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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 March 31, 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 May 9, 1997
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HFNC FINANCIAL CORP.
TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements:
Unaudited Consolidated Condensed Balance Sheets,
March 31, 1997 and June 30, 1996 3
Unaudited Consolidated Condensed Statements of Income,
Three Month and Nine Month Periods
Ended March 31, 1997 and 1996 4
Unaudited Consolidated Condensed Statements of Cash
Flows Nine Month Periods Ended March 31, 1997 and 1996 5
Notes to Unaudited Consolidated Condensed Financial 6-8
Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures
2
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HFNC FINANCIAL CORP.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
------------------------
MARCH 31, JUNE 30,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS:
Cash................................................................................ $13,701,096 $ 6,769,598
Federal funds sold.................................................................. 7,189,000 2,836,000
----------- -----------
Total............................................................................. 20,890,096 9,605,598
----------- -----------
SECURITIES AVAILABLE FOR SALE:
At fair value (amortized cost: March 31, 1997--$173,849,798; June 30,
1996--$248,922,746)............................................................... 176,091,146 248,445,333
LOANS RECEIVABLE, NET................................................................. 617,870,023 505,130,813
REAL ESTATE........................................................................... 1,259,436 2,539,014
OFFICE PROPERTIES AND EQUIPMENT, NET.................................................. 10,060,406 5,846,103
STOCK OF FEDERAL HOME LOAN BANK OF ATLANTA - At cost.................................. 5,374,400 5,062,100
DEFERRED INCOME TAX ASSET............................................................. 5,582,736 5,805,502
OTHER ASSETS.......................................................................... 5,788,770 6,443,605
----------- -----------
TOTAL................................................................................. $842,917,013 $788,878,068
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS.............................................................................. $447,857,788 $448,570,916
OTHER BORROWED FUNDS.................................................................. 225,000,000 85,000,000
OTHER LIABILITIES..................................................................... 11,323,424 8,802,696
----------- -----------
TOTAL LIABILITIES................................................................. 684,181,212 542,373,612
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.......................................................... 92,696,240 168,390,571
ESOP loan and unvested restricted stock............................................. (21,782,429) (8,700,000)
Retained income..................................................................... 86,271,635 86,896,095
Unrealized gain (loss) on securities available for sale (net of deferred taxes:
March 31, 1997-- $862,918; June 30, 1996--$223,278)............................... 1,378,430 (254,135)
----------- -----------
Total shareholders' equity........................................................ 158,735,801 246,504,456
----------- -----------
TOTAL................................................................................. $842,917,013 $788,878,068
----------- -----------
----------- -----------
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
3
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HFNC FINANCIAL CORP.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans........................................... $12,605,762 $9,992,366 $35,835,117 $29,445,142
Interest on securities...................................... 4,010,549 3,783,635 12,966,122 8,024,647
---------- ---------- ---------- ----------
Total..................................................... 16,616,311 13,776,001 48,801,239 37,469,789
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits........................................ 5,801,495 6,430,038 17,682,886 21,083,849
Interest on other borrowed funds............................ 2,906,014 -- 7,243,373 61,474
---------- ---------- ---------- ----------
Total..................................................... 8,707,509 6,430,038 24,926,259 21,145,323
---------- ---------- ---------- ----------
NET INTEREST INCOME........................................... 7,908,802 7,345,963 23,874,980 16,324,466
PROVISION FOR LOAN LOSSES..................................... 239,283 250,447 200,149 269,636
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES........... 7,669,519 7,095,516 23,674,831 16,054,830
---------- ---------- ---------- ----------
OTHER OPERATING INCOME:
Service charges and fees.................................... 170,613 191,581 558,808 637,722
Gain on sale of office properties and equipment............. -- -- -- 657,616
Gain on sale of securities.................................. 19,379 -- 19,379 --
Other income................................................ 123,564 118,862 367,408 322,720
---------- ---------- ---------- ----------
Total..................................................... 313,556 310,443 945,595 1,618,058
---------- ---------- ---------- ----------
OTHER OPERATING EXPENSES:
Personnel expenses.......................................... 3,302,129 1,631,222 7,756,832 4,610,355
Federal deposit insurance premiums.......................... 70,930 293,668 593,317 844,595
Special SAIF recapitalization assessment.................... -- -- 3,077,275 --
Occupancy................................................... 434,425 441,941 1,244,569 1,544,400
Net cost of real estate operations.......................... 20,266 (69,878) 101,192 219,575
Advertising................................................. 253,433 192,197 626,414 554,060
Data processing............................................. 119,962 118,794 315,016 279,502
Other expenses.............................................. 742,356 446,771 2,238,283 1,288,485
---------- ---------- ---------- ----------
Total..................................................... 4,943,501 3,054,715 15,952,898 9,340,972
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE..................................... 3,039,574 4,351,244 8,667,528 8,331,916
PROVISION FOR INCOME TAXES.................................... 1,170,236 1,772,803 3,336,998 3,201,378
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE................................................... 1,869,338 2,578,441 5,330,530 5,130,538
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING FOR POSTRETIREMENT
BENEFITS (net of income tax benefit of $650,000)............ -- -- -- 1,050,000
---------- ---------- ---------- ----------
NET INCOME.................................................... 1,869,338 2,578,441 5,330,530 4,080,538
Retained income, beginning balance............................ 88,402,187 80,824,090 86,896,095 79,321,993
Less: Dividends declared...................................... (3,999,890) -- (5,954,990) --
---------- ---------- ---------- ----------
Retained income, ending balance............................... $86,271,635 $83,402,531 $86,271,635 $83,402,531
---------- ---------- ---------- ----------
Earnings per share............................................ $ 0.12 $ 0.16 $ 0.33 n/a
Dividends per share........................................... $ 5.07 $ -- $ 5.19 n/a
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
4
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HFNC FINANCIAL CORP.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................................. $ 5,330,530 $ 4,080,538
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of a change in accounting principle................................ -- 1,050,000
Depreciation & amortization.......................................................... 373,830 376,875
Net amortization (accretion) of premiums and discounts on investment securities...... 338,277 (13,356)
Amortization of net deferred loan fees............................................... 1,310,887 1,320,703
Provision for loan loss.............................................................. 200,149 213,996
Provision for losses on real estate.................................................. 92,379 32,255
Amortization of unearned stock compenstation, at fair value.......................... 3,170,178 200,442
(Gain) loss on sales of:
Fixed assets....................................................................... -- (657,616)
Real estate owned.................................................................. (90,437) 108,909
Investments........................................................................ (19,379) (15,157)
(Increase) decrease in other assets.................................................. (189,214) 415,654
Increase (decrease) in other liabilities............................................. 2,520,729 (930,882)
----------- -----------
Net cash provided by operating activities........................................ 13,037,929 6,182,361
----------- -----------
INVESTING ACTIVITIES:
Proceeds from maturities of securities............................................... 5,000,000 38,325,060
Proceeds from sales of securities available for sale................................. 67,279,569 7,015,482
Purchases of securities held to maturity............................................. -- (3,788,480)
Purchases of securities available for sale........................................... (6,950,000) (154,845,424)
Purchases of Federal Home Loan Bank stock............................................ (312,300) --
Principal repayment on mortgage-backed securities.................................... 9,405,098 553,794
Proceeds from sales of real estate................................................... 2,214,110 2,355,816
Net loan originations................................................................ (115,186,719) (29,750,668)
Proceeds from disposals of office properties and equipment........................... -- 1,497,096
Purchases of office properties & equipment........................................... (4,588,133) (50,901)
----------- -----------
Net cash used in investing activities............................................ (43,138,375) (138,688,225)
----------- -----------
FINANCING ACTIVITIES:
Decrease in deposits................................................................. (713,128) (27,710,838)
Proceeds from other borrowed funds................................................... 140,000,000 --
Repayments of other borrowed funds................................................... -- (10,000,000)
Purchases of restricted stock for benefit plan....................................... (15,949,032) --
Net proceeds from the sale of stock.................................................. -- 159,437,938
Dividends paid....................................................................... (81,952,896) --
----------- -----------
Net cash provided by financing activities........................................ 41,384,944 121,727,100
----------- -----------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS......................................... 11,284,498 (10,778,764)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD......................................... 9,605,598 15,122,724
----------- -----------
CASH & CASH EQUIVALENTS AT END OF PERIOD............................................... $20,890,096 $ 4,343,960
----------- -----------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest........................................................................... $ 7,543,735 $20,041,439
Income taxes....................................................................... 2,781,284 1,417,000
Loans foreclosed..................................................................... 936,473 1,634,479
Unrealized gain on investment securities available for sale, net of taxes............ 1,632,565 1,169,316
Transfers from securitites held for investment to securities available for sale, at
fair value......................................................................... -- 108,537,197
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
5
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HFNC FINANCIAL CORP.
Notes to Unaudited 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 and nine month periods ended March
31, 1997 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 for periods prior to that
time are not considered meaningful for presentation in the consolidated
condensed financial statements. Earnings per share for periods since the
Conversion 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 March 31, 1997 and 1996 and the nine month period ended
March 31, 1997 were 15,785,575, 16,300,000, and 16,199,519, respectively.
Options granted during the quarter ended March 31, 1997 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
6
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Board Opinion No. 15. Full dilution would have included 16,123,311 weighted
average shares outstanding. 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.
2. STOCK COMPENSATION PLANS
On December 30, 1996, the Company's shareholders adopted the Company's Stock
Option Plan and Recognition and Retention Plan and Trust. Grants under both
plans are administered by the Board of Directors. The Stock Option Plan
provides that a total of 1,719,250 options to purchase the Company's common
stock may be granted to directors, officers, and key personnel with a vesting
period of three years and an option price equal to the market price on the
date of grant. On December 30, 1996, 1,203,471 options were granted to
members of the Board of Directors and executive management. Subsequently, on
February 18, 1997, an additional 345,000 options were granted to other
employees of the Company. The remainder of the options available under the
plan may be awarded in the future at the discretion of the Board of
Directors. The cost of options is recognized using the intrinsic value
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees", as allowed under Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation". The Recognition
and Retention Plan provides that a total of 687,700 shares may be acquired
for subsequent grant to directors, officers, and key personnel. On December
30, 1996, 61,953 shares of stock were granted to the Association's three
executive officers, with an additional 61,955 shares granted to members of
the Association's Board of Directors and various employees during the quarter
ended March 31, 1997. These shares vested immediately upon grant. On March
19, 1997, 495,632 shares were allocated to members of the Board of Directors,
management, and other employees. The shares granted on March 19, 1997 vest
25% per year over the next four years. The remaining shares allowable under
the plan may be awarded at the discretion of the Board of Directors.
Compensation expense is recognized over the vesting period at the fair value
of shares granted on the date of the grant.
3. 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
7
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Association. The Recommended Order is now before the United States
District Court for the Western District of North Carolina and the parties are
awaiting the Federal District Court's decision on whether to enter an Order
Granting Summary Judgment in accordance with the Recommended Order by the United
States Bankruptcy Judge.
In February, 1997 two companies affiliated with those referred to in the
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.
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.
8
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
The Company's assets amounted to $842.9 million at March 31, 1997, compared
to $788.9 million at June 30, 1996, an increase of $54.0 million or 6.9%.
This increase in total assets was due to leveraging of the Company's capital
through growth in loans receivable of $112.7 million, to $617.9 million at
March 31, 1997. This growth was offset somewhat by the payment of a special
distribution of $78.9 million, or $5.00 per share, to shareholders on March
18, 1997, that was partially funded by the sale of securities, which declined
$72.4 million to $176.1 million at March 31, 1997 from $248.4 million at June
30, 1996. Total liabilities increased $141.8 million due to a $140.0 million
increase in other borrowed funds to $225.0 million at March 31, 1997 from
$85.0 million at June 30, 1996. These funds were used to fund the loan
portfolio growth and a portion of the cost of the special distribution.
Shareholders' equity declined $87.8 million to $158.7 million due to the
payment of $82.0 million in dividends during the nine months ended March 31,
1997 (including the $78.9 million special distribution referred to above) and
to the cost of unvested restricted stock in the Recognition and Retention
Plan amounting to approximately $15.9 million (including reinvestment of
dividends), offset somewhat by the release of $3.2 million in ESOP and
restricted stock shares, an increase in unrealized gain on securities
available for sale of $1.6 million, and earnings during the period of $5.3
million.
Results of Operations for the Three Months Ended March 31, 1997 and 1996
General: Net income for the three months ended March 31, 1997 amounted to
$1.9 million, a decrease of $709,000 from the three months ended March 31,
1996, due primarily to an increase in other operating expenses of $1.9
million, which was partially offset by an increase in net interest income of
$563,000 and a decrease in the provision for income taxes of $603,000.
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
$563,000 or 7.7% to $7.9 million for the three months ended March 31, 1997,
compared to $7.3 million for the three months ended March 31, 1996. This
increase reflects a slight increase in the Company's interest rate spread to
2.33% at March 31, 1997 from 2.32% in the prior year quarter, largely offset
by a decrease in the ratio of interest-earning assets to interest-bearing
liabilities to 1.34 from 1.51 in the prior year resulting from the leveraging
of the Company's balance sheet during the year and the special distribution
paid during the current quarter. This ratio is expected to decline further,
as the effect of the special
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distribution was minimized by its payment in the last two weeks of the
current quarter. The net interest margin declined to 3.69% in the current
quarter from 4.20% in the prior year quarter, also due to the special
distribution.
Interest Income: Interest income increased $2.8 million or 20.6% from the
prior year quarter due to an increase in interest on loans of $2.6 million
and an increase in interest on securities of $227,000. The increase in loan
interest resulted from loan growth during the year, with the average balance
outstanding during the 1997 quarter increasing to $605.1 million from $453.1
million in the prior year quarter, an increase of $152.0 million or 33.5%.
The average yield on loans decreased somewhat, to 8.33% from 8.82%, due to
new mortgage loan products 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 increase in interest on securities primarily
resulted from improvement in the yield on the securities portfolio, to 6.36%
from 5.90%, due to investment of a larger proportion of the current quarter's
portfolio into longer term mortgage backed securities relative to the prior
year quarter when shorter term securities made up a larger portion of the
portfolio. Interest income on securities will be reduced in future quarters
due to lower principal balances following the sale of securities in the March
1997 quarter. These securities were sold to fund the special distribution as
discussed under "Financial Condition" above.
Interest Expense: Total interest expense for the quarter ended March 31,
1997 increased $2.3 million or 35.4% over the quarter ended March 31, 1996.
Interest on deposits during the current quarter decreased $629,000 from the
quarter ended March 31, 1996 due to a decrease in the average balance
outstanding from $463.6 million during the quarter ended March 31, 1996 to
$440.2 million during the current year quarter. A portion of the prior year
deposits consisted of high rate certificates issued during a period of very
competitive rates in the spring of 1995. These certificates have now matured
and have either been renewed at lower rates or have not been renewed. As a
result of the effort to reprice these maturing deposits to market, the
average rate paid for the Association's deposit portfolio has declined from
5.55% at March 31, 1996 to 5.27% for the current quarter. Interest on other
borrowed funds increased from none in the 1996 quarter to $2.9 million in the
current 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. The average balance of such borrowings during the 1997 quarter
amounted to $201.7 million, compared to none during the 1996 quarter.
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 March 31, 1997, the Association recorded a net provision of $239,000
10
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compared to a net provision during the prior year quarter of $250,000. At
March 31, 1997, the allowance for loan losses amounted to $7.9 million, which
was 111.3% of nonperforming loans and 1.3% of total loans.
Other Operating Expenses: Other operating expenses increased $1.9 million,
to $4.9 million compared to $3.1 million in the prior year quarter. The
primary components of this increase were an increase in personnel expenses of
$1.7 million and an increase in miscellaneous other expenses of $296,000.
These increases were partially offset by a reduction in federal deposit
insurance premiums of $223,000. The increase in personnel expenses
principally consisted of the $1.1 million fair market value of 61,955 vested
shares of stock granted during the quarter to the Association's Board of
Directors and various employees and members of management pursuant to the
Recognition and Retention Plan and Trust adopted by the shareholders on
December 30, 1996. These shares represent one-fifth of the shares granted to
these individuals to date under the plan. The remaining four-fifths of the
shares will vest over the next four years, with the related expense to be
accrued during the vesting period. In accordance with this vesting schedule,
the quarter ended March 31, 1997 also included $470,000 in accrued costs for
the shares that will vest during fiscal 1998. As a result, the costs
associated with the recognition and retention plan should be reduced
significantly in future periods. Federal deposit insurance premiums declined
$223,000 from the prior quarter due to the reduction in rate from $.23 per
$100 in deposits to $.065 per $100. This reduction in premium was the result
of the one time Savings Association Insurance Fund (SAIF) assessment charged
during the quarter ended September 30, 1996 to recapitalize the insurance
fund and reduce the premium levels of savings associations to a level more
comparable to those of commercial banks. Miscellaneous other expenses
increased $296,000 over the 1996 quarter primarily due to $172,000 in
increased legal and professional fees associated with the ongoing lawsuit by
a former borrower and for determination of the nature, tax treatment, and
other implications of the special distribution paid in March 1997.
Results of Operations for the Nine Months Ended March 31, 1997 and 1996
General: Net income for the nine months ended March 31, 1997 amounted to
$5.3 million, an increase of $1.2 million from the nine month period ended
March 31, 1996, primarily due to an increase in net interest income of $7.6
million. This was offset somewhat by a reduction in the gain on sale of
office properties and equipment of $658,000, the SAIF assessment of $3.1
million, (discussed in the following paragraph), and an increase in other
operating expenses (excluding the SAIF assessment) of $3.5 million.
Further, the prior year period included a one time after-tax cost of $1.1
million resulting from the implementation of a new accounting pronouncement
related to postretirement benefits.
The nine month period ended March 31, 1997 was impacted by a $3.1 million one
time special assessment by the Federal Deposit Insurance Corporation (FDIC) to
recapitalize the SAIF. This assessment recapitalized the SAIF insurance fund
and allowed insurance
11
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premiums for savings and loan associations to be reduced to a level more
comparable to those of commercial banks. The reduced premiums took effect in
January of 1997 and will benefit the Company's net income in future periods.
This is expected to reduce the Association's pre-tax annual deposit insurance
premiums by approximately $800,000 (based on current deposit levels).
Net Interest Income: The Company's net interest income for the nine months
ended March 31, 1997 increased $7.6 million, or 46.3%, over the comparable
period in the prior year. This was due to a moderate increase in the
interest rate spread from 2.28% in the prior year to 2.35% in the nine month
period ended March 31, 1997 in combination with the current year's asset
growth, which increased the net interest margin to 3.83% in the current nine
month period from 3.42% in the prior year period.
Interest Income: Interest income for the nine months ended March 31, 1997
increased $11.3 million or 30.2% over the prior year period, to $48.8 million
from $37.5 million. This was due to a $6.4 million increase in interest from
loans resulting from growth in the loan portfolio, from an average balance
during the prior year period of $445.8 million to an average balance of
$567.0 million during the current period. This more than compensated for a
decline in the average yield of the loan portfolio from 8.81% to 8.43%.
Interest from securities increased $4.9 million due to increases in both the
average balance and the yield. The increase in the average balance was
primarily due to the utilization of the stock conversion proceeds, while the
increase in the average yield was primarily due to investment in securities
with longer maturities and commensurately greater yields.
Interest Expense: Interest on deposits for the nine months ended March 31,
1997 declined $3.4 million from the comparable prior year period due to both
a reduction in the average balance outstanding during the period and a
reduction in the average rate paid on those deposits. The factors affecting
such decreases were the same as for the three months ended March 31, 1997 and
are discussed in detail under "Results of Operations for the Three Months
Ended March 31, 1997 and 1996 -- Interest Expense". Interest on other
borrowed funds increased $7.2 million over the prior year period due to the
borrowings during the nine months ended March 31, 1997 to support loan growth.
Other Operating Income: Other operating income declined $672,000, primarily
due to a $658,000 gain on the sale of office property during the prior year
period that did not recur during the current nine month period.
Other Operating Expenses: Other operating expenses for the nine months ended
March 31, 1997 increased $6.6 million over the comparable prior year period,
of which $3.1 million was attributable to the one-time SAIF assessment
discussed above. Of the remaining $3.5 million increase, personnel expenses
and miscellaneous other expenses increased $3.1 million and $950,000,
respectively, while federal deposit insurance premiums and occupancy costs
declined $251,000 and $300,000, respectively. The increase in personnel
expenses consisted primarily of the $2.2 million fair market value of 61,953
vested shares of stock granted to the Association's three executive officers
in
12
<PAGE>
December 1996 and to 61,955 vested shares granted to the Association's Board
of Directors and various employees and members of management during the
quarter ended March 31, 1997 pursuant to the Recognition and Retention Plan
and Trust adopted by the shareholders on December 30, 1996. An additional
cost of $470,000 was accrued for shares awarded under the plan that will vest
in the quarters ending in December 1997 and March 1998. Miscellaneous other
expenses increased primarily due to increased legal expenses and to various
corporate expenses that did not exist prior to the organization of the
holding company and conversion to stock ownership. Deposit insurance
premiums declined due to the reduction in rate following the recapitalization
of the Savings Association Insurance Fund in September of 1996 as discussed
above. Occupancy costs decreased due to non-recurring expenses in 1995
relating to exterior repairs to the Company's main office.
Change in Accounting Principle: The Association adopted SFAS No. 106,
"Employers' Accounting for Post-retirement Benefits Other Than Pensions"
during the quarter ended September 30, 1995. As a result, the Association
recognized a $1.7 million accumulated post-retirement benefit obligation
effective July 1, 1995. On an after-tax basis, this charge amounted to
approximately $1.1 million and is reported as a change in accounting
principle for the nine months ended March 31, 1996.
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.
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 19.4%, 19.4% and 37.1%, respectively, at March 31, 1997.
13
<PAGE>
HFNC FINANCIAL CORP.
Part II
Item 1. Legal Proceedings
Other than as discussed in Note 3 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.
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: May 9, 1997 By: /s/ H. Joe King, Jr.
-------------------------------------
H. Joe King, Jr.
President and Chief Executive Officer
Date: May 9, 1997 By: /s/ A. Burton Mackey, Jr.
-------------------------------------
A. Burton Mackey, Jr.
Vice President and Treasurer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0001001582
<NAME> HFNC FINANCIAL CORP
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 13,701,096
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,189,000
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<INVESTMENTS-CARRYING> 173,849,798
<INVESTMENTS-MARKET> 176,091,146
<LOANS> 625,774,374
<ALLOWANCE> 7,904,351
<TOTAL-ASSETS> 842,917,013
<DEPOSITS> 447,857,788
<SHORT-TERM> 225,000,000
<LIABILITIES-OTHER> 11,323,424
<LONG-TERM> 0
0
0
<COMMON> 171,925
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<INTEREST-TOTAL> 48,801,239
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<INTEREST-INCOME-NET> 23,874,980
<LOAN-LOSSES> 200,149
<SECURITIES-GAINS> 19,379
<EXPENSE-OTHER> 15,952,898
<INCOME-PRETAX> 8,667,528
<INCOME-PRE-EXTRAORDINARY> 5,330,530
<EXTRAORDINARY> 0
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<NET-INCOME> 5,330,530
<EPS-PRIMARY> $0.33
<EPS-DILUTED> $0.33
<YIELD-ACTUAL> 7.82
<LOANS-NON> 6,825,429
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