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 December 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 February 6, 1998
<PAGE>
HFNC FINANCIAL CORP.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets,
December 31, 1997 and June 30, 1997
Consolidated Condensed Statements of Income,
Three and Six Months Ended
December 31, 1997 and 1996
Consolidated Condensed Statements of Changes in
Shareholders' Equity, Six Months Ended
December 31, 1997 and 1996
Consolidated Condensed Statements of Cash Flows
Six Months Ended December 31, 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 and Use of Proceeds
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
<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
As of
--------------------------------
December 31, June 30,
ASSETS 1997 1997
------------- -------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Cash ............................................. $ 9,483,019 $ 9,934,359
Federal funds sold ............................... 8,195,000 21,436,000
------------- -------------
Total ...................................... 17,678,019 31,370,359
------------- -------------
SECURITIES - Available for sale, at fair value
(amortized cost: $124,223,072 and $169,285,103,
at December 31 and June 30, respectively) ........ 128,034,360 175,710,104
LOANS RECEIVABLE, NET .............................. 730,428,763 658,323,320
REAL ESTATE, NET ................................... 2,588,751 867,876
OFFICE PROPERTIES AND EQUIPMENT, NET ............... 10,108,392 10,099,107
STOCK OF FEDERAL HOME LOAN BANK OF ATLANTA - At cost 10,500,000 6,450,000
DEFERRED INCOME TAX ASSET, NET ..................... 4,396,405 3,390,125
OTHER ASSETS ....................................... 7,051,246 6,709,218
------------- -------------
TOTAL .............................................. $ 910,785,936 $ 892,920,109
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS ........................................... $ 437,907,791 $ 443,839,542
OTHER BORROWED FUNDS ............................... 296,800,000 277,000,000
OTHER LIABILITIES .................................. 9,972,866 11,020,650
------------- -------------
Total liabilities ............................ 744,680,657 731,860,192
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(continued)
As of
--------------------------------
December 31, 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 ....................... 90,025,758 89,967,883
ESOP loan and unvested restricted stock .......... (21,233,632) (23,137,490)
Retained income .................................. 94,797,286 90,106,224
Unrealized gain on securities available for sale
(net of deferred taxes: $1,467,346 and
$2,473,626 at December 31 and June 30,
respectively) .................................. 2,343,942 3,951,375
------------- -------------
Total shareholders' equity ................. 166,105,279 161,059,917
------------- -------------
TOTAL .............................................. $ 910,785,936 $ 892,920,109
============= =============
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans ...................... $ 14,532,538 $ 12,035,400 $ 28,410,420 $ 23,229,355
Interest on securities ................. 2,537,040 4,508,216 5,571,102 8,955,573
------------ ------------ ------------ ------------
Total ............................ 17,069,578 16,543,616 33,981,522 32,184,928
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Interest on deposits ................... 5,870,971 5,934,201 11,836,869 11,881,391
Interest on other borrowed funds ....... 3,918,959 2,554,703 7,839,133 4,337,359
------------ ------------ ------------ ------------
Total ............................ 9,789,930 8,488,904 19,676,002 16,218,750
------------ ------------ ------------ ------------
NET INTEREST INCOME ...................... 7,279,648 8,054,712 14,305,520 15,966,178
PROVISION FOR LOAN LOSSES (RECOVERY
OF ALLOWANCE) .......................... 65,031 (413,531) 2,061 (39,134)
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES (RECOVERY OF ALLOWANCE) .... 7,214,617 8,468,243 14,303,459 16,005,312
------------ ------------ ------------ ------------
OTHER OPERATING INCOME:
Service charges and fees ............... 107,840 192,152 313,615 388,195
Gain on sale of securities ............. 1,492,160 -- 4,833,315 --
Other income ........................... 89,563 128,282 157,264 243,844
------------ ------------ ------------ ------------
Total ............................ 1,689,563 320,434 5,304,194 632,039
------------ ------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(continued)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
OTHER OPERATING EXPENSES:
Personnel expenses ..................... 2,523,044 2,853,893 5,202,808 4,454,703
Federal deposit insurance premiums ..... 70,525 256,903 141,126 522,387
Special SAIF recapitalization assessment -- -- -- 3,077,275
Occupancy .............................. 464,310 399,579 924,393 810,144
Net cost of real estate operations ..... 125,666 (92,277) 118,923 80,926
Advertising ............................ 272,123 190,696 458,845 372,981
Data processing ........................ 113,909 99,225 222,083 195,054
Other expenses ......................... 748,130 715,627 1,260,717 1,495,927
------------ ------------ ------------ ------------
Total ............................ 4,317,707 4,423,646 8,328,895 11,009,397
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES ............... 4,586,473 4,365,031 11,278,758 5,627,954
PROVISION FOR INCOME TAXES ............... 1,794,228 1,680,537 4,412,250 2,166,762
------------ ------------ ------------ ------------
NET INCOME ............................... $ 2,792,245 $ 2,684,494 $ 6,866,508 $ 3,461,192
============ ============ ============ ============
Earnings per share ....................... $ 0.18 $ 0.16 $ 0.44 $ 0.21
Earnings per share assuming dilution ..... $ 0.17 $ 0.16 $ 0.42 $ 0.21
Dividends per share ...................... $ 0.07 $ 0.07 $ 0.14 $ 0.12
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
Net Unrealized
ESOP and Gain (Loss) on
Unvested Securities
Common Additional Retained Restricted Available for
Stock Paid-in-Capital Income Stock Sale (1) Total
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JUNE 30, 1996 ............ $ 171,925 $ 168,390,571 $ 86,896,095 $ (8,700,000) $ (254,135) $ 246,504,456
Net income ................. -- -- 3,461,192 -- -- 3,461,192
Shares released from ESOP .. -- 220,815 -- 300,000 -- 520,815
Dividends paid ............. -- -- (1,955,100) -- -- (1,955,100)
Change in net unrealized
loss on securities available
for sale ................... -- -- 2,849,125 2,849,125
------------- ------------- ------------- ------------- ------------- -------------
BALANCE,
DECEMBER 31, 1996 ........ $ 171,925 $ 168,611,386 $ 88,402,187 $ (8,400,000) $ 2,594,990 $ 251,380,488
============= ============= ============= ============= ============= =============
BALANCE,
JUNE 30, 1997 ............ $ 171,925 $ 89,967,883 $ 90,106,224 $ (23,137,490) $ 3,951,375 $ 161,059,917
Net income ................. -- -- 6,866,508 -- -- 6,866,508
Shares released from
ESOP and restricted
stock trusts ............... 57,875 -- 1,903,858 -- 1,961,733
Dividends paid ............. -- -- (2,175,446) -- -- (2,175,446)
Change in net unrealized
gain on securities available
for sale ................... -- -- (1,607,433) (1,607,433)
------------- ------------- ------------- ------------- ------------- -------------
BALANCE,
DECEMBER 31, 1997 ........ $ 171,925 $ 90,025,758 $ 94,797,286 $ (21,233,632) $ 2,343,942 $ 166,105,279
============= ============= ============= ============= ============= =============
</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)
Six Months Ended
December 31,
--------------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .................................................. $ 6,866,508 $ 3,461,192
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .............................................. 325,653 221,086
Net amortization of premiums on investment securities ..... 72,798 275,409
Amortization of net deferred loan fees .................... (949,096) (881,398)
Provision for loan loss (recovery of allowance) ........... 2,061 (39,134)
Provision for losses on real estate (recovery of allowance) (822) 71,379
Amortization of unearned stock compensation ............... 1,961,733 520,815
Gain on sales of:
Real estate ............................................. (70,473) (72,784)
Investments ............................................. (4,833,315) --
Increase in other assets .................................. (342,028) (2,233,525)
(Decrease) increase in other liabilities .................. (1,047,787) 475,507
------------- -------------
Net cash provided by operating activities ............... 1,985,232 1,798,547
------------- -------------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities ......... 15,966,184 5,000,000
Proceeds from sales of securities available for sale ...... 55,051,558 --
Purchases of securities available for sale ................ (24,979,375) (4,950,000)
Purchases of Federal Home Loan Bank stock ................. (4,050,000) --
Principal repayment on mortgage-backed securities ......... 3,784,182 6,388,400
Proceeds from sales of real estate ........................ 673,043 1,934,545
Net loan originations ..................................... (73,481,029) (88,070,217)
Purchases of office properties and equipment .............. (334,938) (3,574,046)
------------- -------------
Net cash used in investing activities ................... (27,370,375) (83,271,318)
------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
Six Months Ended
December 31,
--------------------------------
1997 1996
------------- -------------
<S> <C> <C>
FINANCING ACTIVITIES:
Decrease in deposits ...................................... (5,931,751) (4,617,104)
Proceeds from other borrowed funds ........................ 81,000,000 112,000,000
Repayments of other borrowed funds ........................ (61,200,000) --
Dividends paid ............................................ (2,175,446) (1,955,100)
------------- -------------
Net cash provided by financing activities ............... 11,692,803 105,427,796
------------- -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............ (13,692,340) 23,955,025
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............ 31,370,359 9,605,598
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 17,678,019 $ 33,560,623
============= =============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest ............................................... $ 20,197,002 $ 16,781,911
Income taxes ........................................... 3,573,000 2,069,501
Loans foreclosed .......................................... 2,322,621 247,793
Change in unrealized (loss) gain on investment
securities available for sale, net of taxes ............. (1,607,433) 2,849,125
</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 and six months ended December 31, 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 has been computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the period. In accordance with generally accepted accounting principles,
employee stock ownership plan and restricted stock shares are only considered
outstanding for the basic earnings per share calculations when they are vested
or committed to be released. The weighted average shares outstanding were
15,627,260 and 15,614,280, respectively, for the three and six months ended
December 31, 1997, and 16,345,000 and 16,337,500, respectively, for the three
and six months ended December 31, 1996. Stock options and unvested restricted
stock granted during the fiscal year ended June 30, 1997 represented additional
potentially dilutive securities and are given effect in the computation of
earnings per share assuming dilution. Potential dilution from these options and
restricted shares amounted to 113,107 and 589,496 shares, respectively, for the
quarter ended December 31, 1997 and 161,608 and 589,496 shares, respectively,
for the six months ended December 31, 1997. The total weighted average shares
outstanding utilized in computing earnings per share assuming dilution for the
three and six months ended December 31, 1997 therefore amounted to 16,329,863
and 16,365,384 shares, respectively. No potentially dilutive securities were
outstanding for a significant period during the six months ended December 31,
1996.
<PAGE>
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. The borrower has appealed the Order Granting Summary Judgment
in favor of the Association.
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
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 to 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 in the Superior
Court for Mecklenburg County, North Carolina 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. On
January 29, 1998, the Superior Court of Mecklenburg County granted the Motion
for Summary Judgment filed by the officers of the Association dismissing the
lawsuit against them. The litigation in the United States Bankruptcy Court
referenced above remains pending. The Association agreed to indemnify both of
its officers with respect to certain costs, expenses, and liability which might
arise in connection with both of these cases.
<PAGE>
In July 1997, the above borrower and affiliated companies filed an additional
action in the United States District Court for the Western District of North
Carolina 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,
US 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 another lawsuit action in the United States
District Court for the Western District of North Carolina 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. On December 4, 1997, this lawsuit was dismissed
as to all defendants. The borrower has appealed. The Association agreed to
indemnify the attorneys for the Association with respect to certain costs,
expenses, and liabilities which might arise in connection with this matter.
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 $910.8 million at December 31, 1997, compared
to $892.9 million at June 30, 1997, an increase of $17.9 million or 2.0%. This
increase in total assets was due to growth in loans receivable of $72.1 million,
to $730.4 million at December 31, 1997 compared to $658.3 million at June 30,
1997. This asset growth was partially offset by a decrease in securities of
$47.7 million to $128.0 at December 31, 1997 and a decrease in cash and cash
equivalents of $13.7 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
$5.5 million of the securities sold were equity securities which had appreciated
significantly in value and were sold at a $5.3 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. In addition to the growth in
loans receivable, net real estate increased $1.7 million over the June 30, 1997
amount due to the foreclosure of real estate loans and the transfer of these
assets to real estate owned. Total liabilities increased $12.8 million from the
June 30, 1997 level due primarily to a $19.8 million increase in other borrowed
funds during the six month period ended December 31, 1997. These funds, combined
with funds derived from the sale of securities during the period, were used
primarily to fund loan originations. Deposits amounted to $437.9 million at
December 31, 1997, a decline of $5.9 million from June 30, 1997. Shareholders'
equity increased $5.0 million due primarily to net income of $6.9 million and to
the release of shares from the ESOP and restricted stock trusts amounting to
$1.9 million, partially offset by a decrease in unrealized gains on securities
available for sale of $1.6 million and dividends paid of $2.2 million.
Results of Operations for the Three Months Ended December 31, 1997 and 1996
General: Net income for the three months ended December 31, 1997 amounted to
$2.8 million, an increase of $108,000 from the comparable quarter of 1996. This
increase was primarily due to an increase in other operating income of $1.4
million and a decrease in other operating expenses of $106,000, which were
largely offset by a decrease in net interest income of $775,000, a $479,000
increase in the loan loss provision from a net recovery of $414,000 in the prior
year quarter to a $65,000 net provision in the 1997 quarter, and to an increase
in the provision for income taxes of $114,000.
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 decreased $775,000 or 9.6% to
$7.3 million for the three months ended December 31, 1997, compared to $8.1
million for the three months ended December 31, 1996. This decrease is primarily
the result of a reduction in the ratio of interest-earning assets to
interest-bearing liabilities to 1.21 during the quarter ended December 31, 1997
from 1.38 during the quarter ended December 31, 1996. This ratio declined due to
the liquidation of a significant portion of the securities portfolio to fund the
$5 per share special distribution paid to shareholders in March 1997, coupled
with the Company's additional borrowings to fund loan growth. This effect was
<PAGE>
somewhat offset, however, by an increase in the interest rate spread to 2.43% in
the quarter ended December 31, 1997, from 2.29% in the prior year quarter,
resulting from the balance sheet restructuring discussed at "Financial
Condition" above. The net interest margin declined to 3.42% in the current
quarter from 3.80% in the prior year quarter, also due to the reduction in
interest-earning assets following the special distribution.
Interest Income: Interest income increased $526,000 or 3.2% over the prior year
quarter due to an increase in interest on loans of $2.5 million and a decrease
in interest on securities of $2.0 million. The increase in loan interest
resulted from loan growth during 1997, with the average balance outstanding
during the 1997 quarter increasing to $705.4 million from $570.8 million in the
prior year quarter, an increase of $134.6 million or 23.6%. The average yield on
loans decreased somewhat, to 8.24% from 8.43%, due to an increasing proportion
of the Association's loan portfolio consisting of loan products 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 $131.1 million or 47.3% decline in the average balance of securities to
$146.1 million for the quarter ended December 31, 1997 from $277.1 million in
the prior year quarter. This decrease was due to the sale of securities to fund
the special $5 distribution paid to shareholders in March 1997 and to the
additional sale of lower yielding securities during the quarters ended September
30, 1997 and December 31, 1997 discussed at "Financial Condition" above. This
sale of securities did, however, improve the Company's yield on securities to
6.95% in the current quarter, compared to 6.51% in the prior year quarter.
Interest Expense: Total interest expense for the quarter ended December 31, 1997
increased $1.3 million, or 15.3%, over the quarter ended December 31, 1996.
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 $1.4
million to $3.9 million for the quarter ended December 31, 1997 from $2.6
million in the prior year quarter. This increase was due to an increase in the
average balance of borrowed funds to $264.2 million in the current quarter from
$176.7 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 to partially
fund the special distribution. In addition, the average rate paid on these
borrowings increased slightly to 5.93% from 5.78%.
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 conditions in the Company's market area, and to other factors
related to the collectibility of the loan portfolio. During the quarter ended
December 31, 1997, the Association recorded a net provision for loan losses of
$65,000 compared to a net recovery of allowance during the prior year quarter of
$414,000. The recovery of allowance during the 1996 quarter was due to a
recovery of $450,000 on a commercial loan that had been fully reserved. At
December 31, 1997, the allowance for loan losses amounted to $7.3 million, which
was 157.8% of nonperforming loans and .98% of total loans.
<PAGE>
Other Operating Income: Other operating income increased $1.4 million, to $1.7
million compared to $320,000 in the prior year quarter, due to a current quarter
gain on the sale of securities amounting to $1.5 million. This sale, discussed
in "Financial Condition" above, and was made due to the disparity between the
yield on the these securities and the yields available on loans receivable and
the costs of borrowed funds.
Other Operating Expenses: Total other operating expenses amounted to $4.3
million, substantially unchanged from the prior year quarter. Among fluctuations
in individual expense categories, federal deposit insurance premiums declined
considerably due to payment of the SAIF assessment in late 1996. This one-time
assessment reduced the future periodic cost of federal deposit insurance
premiums beginning in January 1997, resulting in a cost of $71,000 during the
current quarter, compared to $257,000 in the 1996 quarter. The net cost of real
estate operations increased to $126,000 during the quarter ended December 31,
1997, compared to a net profit of $92,000 during the 1996 quarter. This
increased cost was due in large part to the payment of $116,000 in accumulated
property taxes on properties formerly owned by a major borrower in bankruptcy.
The borrower had not been paying the taxes, but payment was required upon
foreclosure by the Association in the current quarter.
Results of Operations for the Six Months Ended December 31, 1997 and 1996
General: Net income for the six months ended December 31, 1997 amounted to $6.9
million, an increase of $3.4 million from the comparable quarter of 1996. The
increase was primarily due to an increase in other operating income of $4.7
million and a decline in other operating expenses of $2.7 million. These
increases were partially offset by a $1.7 million reduction in net interest
income and a $2.2 million increase in the provision for income taxes.
Net Interest Income: The Company's net interest income for the six months ended
December 31, 1997 decreased $1.7 million, or 10.4%, over the comparable period
in 1996. This decline was due to a reduction in the ratio of interest earning
assets to interest bearing liabilities from 1.39 during the six months ended
December 31, 1996 to 1.21 during the six months ended December 31, 1997,
resulting primarily from the liquidation of securities to fund the $5 per share
special distribution paid to shareholders in March 1997 and from the Company's
additional borrowings to fund loan growth. The sale of securities during the
1997 period had a less significant effect, because the proceeds were reinvested
in mortgage loans or used to partially repay borrowed funds. The effect of this
decline in earning assets was moderated to some extent by a moderate increase in
the interest rate spread from 2.35% during the prior year period to 2.39% in the
six month period ended December 31, 1997. These two factors combined to produce
a 3.34% net interest margin during the six months ended December 31, 1997,
compared to 3.90% during the prior year period.
Interest Income: Interest income for the six months ended December 31, 1997
increased $1.8 million or 5.6% over the prior year period, to $34.0 million from
$32.2 million. This increase was due to the growth in the loan portfolio, to an
average balance during the 1997 period of $688.9 million from an average balance
of $548.3 million during the 1996 period. This more than compensated for a
decline in the average yield of the loan portfolio from 8.47% to 8.25%. Income
from securities decreased $3.4 million due to decreases in the average balance
to $167.4 million from $270.7 million in the prior year period. Average yields
during the six month periods were relatively unchanged.
<PAGE>
Interest Expense: Interest on deposits was relatively unchanged from the prior
year, as average balances and yields on customer deposits were relatively
constant for the six month period ended December 31, 1997 compared to the same
period in 1996. Interest on other borrowed funds increased $3.5 million over the
1996 period due to the additional borrowings during 1997 to support loan growth.
The average balance of other borrowed funds increased 79.8% to $269.1 million
during the six months ended December 31, 1997. The average cost of these
borrowings was consistent at 5.83% during the current period compared to 5.80%
in the prior year period.
Other Operating Income: Other operating income increased $4.7 million due to
$4.8 million in gains on the sale of securities during the 1997, with no such
sales during the same period in 1996. This sale was discussed at "Financial
Condition" above.
Other Operating Expenses: Other operating expenses for the six months ended
December 31, 1997 declined $2.7 million from the comparable period in 1996,
resulting primarily from the $3.1 million one-time SAIF assessment paid in 1996,
the resultant $381,000 current period reduction in the cost of deposit insurance
premiums, and a $235,000 reduction of miscellaneous other operating expenses,
partly offset by a $748,000 increase in personnel expenses. The prior year's
SAIF assessment and resulting current year decline in deposit insurance premiums
were discussed in "Results of Operations for the Three Months Ended December 31,
1997 and 1996 -- Other Operating Expenses". Miscellaneous other operating
expenses declined from the prior year levels due to reduced legal costs in
connection with the Association's litigation involving a former borrower who is
in bankruptcy. See Note 2 of "Notes to Consolidated Condensed Financial
Statements." nears its resolution. The increase in personnel expenses was
largely due to increases in costs associated with the Company's stock benefit
plans, primarily the Employee Stock Ownership Plan. The $5 per share special
distribution in March 1997 received by shares owned by the ESOP was used by the
Plan to purchase additional shares, which are being released over the remaining
term of the ESOP loan. The market value of these additional shares is charged to
personnel expense each quarter as they are committed to be released, as are the
value of the shares originally owned by the Plan.
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 16.2%, 16.2%
and 30.6%, respectively, at December 31, 1997.
Year 2000 Issue
The Company has completed its assessment of the Company's vulnerability to Year
2000 problems and has prepared initial estimates of the costs of resolution. The
Company's most critical computer system is utilized by its subsidiary, Home
Federal Savings and Loan Association, for loan, deposit, and accounting
functions, and is maintained by a third party service bureau. The costs of
compliance will by borne by the vendor under the contract. While this system is
presently substantially Year 2000 compliant, Association personnel will
participate in tests of the system during 1998 to ensure full compliance.
Failure to prepare this system for the Year 2000 would materially affect the
Association's ability to operate and serve its customers. The Company's other
information technology-controlled systems have also been identified and are in
various states of readiness. Progress is underway to address these issues, with
an estimated cost of $150,000 to $230,000; the actual amount will depend on
choices to be made by management in the coming months. This amount could
increase materially if problems are noted in the testing process that have not
yet been identified. The majority of these costs are expected to be incurred
during calendar year 1998; all such costs will be charged to expense as
incurred.
<PAGE>
HFNC FINANCIAL CORP.
Part II
Item 1. Legal Proceedings
Other than as discussed in Note 2 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 and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On October 24, 1997, the Company held an annual meeting of
shareholders to elect seven directors for a one year term and to
ratify the appointment by the Board of Directors of Deloitte &
Touche LLP as the Company's independent auditors for fiscal 1998.
The results of the voting are set forth below.
Proposal One (Election of Directors):
Name FOR WITHHELD
---- --- --------
H. Joe King, Jr. 13,147,145 137,232
J. Harold Barnes, Jr. 13,149,145 135,232
Ray W. Bradley, Jr. 13,119,322 165,055
Joe M. Logan 13,120,422 163,955
John M. McCaskill 13,142,322 142,055
Lewis H. Parham, Jr. 13,146,095 138,282
Willie E. Royal 13,122,622 161,755
Proposal Two (Ratification of Auditors):
FOR AGAINST ABSTAIN
--- ------- -------
13,120,694 46,895 116,788
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.
February 6, 1997 By: \s\ H. Joe King, Jr.
--------------------
H. Joe King, Jr.
President and Chief Executive Officer
February 6, 1997 By: \s\ A. Burton Mackey, Jr.
-------------------------
A. Burton Mackey, Jr.
Vice President and Treasurer
<TABLE> <S> <C>
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 9,483,019
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0
0
<COMMON> 171,395
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