....................................................................... $ 4,074,263 $ 776,698
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation ................................................................... 163,515 110,545
Net amortization of premiums on investment securities .......................... 20,342 165,792
Amortization of net deferred loan fees ......................................... (449,612) (453,356)
Provision for loan loss (recovery of allowance) ................................ (62,970) 374,397
Provision for losses on real estate (recovery of allowance) .................... (822) 70,379
Fair value of released ESOP .................................................... 414,597 253,950
(Gain) loss on sales of:
Real estate owned ............................................................ (54,544) 30,073
Investments .................................................................. (3,341,155) --
Decrease (increase) in other assets ............................................ 1,728,619 (319,659)
Increase in other liabilities .................................................. 3,696,828 4,631,084
------------ ------------
Net cash provided by operating activities .................................... 6,189,061 5,639,903
------------ ------------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities .............................. 14,466,184 2,000,000
Proceeds from sales of securities available for sale ........................... 53,518,151 --
Purchases of securities available for sale ..................................... (15,993,125) (4,950,000)
Purchases of Federal Home Loan Bank stock ...................................... (1,550,000) --
Principal repayment on mortgage-backed securities .............................. 1,651,200 3,040,936
Proceeds from sales of real estate ............................................. 407,543 1,232,594
Net loan originations .......................................................... (28,928,839) (48,316,475)
Purchases of office properties & equipment ..................................... (169,944) (3,361,415)
------------ ------------
Net cash provided by (used in) investing activities .......................... 23,401,170 (50,354,360)
------------ ------------
</TABLE>
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<TABLE>
<CAPTION>
HFNC FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
Three Month Periods Ended
September 30,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
FINANCING ACTIVITIES:
Decrease in deposits ........................................................... (1,525,208) (9,694,389)
Proceeds from other borrowed funds ............................................. 31,000,000 60,000,000
Repayments of other borrowed funds ............................................. (61,200,000) --
Dividends paid ................................................................. (1,087,723) (814,625)
------------ ------------
Net cash (used in) provided by financing activities .......................... (32,812,931) 49,490,986
------------ ------------
(DECREASE) INCREASE IN CASH & CASH EQUIVALENTS ................................... (3,222,700) 4,776,529
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD ................................... 31,370,359 9,605,598
------------ ------------
CASH & CASH EQUIVALENTS AT END OF PERIOD ......................................... $ 28,147,659 $ 14,382,127
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest .................................................................... $ 10,406,882 $ 8,396,563
Income taxes ................................................................ 7,000 431,501
Loans foreclosed ............................................................... 585,873 98,444
Unrealized (loss) gain on investment securities available for sale, net of taxes (1,433,611) 1,043,701
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
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 were
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, 1997
are not necessarily indicative of the results to be expected for the year ending
June 30, 1998. 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, 1997, contained in the Company's 1997 annual report.
Earnings Per Share
Earnings per share for periods has been computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period. The weighted average shares outstanding for the
three month periods ended September 30, 1997 and 1996 were 15,601,251 and
16,330,000, respectively. Options granted during the quarter ended December 31,
1996 and March 31, 1997 quarters under the Company's stock option plan
represented additional potentially dilutive securities. The potential dilution,
however, was less than the amount requiring income statement presentation under
Accounting Principles Board Opinion No. 15. Full dilution would have included
15,813,253 weighted average shares outstanding at September 30, 1997. In
accordance with generally accepted accounting principles, employee stock
ownership plan and recognition and retention plan shares are only considered
outstanding for earnings per share calculations when they are committed to be
released.
<PAGE>
New Accounting Pronouncements
SFAS No. 128, Earnings Per Share -- This statement establishes standards for
computing and presenting earnings per share ("EPS"). It will require the
presentation of basic EPS on the face of the income statement with dual
presentation of both basic and diluted EPS for entities with complex capital
structures. Basic EPS excludes the dilutive effect that could occur if any
securities or other contracts to issue common stock were exercised or converted
into or resulted in the issuance of common stock. Basic EPS is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. The computation of diluted EPS is
similar to the computation of basic EPS except the denominator is increased to
include the number of additional common shares that would have been outstanding
if the dilutive potential common shares had been issued. In the case of certain
convertible securities, the numerator may also be increased by related interest
or dividends. This statement will be effective for interim and annual periods
ending after December 31, 1997.
SFAS No. 130, Reporting Comprehensive Income -- This statement establishes
standards for reporting and disclosure of comprehensive income and its
components (revenues, expenses, gains and losses). This statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income (including, for example, unrealized holding
gains and losses on available for sale securities) be reported in a financial
statement similar to the statement of income and retained income. The
accumulated balance of other comprehensive income will be disclosed separately
from retained income in the shareholders' equity section of the balance sheet.
This statement is effective for the Company for the fiscal year beginning July
1, 1998.
2. LITIGATION
In June, 1995 a lawsuit was initiated against the Association by a borrower's
affiliated companies in which the plaintiffs alleged that the Association
wrongfully set-off certain funds in an account being held and maintained by the
Association. In addition, the plaintiffs alleged that as a result of the
wrongful set-off, the Association wrongfully dishonored a check in the amount of
$270,000. Plaintiffs further alleged that the actions on behalf of the
Association constituted unfair and deceptive trade practices, thereby entitling
plaintiffs to recover treble damages and attorney fees. The Association denied
any wrongdoing and filed a motion for summary judgment. Upon consideration of
the motion, the United States Bankruptcy Judge entered a Recommended Order
Granting Summary Judgment, recommending the dismissal of all claims asserted
against the Association. On October 11, 1997, the United States District Court
for the Western District of North Carolina entered an Order Granting Summary
Judgment in accordance with the Recommended Order by the United States
Bankruptcy Judge.
In December, 1996, the Association filed a suit against the borrower and his
company and against the borrower's wife, daughter and a company owned by his
wife and daughter, alleging transfers of assets to the wife, daughter, and their
company in fraud of creditors, and asking that the fraudulent transfers be set
aside. The objective of the lawsuit is to recover assets which may be used to
satisfy a portion of the judgments obtained in favor of the Association in prior
litigation. The borrower's wife filed a counterclaim against the Association
alleging that she borrowed $750,000 from another financial institution, secured
<PAGE>
by a deed of trust on her principal residence, the proceeds of which were paid
to the Association for application on a debt owed by one of her husband's
corporations, claiming that officers of the Association promised to resume
making loans to her husband's corporations after the payment. Home Federal and
its officers vigorously deny all of her allegations. The case is currently in
the discovery phase, after which the Association intends to file a motion for
summary judgment for dismissal of the counterclaim.
In February, 1997 two companies affiliated with those referred to in the first
paragraph above filed an additional action against two executive officers of the
Association and against an officer of another financial institution. The action
was removed from the state court and is presently pending in the United States
Bankruptcy Court for the Western District of North Carolina. At the same time,
the borrower, who is affiliated with all of these companies, also filed an
action against the two executive officers of the Association and against an
officer of another financial institution. The Complaints in both actions assert
virtually identical claims. The plaintiffs in both lawsuits allege that the
officers of both financial institutions engaged in a conspiracy to wrongfully
declare loans to be in default so as to eliminate those companies as borrowers
of the Association. Plaintiffs allege misrepresentation, breach of fiduciary
duty, constructive fraud, interference with business expectancy, wrongful bank
account set-off, and unfair and deceptive acts and practices. Plaintiffs claim
actual damages, treble damages and punitive damages together with interest,
attorneys' fees and other costs. The Association has agreed to indemnify both of
its officers with respect to costs, expense and liability which might arise in
connection with both of these cases.
In July, 1997 the above borrower and affiliated companies filed an additional
action against HFNC Financial Corp., the Association, and the other financial
institution referred to in the paragraph above, alleging that previous judgments
in favor of Home Federal and the other financial institution obtained in prior
litigation were obtained by the perpetration of fraud on the Bankruptcy Court,
U.S. District Court, and the 4th Circuit Court of Appeals. The plaintiffs are
seeking to have the judgments set aside on that basis. Home Federal has filed a
motion to dismiss this lawsuit and is awaiting ruling on that motion. The
Association vehemently denies that any fraud was perpetrated upon the courts and
intends to vigorously contest this matter.
In August, 1997 the borrower filed a lawsuit against attorneys for the
Association, attorneys for the other financial institution, and two United
States Bankruptcy Judges in which the borrower alleges that the defendants have
conspired against him and his corporations by allowing the Association to obtain
judgments against him and his various corporations. All defendants have filed
motions to dismiss this lawsuit and are awaiting rulings on these motions.
The Association, its officers and its attorneys 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
at the present time to give an opinion as to the likely outcome of the lawsuits
or estimate the amount or range of potential loss, if any.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
The Company's assets amounted to $866.9 million at September 30, 1997, compared
to $892.9 million at June 30, 1997, a decrease of $26.1 million or 2.9%. This
decrease in total assets was due to the sale of $53.5 million of the Company's
securities portfolio, partially offset by an increase in loans receivable of
$28.9 million. The securities sold were yielding less than current market rates
and were sold to reinvest the proceeds into higher yielding assets, primarily
loans, and to partially repay borrowed funds. Approximately $3.9 million of the
securities sold were equity securities which had appreciated significantly in
value and were sold at a $3.8 million gain. An additional $49.6 million were
investment securities which were also yielding less than current market rates
and were sold at a $476,000 loss. Loans receivable increased $28.9 million, or
4.4%, during the quarter due to the reinvestment of the securities proceeds in
conjunction with the Company's loan growth strategy. Total liabilities decreased
$28.0 million to $703.8 million due primarily to the partial repayment of other
borrowed funds following the sale of securities. Shareholders' equity increased
$2.0 million to $163.0 million due to net earnings of $4.1 million and the
release of $415,000 in ESOP shares, offset somewhat by $1.1 million in dividends
and a $1.4 million reduction in the unrealized gain on securities available for
sale.
Results of Operations for the Three Months Ended September 30, 1997 and 1996
General: Net income for the three months ended September 30, 1997 amounted to
$4.1 million, an increase of $3.3 million from the three months ended September
30, 1996, due to a $3.3 million increase in other operating income, a $2.6
million decrease in other operating expenses, and a $437,000 decrease in the
provision for loan losses, which were partially offset by a $886,000 decrease in
net interest income and a $2.1 million increase in the provision for income
taxes.
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 decreased $886,000, or 11.2%, to
$7.0 million for the three months ended September 30, 1997, compared to $7.9
million for the three months ended September 30, 1996. This decrease is
primarily the result of a reduction in the ratio of interest-earning assets to
interest-bearing liabilities to 1.20 at September 30, 1997 from 1.40 at
September 30, 1996. This ratio declined due to the Company's additional
borrowings to fund loan growth, coupled with the liquidation of a significant
portion of the securities portfolio to fund the $5 per share special
distribution paid to shareholders in March 1997. The Company also experienced a
moderate decrease in the interest rate spread to 2.34%, from 2.43% in the prior
year quarter. The net interest margin declined to 3.26% in the current quarter
from 4.00% in the prior year quarter, also due to the reduction in interest
earning assets following the special distribution.
<PAGE>
Interest Income: Interest income increased $1.3 million or 8.1% from the prior
year quarter due to an increase in interest on loans of $2.7 million, offset
somewhat by a decrease in interest on securities of $1.4 million. The increase
in interest on loans resulted from loan growth during the year, with the average
balance outstanding during the 1997 quarter increasing to $672.4 million from
$525.9 million in the prior year quarter, an increase of $146.5 million or
27.9%. The average yield on loans decreased somewhat, to 8.26% from 8.51%, due
to the large volume of new mortgage loan products originated during the past
year that have a moderate rate discount during the first three to five years. At
the end of the initial period, the loans convert to a fixed rate or one year
adjustable rate loan at the full market rate. These competitive loan products
were instrumental in the recent loan growth and the yields are expected to rise
somewhat when the initial terms expire. The decrease in interest on securities
primarily resulted from a decline in the average balance of securities to $188.8
million for the quarter ended September 30, 1997 from $264.3 million in the
prior year quarter. This decrease was due to the sale of mortgage-backed
securities to fund the special $5 distribution paid to shareholders in March
1997. A decline in the yield on securities also contributed to the decrease in
securities income. The yield declined to 6.43% in the current quarter from 6.65%
in the prior year quarter because the securities sold to fund the special
distribution were mortgage-backed securities, which generally have a higher
yield than securities held primarily for liquidity purposes. Consequently, the
liquidation of these securities reduced the average yield of the portfolio.
Interest Expense: Total interest expense for the quarter ended September 30,
1997 increased $2.2 million or 27.9% over the quarter ended September 30, 1997.
Interest on deposits during the current quarter was virtually unchanged from the
prior year quarter, with both the average balance and the average rate paid
approximating prior year levels. Interest on other borrowed funds increased $2.1
million to $3.9 million for the quarter ended September 30, 1997, from $1.8
million in the prior year quarter. This increase was due to an increase in the
average balance of borrowed funds to $274.0 million in the current quarter from
$122.7 million in the prior year quarter, resulting from the use of borrowed
funds to support the Company's loan growth during the past year and partially
fund the special distribution. Meanwhile, the average rate paid on these
borrowings increased slightly to 5.72% from 5.64%.
Provision for Loan Losses: 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 conditions in the
Company's market area, and to other factors related to the collectibility of the
loan portfolio. During the quarter ended September 30, 1997, the Association
recorded a net recovery of provision of $62,970 compared to a net provision
during the prior year quarter of $374,397. The current quarter recovery resulted
from significant improvements in the Company's nonperforming loans. One major
borrower represented $2.8 million or 40.5% of the Company's nonperforming loans
at September 30, 1997. This represented a reduction of over $540,000 from the
June 30, 1997 level and a reduction of $1.6 million from this borrower's level
at September 30, 1996. As a result of this and other improvements, reserves
related to specific nonperforming loans, including those to this borrower, were
reduced during the quarter by $697,000. Meanwhile, reserves for unidentified
risks in the portfolio at large were increased during the quarter by $437,000
due to portfolio growth. At September 30, 1997, the allowance for loan losses
amounted to $7.4 million, which was 107.4% of nonperforming loans and 1.1% of
total loans.
<PAGE>
Other Operating Income: Other operating income increased $3.3 million, to $3.6
million compared to $312,000 in the prior year quarter, due to a current quarter
gain on the sale of securities amounting to $3.3 million. This sale, discussed
in "Financial Condition" above, resulted in a net gain because a portion of
these securities had significantly appreciated in value. The sale was executed
during the quarter ended September 30, 1997 due to the disparity at that time
between the yield on the these securities and the yields available on loans
receivable and the costs of borrowed funds.
Other Operating Expenses: Other operating expenses declined $2.6 million, to
$4.1 million compared to $6.6 million in the prior year quarter. The September
1997 decrease over the prior year quarter was primary due to the $3.1 million
special one time assessment in September 1996 to recapitalize the Savings
Association Insurance Fund (SAIF). Additional expense reductions during the
current year quarter included a reduction in federal deposit insurance premiums
of $195,000, a $180,000 decline in the net cost of real estate operations, and a
reduction in "other expenses" of $268,000. These reductions were partially
offset by an increase in personnel expenses amounting to $1.1 million.
The payment of the SAIF assessment in late 1996 reduced the future periodic cost
of federal deposit insurance premiums, resulting in a cost of $71,000 during the
current quarter, compared to $265,000 in the 1996 quarter. The net cost of real
estate operations decreased from a net cost in the 1996 quarter of $173,000 to a
net gain in the 1997 quarter of $7,000, due to a $66,000 reduction in expenses
related to foreclosed properties and to a $109,000 reduction in the quarterly
provision for losses on foreclosed properties. Both costs declined during the
quarter ended September 30, 1997 due to the nature of the foreclosed properties
- -- at September 30, 1996 a substantial portion of the foreclosed properties
included houses in various stages of completion, which bear a greater cost of
upkeep and risk of loss, while at September 30, 1997 foreclosed properties
included only one small house, with the remainder being land for residential
construction. The "other expense" category also declined during the quarter
ended September 30, 1997, to $513,000 from $780,000 in the quarter ended
September 30, 1996. This decline was primarily due to a $158,000 decline in
legal expenses, mostly related to the long-standing legal dispute with a former
borrower, and to a reduction in miscellaneous other expenses. The increase in
personnel expenses principally consisted of a $857,000 accrual for the cost of
shares of stock granted pursuant to the Recognition and Retention Plan and Trust
that will vest during fiscal 1998.
Liquidity and Capital Resources
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing and financial 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.
<PAGE>
The Association is required by Office of Thrift Supervision regulations to
maintain tangible capital equal to at least 1.5% of adjusted total assets, core
capital equal to at least 3.0% of adjusted total assets and total capital equal
to at least 8.0% of risk-weighted assets. The Association substantially exceeded
such requirements with tangible, core and total capital equal to 16.7%, 16.7%
and 31.4%, respectively, at September 30, 1997.
<PAGE>
HFNC FINANCIAL CORP.
Part II
Item 1. Legal Proceedings
Other than as discussed in Note 2 of the Notes to Unaudited
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.
<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.
November 5, 1997 By: /s/ H. Joe King, Jr.
---------------------
H. Joe King, Jr.
President and Chief Executive Officer
November 5, 1997 By: /s/ A. Burton Mackey, Jr.
--------------------------
A. Burton Mackey, Jr.
Vice President and Treasurer
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